The Pulse – June 2025

Executive summary:

• Markets continue to be affected by Donald Trump’s trade policies and Middle Eastern developments, leading to investor uncertainty.
• Short-term market movements are inherently unpredictable; however, investing is about the long term, and ultimately, it’s the fundamentals of an asset class which drive returns.
• Fundamentals such as using the price/earnings ratio as a guide when reviewing a stock or reviewing the yield as a determinant of bond returns.
• We can also use defined returns to reduce some of the uncertainty in the short term and potentially enhance returns.
• The Equilibrium portfolios have consistently outperformed cash and inflation over various 10-year periods, demonstrating the effectiveness of our investment approach.

Core concepts

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” – Warren Buffett

We often come back to this quote, which seems to sum up our approach to investing. We’ve used it in numerous presentations and articles over the years.

In last month’s The Pulse, we discussed the difference between evidence and opinion. Markets are, at present, being moved around largely by developments in Donald Trump’s trade wars. More recently, some investors are worried about developments in the Middle East and the impacts an escalation could have.

We can all have an opinion about what might happen with tariffs or conflicts, how that might affect the economy, and where markets might go in the short term.

However, it goes without saying that we are unable to accurately predict the future! To work out the impact of tariffs, for example, we’d need to know what Trump might do next.

Or, as Buffett puts it, unfortunately, we don’t have any unusual business insights or inside information, the sorts of things which might allow us to predict the future more accurately. However, we do have a sound framework for making decisions.

In these newsletters, we often focus on short-term events and try to explain what’s currently driving portfolios.

But in investing, it’s the long term which is important. We might not know what Donald Trump’s going to do in the short term but, but as we often stress, it’s the long-term fundamentals of an asset class that drive returns.

Fundamentals

When you buy a share in a company, its price will move up and down in the short term in response to news flow, changes in sentiment, and even emotions like fear and greed.

But over the long term, the return you get from that stock will depend on how well that company performs, what profits it makes and how much those earnings grow, as well as the price you paid to buy the shares in the first place.

The same is true for the market as a whole. True, we can’t know in advance how much companies will grow their profits in the future, but we do know what profits they’re currently making, and we can compare that to the current share price. This is known as the price/earnings ratio, and historically, it’s been a good guide to what sort of returns we might expect over the long term.

Other assets have similar fundamentals that we can review.

For example, when you lend money to a government or a company by buying a gilt or a corporate bond, the interest you receive is fixed at the outset. You also know when the bond will mature and when your loan will be repaid. Therefore, most of the returns from bonds are determined by the “yield” when you buy it.

Currently, if you lend money to the UK government for 10 years, you’ll get paid about 4.75% p.a. If you lend money to a so-called “investment grade” company with a strong credit rating, you’ll get paid about 5.8% p.a (Source: LSEG Datastream).

Of course, these investments aren’t risk-free. Companies can go bust and could default on these loans, although the companies referred to are considered relatively safe and secure. A gilt is, of course, guaranteed by the government, so default risk is very, very low (but not quite zero).

In the short term, those bonds might go up or down in price. Largely, that will be driven by changes in expectations of interest rates and inflation. Sometimes, the prices go up when investors are worried, as there’s a flight to safety, meaning bonds also provide an element of “insurance” in portfolios in certain circumstances.

But in the long term, the yield is by far the biggest determinant of bond returns.

We think these yields look pretty attractive. And if you’re willing to take a bit more risk, you can even get high single-digit yields by lending to slightly less secure companies (known as high-yield bonds).

Equities are inherently more unpredictable in the short term. However, we can potentially enhance returns and reduce some of this uncertainty by using defined returns products.

In short, defined returns will produce a fixed return (known in advance), provided the stock market is either flat or goes up over (typically) a five-year period. Because we don’t need the markets to go up strongly to get some decent returns, this reduces some of the uncertainty around achieving these returns.

If all our defined returns products kicked out over the next year or two, the return would be in the region of 12% (Source: LSEG Datastream/ Equilibrium Investment Management 31/05/2025). To get that return, we just need markets to go sideways.

Stick to the process

We believe that if we stick to our process, then by utilising assets like those outlined above, we can achieve some decent returns regardless of what Trump does with tariffs in the short term.

We’ve recently carried out some analysis of our core portfolios (Cautious, Balanced and Adventurous), going back to when we set up our dedicated investment team in 2008.

Since then, we have 90 different 10-year periods we can analyse. The first runs from 1 January 2008 to 1 January 2018, the next from 1 February 2008 to 1 February 2018 and so on. The most recent period is the one from 1 June 2015 to 1 June 2025.

Over those 90 periods, we were very pleased to find out that our portfolios beat both cash (Bank of England base rate) and inflation (UK Consumer Prices Index) by over 100% of 10-year periods. Cash returns were below inflation over every one of these periods, which means it was definitely worth investing in order to have your assets keep pace with increases in prices.

Of course, there are lots of other people who try to run diversified portfolios full of lots of different asset classes like we do. This includes “mixed investment” funds and portfolios run by wealth managers and private banks. We can also track how our portfolios did against these “competitors”.

We are pleased to report that our portfolios all beat the typical “balanced” portfolio over 100% of 10-year periods (as represented by the IA Mixed Investment 20-60% shares sector).

Our portfolios also outperformed the typical discretionary balanced portfolio 100% of the time over 10 years, as represented by the ARC Sterling Balanced Index of wealth manager and private bank portfolios. (Source: FE Analytics)

We are proud of this track record. And once again, it hasn’t been achieved through a stratospheric IQ, unusual business insight, or inside information – but because we have a sound framework for building portfolios built on evidence.

We believe that if we stick to this approach, this will continue into the future despite the uncertainty many of us feel right now.

Past performance is for illustrative purposes only and cannot be guaranteed to apply in the future.

This newsletter is intended as an information piece and does not constitute investment advice.