Key fund and investment trust trends in 2024

With the clock ticking towards the end of 2024, it’s time to examine some of the key trends among funds and investment trusts. 

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1) Passive funds selling like hot cakes

Demand for index funds and exchange-traded funds (ETFs) showed no signs of slowing.

In 2024 (up to 11 December), seven of the top 10 most-bought funds among interactive investor customers were index funds.

Global is the strategy of choice, with Vanguard LifeStrategy 80% Equity, HSBC FTSE All World Index, Fidelity Index World, Vanguard LifeStrategy 100% Equity and Vanguard FTSE Global All Cap Index all in the top 10. They were joined by technology tracker L&G Global Technology Index and Vanguard US Equity Index.

For ETFs, the US and global dominated the top 10. The most-popular ETFs for the US market were Vanguard S&P 500 ETF (LSE:VUSA) and Vanguard S&P 500 ETF (LSE:VUAG). Coming out on top for global exposure was iShares Core MSCI World ETF (LSE:SWDA).

Flying the flag for active management exposure in the top 10 most-bought funds list were Royal London Short Term Money Market, Jupiter India and Fundsmith Equity.

In the case of Royal London Short Term Money Market, investors are looking to pocket a distribution yield of around 5% from an area of the bond market that is low risk.

Jupiter India offers exposure to a fast-growing economy that has favourable demographics, including a young population. India’s stock market has enjoyed a good spell of performance over the past couple of years, and investors buying today will be hoping the purple patch continues. 

Fundsmith Equity, managed by well-known investor Terry Smith, fell to fifth place in the popularity rankings this year having been in first place in 2023. Smith, like other professional investors, is continuing to face into the headwind of global stock market returns being heavily influenced by a small number of US technology companies. Fundsmith Equity has failed to beat a global tracker over the past five years – up 55.2% versus 79.5% for Fidelity Index World.

• Top 10 most-bought investment funds: December 2024
• Top 10 most-bought investment trusts: December 2024

In an interview with interactive investor’s On The Money podcast, Smith said: “there’s something a bit extreme going on”, due to the continued strong share price gains of the “Magnificent Seven” stocks: Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA), Meta Platforms (NASDAQ:META), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG) and Tesla (NASDAQ:TSLA).

Smith said the dominance of those seven companies, which have driven US markets higher over the past two years, has been a headwind for many investors.

• Listen here: 100th episode special: the Terry Smith interview

2) Big tech dominance being a headwind for stock pickers 

The one-year return of 20.2% for iShares Core MSCI World ETF demonstrates how big tech has proved challenging for global actively managed funds, since the sector average return is 13.4%. 

Most actively managed US and global funds tend to hold less than the wider market in the US technology giants. One reason is due to portfolio concentration rules, which prohibit funds from holding more than 10% in a single stock. Index funds and ETFs, meanwhile, can hold a higher percentage.

In a recent video interview with interactive investor, Stephen Yiu, manager of Blue Whale Growth fund, said that owing to these fund rules he was “forced to take profits” in Nvidia.

Such rules are in place to ensure funds are sufficiently diversified, which helps to reduce risk.   

Yiu said: “If we didn’t have a cap, which is a UCITS [Undertakings for Collective Investment in Transferable Securities] cap at 10%, the performance of the fund would have been a lot better because, over time, the position side would have become bigger as Nvidia’s share price [went up].”

• Blue Whale Growth video: why I'm bearish about most of the Magnificent Seven

3) UK funds failing to shake off the ‘unloved’ tag

Despite plenty of predictions, and many commentators pointing out how cheap valuations are for UK shares versus history and compared to the US, investors have continued to shy away from the UK.

Since the Brexit vote, UK funds have consistently experienced outflows, with more money being withdrawn than invested.

There is, however, a very early sign that sentiment could be starting to turn. According to data from Calastone, UK equity funds posted their first month of inflows in three years in November, attracting £317 million. Investors have withdrawn £25.3 billion in the previous three and a half years. 

Laura Foll, manager of Lowland Investment Company (LSE:LWI), said “the fact that the US market is still outperforming” is overshadowing the cheaper valuations on offer in the UK market.

Foll told interactive investor: “The valuations in the UK equity market still look pretty attractive. There are takeovers going on, there are buybacks going on. I think the UK equity market has positive things going for it and the absolute total return has been pretty decent over the past year. It's just that there is this 'Big Brother' in the room, if you like, of the S&P 500 that continues to outperform.”

• Watch our Lowland video here: opportunities and risks for UK stock market in 2025

Thomas Moore, manager of abrdn Equity Income Trust (LSE:AEI), points to an increase in share buybacks and M&A as catalysts for investors to return to the UK market.

In a video interview with interactive investor he said: “Performance begets performance, flows beget flows. Once people start to become more interested in the UK equity market, it could get its own momentum.”

• Watch our abrdn Equity Income Trust video: how we yield 7% investing in the UK equity market

4) Expensive India outperforming cheap China

China grabbed plenty of headlines in September when its stock market soared in response to stimulus from Chinese financial institutions, the country’s central bank, and financial regulators. 

However, over one year it is the more expensive India market that produced higher returns. The average fund in the India/Indian Subcontinent sector is up 20.2% versus 15.5% for the average fund return in the China/Greater China sector.

India’s stock market is trading on a price-to-earnings ratio of 23 times versus 14 times for China, according to CEIC Data. However, those bullish on the prospects for India point out that those richer valuations are being backed up by earnings growth. Moreover, political risk is considered to be lower than in other emerging markets.

In terms of China, as our recent feature pointed out, investing in the world’s second-biggest economy is a challenging proposition for many professional investors. On the one hand, there are many innovative and well-run Chinese businesses. However, concerns remain over the ongoing troubles of the property sector and geopolitical tensions, which are likely to ramp up further with the return of Donald Trump to the US presidency.

• India's stock market is booming: the opportunities and risks 
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John Citron, co-portfolio manager of JPMorgan Emerging Markets (LSE:JMG), who invests in both countries, says:“If we look to India, there are many reasons to be positive about the fundamental prospects for companies in the region: India has an economic system in which corporate skill is rewarded by the market and translated into value creation for shareholders; and it has an economy which is growing faster than any other major country. We believe these two conditions will continue to apply for a long time.

“One of our largest areas of investment has been IT services, where India has produced large world-class companies. One of our key positions in this space is Tata Consultancy Services (TCS), which provides a comprehensive range of IT services to clients across diverse industries.

“China’s situation is more complex, but as the single biggest market in our investment universe, it still presents selective opportunities. The country’s advanced manufacturing and electric vehicle sectors are thriving, bolstered by government policies aimed at stabilising the economy and driving innovation. Key industries, such as renewable energy and technology, continue to show strong growth potential, underpinned by both domestic consumption and global demand.”

5) Investment trust consolidation gathering pace

As 2024 draws to a close, there were a total of 10 mergers between investment trusts. The most high-profile one was the combination of Alliance Trust and Witan to create Alliance Witan (LSE:ALW), with the trust’s assets swelling sufficiently enough for it to enter the FTSE 100 at the end of this year.

There were also five liquidations, including Gulf Investment Fund. As a result, there is no longer a fund or investment trust that offers such concentrated exposure to the Arabian Gulf, also known as the Persian Gulf, including Saudi Arabia, the United Arab Emirates (UAE) and Qatar. 

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Six investment trusts were acquired in 2024, including Balanced Commercial Property Trust, which paid a monthly income.

Consolidation is picking up because there are a lot of potentially sub-scale investment trusts. For a wealth manager to consider an investment trust, the assets need to be around £300 million for it to have a sufficient amount of liquidity.

Of course, retail investors can consider investment trusts with assets below £300 million, and some are potentially hidden gems. But do bear in mind that some small investment trusts have higher costs, including potentially higher dealing spreads.

While, past criticism has been aimed at boards’ reluctance to be “turkeys voting for Christmas” in the sense that they would be voting themselves out of a job, the uptick in mergers shows that boards are becoming more proactive.

6) Stubbornly wide investment trust discounts

Boards have also become more hands-on in attempting to tackle wide discounts, which occur when an investment trust’s share price is trading below the value of its underlying investments, the net asset value (NAV).

According to the latest figures from Winterflood (using Morningstar data), £6.95 billion of shares were repurchased in the first 11 months of 2024. This surpassed the previous record of £3.9 billion in 2023.

The discount of the average investment trust, excluding 3i, was 13.7% at the beginning of the year, widening to 15.2% by 12 December 2024.

Wide discounts have attracted the attention of US activist investor Saba Capital, which this week launched a campaign to oust boards at seven investment trusts: Baillie Gifford US Growth Ord (LSE:USA), CQS Natural Resources Growth & Income (LSE:CYN), Edinburgh Worldwide (LSE:EWI), The European Smaller Companies Trust PLC (LSE:ESCT), Henderson Opportunities (LSE:HOT), Herald (LSE:HRI) and Keystone Positive Change (LSE:KPC). 

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One of the attractions of an investment trust is the opportunity to pick up a bargain. But care needs to be taken, as discounts can widen further rather than narrow, which negatively impacts returns. Some trusts persistently trade on a wide discount of 10%-plus due to lack of investor demand for the shares.

To boost demand for a trust’s shares and in turn improve its liquidity, boards have a few options: they can issue or buy back their own shares to reduce the discount, or alternatively remove discount risk entirely by putting what is known as a “discount control mechanism” in place. Those trusts with a discount control mechanism commit to keeping the discount within a certain range, typically anywhere from zero to -10%.