Top investment ideas

Put cash to work and secure durable income

Cash’s long-term underperformance compared to other asset classes is a structural phenomenon. Stocks have beaten cash in 86% and 100% of all 10- and 20-year holding periods, respectively, and by more than 200x overall since 1945.

The imperative to put cash to work is likely to grow in 2025: With interest rates likely to fall further, investors will earn progressively lower returns and will need to find alternative, more durable sources of income.

Switching cash into high-quality fixed income can lock in yields and help dampen portfolio volatility.

Deploying excess cash into equity income or balanced strategies can provide a more long-lasting source of return and increase the likelihood of beating inflation over the long term.

Annuities should also be considered, as they can play an important role in providing greater stability and predictability to income streams.

Strengthen your core

Investors can build an effective portfolio with a variety of individual investments. But there is a risk that portfolio complexity can lead investors to lose sight of their overarching goals, particularly when markets become more volatile or when financial news headlines seem pressing.

To tackle this, we believe that investors should implement a “core” component in their wealth management strategy. The core should be a portfolio diversified effectively across asset classes, geographies, and sectors, and left alone to grow wealth consistently for the long term.

Establishing such a core and letting it deliver compounded returns over time can provide investors with the confidence that their financial goals are accounted for while freeing up time and mental energy to pursue other passions or to seek tactical satellite opportunities.

Diversify with alternatives

By including an allocation to private equity, private debt, private infrastructure, and/or private real estate into portfolios, investors can diversify sources of return and potentially enhance portfolio growth. We believe that investors can consider replacing around 30% of their public equity exposure with private markets, depending on their tolerance for illiquidity.

In private markets, we like private credit, value-oriented buyout, and secondaries including infrastructure; and thematically, we favor software, health, and climate.

Meanwhile, exposure to select hedge funds can play various roles in a portfolio, acting either as a pure diversifier or as a substitute for other assets. Our analysis indicates that global discretionary macro hedge funds have historically shown an average correlation of 0.2-0.4 with various bond indexes since 1997, and exhibit negative downside correlation during periods of financial stress. We believe investors should consider having around 10% in hedge funds, funded by a combination of bonds and equities.

In hedge funds, we favor low net equity long/short strategies, macro, and multi-strategy, and select alternative credit.

Be active

The investment industry has undergone a passive revolution in recent years. In 2023, assets held in global passive equity funds (USD 15.1 trillion) overtook assets in active funds (USD 14.3 trillion) for the first time, according to LSEG Lipper. But investors need to ensure they are balancing their exposure to passive and active strategies effectively.

In equities, passive investing can be a good way to quickly and cheaply add exposure to broad markets. But for investors looking to add exposure to new or less prominent markets, including small caps, emergent growth themes, or emerging markets, passive investments may be too broad to navigate fast-evolving industries or companies that are not as well covered. An active approach to investing can also enable investors to take advantage of changing volatility conditions, generating yield when volatility is high, or hedging portfolios when volatility is low.

In bonds, the complexities of managing weights, maturities, cash flows, duration risk, interest rate risk, and credit risk mean that actively managed funds can often offer greater convenience and superior risk management than investors trying to manage single bond exposure themselves.

Generating alpha is also a core aim of alternative investment managers.

Go sustainable

All major asset classes, including equities, bonds, hedge funds, and private markets, offer sustainable options, which have shown similar risk and return characteristics to traditional investments. With the return of President Trump to the White House, we expect volatility but believe that the longer-term performance of diversified sustainable investing strategies will be driven more by investment fundamentals and the macro environment than by politics.

In stocks, we think investors can consider the equities of companies that are demonstrating improvements or leadership in ESG principles; or in fixed income; bonds issued by multilateral development banks or those with stated green intentions; or credit strategies with an active approach.

In alternatives, consider sustainable hedge funds. Such funds incorporate ESG factors into their investment processes, aiming to exploit market inefficiencies related to ESG issues. They thus may offer differentiated investment opportunities.

And in private markets, sustainable strategies focus on sectors such as renewable energy and sustainable agriculture, and aim to achieve positive environmental and social outcomes while providing diversification and potential for competitive returns.