All four Downing Fox funds made positive returns in 2024 – their first full calendar year. This is good news, but does that mean it was a success? We’ll dive into this over the next few pages, starting with some market background:

What happened in markets?

There was a Groundhog Day feel to stock markets in 2024. Echoing 2023’s experience, if you held equities you made decent returns, and the higher your exposure to large American tech companies, the better you did. AI chipmaker NVIDIA was this theme’s poster child: Already huge as the year began, it had grown an improbable 171% bigger by close of Hootenanny.

At the other end of the scale, exposure to smaller European companies proved painful as, on average, they fell back over the year. This inequality between companies’ size and location prevailed for most of the year, but the trend went ballistic in the final third: Investors loved America’s undisputed election of Trump as much as they hated European political bumbling, scattering their stock markets in opposite directions.

Bond markets were also a mixed bag, but here the difference was credit risk (the risk of the bond’s issuer going bust): The more you took, the better you fared. In developed markets, bonds issued by companies beat bonds issued by governments (UK government bonds – gilts - actually lost money, but British corporate bonds were mildly positive). At the same time, the bonds of riskier, ‘high-yield’ companies proved more lucrative than their steadier ‘investment-grade’ counterparts.

How did the funds perform?

2024 was a groundhog year for our portfolios too¹: Their returns were all firmly positive and eerily similar to their 2023 numbers (based on the performance of our models, which pre-date the funds). They also performed in the right order (in a good year, investors who take the most equity risk should reap the highest returns, and vice versa). This may strike you as inconsequential, but those scarred by the ‘inversion’ of risk profiles in 2022 will appreciate the importance of stacking a fund range correctly. We certainly do.

And just like 2023, our 60% Equity Fund (‘Fox60’) was the only one of our four-fund-family to keep pace with its average competitor (a late-December dip for the tape gave it a photo-finish win). Given the market conditions, this is a surprise. Not that three of our funds lagged, but that one of them didn’t: As in 2023, the conditions were horrendous for our active type of investing.

Despite that, we’re satisfied with this short-term result. Don’t get me wrong - we’re certainly not in this to produce average performance – far from it. But 2024 was our equivalent of a wet and windy away game in January. Avoiding disaster in disastrous conditions matches our aim of providing you and your clients with an Unheroic Journey (see video below to explain).

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By this we mean that – yes - we’re aiming to deliver our investors to a thrilling destination (over the long term), but we’re trying to do so without a thrilling journey. You want your clients to see your business as a haven of calm and reason, not Disneyland, and not putting their savings through Thunder Mountain can only help this.

This means bringing - as far as we can - a level of predictability and reliability to what is an inherently unpredictable and unreliable business. And to show how predictable we’ve managed to be, here’s a prediction we made in last year’s annual review:

“This remains the big-ticket reason why we failed to excel in 2023. If the same thing happens in 2024’s markets, we’d expect to underperform again. Likewise, as in 2022, if this collection of expensive-looking tech giants falls more than the rest, we should look good. We shall see…”

And see we did: The same collection of expensive-looking tech giants led equity markets higher (again), and the same three of our four funds dragged their heels (again). Same conditions, same results – no shocks here.

Why don’t these conditions work for us?

The design of the Fox Funds, which places a high value on active management and diversification, means they’ll never have as much exposure to the market’s biggest companies as the index does (and particularly not when those same companies look expensive on many measures). So, when the big companies perform well, so will index trackers. And now that much of our peer group either uses index trackers, or position themselves in relation to them, our sector averages are likely to rise more when the biggest companies thrash everything else. We, as a result, will look slow.

This should, counterintuitively, be reassuring. If we’d produced different results in the same conditions, it would suggest we’d flip-flopped into doing something we said we never would.

This is why a growing number of you use the Fox Funds as a foil to your clients’ holdings in passive multi-asset products. We can be relied on not to start taking the exact same risks they are, and that you’re trying to move away from. The 2024 experience suggests your hedging strategy is working: When the passive options are winning, as they did in 2023 and 2024, our active portfolios are lagging, but when passives lag, as they did in 2022 (because US large-cap growth stocks fell out of bed), our strategies would have bailed out an otherwise tracker-heavy portfolio:

We’ve seen this play out this year too, albeit in shorter episodes: When US mega caps are rallying, we lag our passive competitors, but when they wobble, which they did a few times in 2024, the Fox Family tended to hold up better.

We offer this as food for thought: If these short episodes are tasters of what the next multi-year market phase will serve up, having something different in your product mix may protect your clients against a prolonged period of lank performance (and ‘different’ is becoming hard to find as more multi-asset products get sucked towards the market-tracking whirlpool).

What happened within the funds?

A question that may be nibbling away at your conscience is; relative to its peers, Fox60 keeps faring better than Foxes 40, 80 and 100 - is it just a better fund?

We can answer this quickly: No, it isn’t.

We know this because each of the Fox Funds consists of the same two components – ‘Growth’ and ‘Defence’ - just in different proportions. As such, the differences in relative performance are nothing to do with our funds, it’s down to the quirks of their sectors.

Why do we do it this ‘modular’ way (when most of our competitors don’t)? It’s back to predictability and reliability. One of the things Vanguard got right with their LifeStrategy funds was mandating consistency across their range. It’s easy to see how this helps you as an adviser: You know that the 60% equity version is exactly like the 40% equity option, except with 20% more equity and 20% less fixed income. Simple.

This puts control of your clients’ asset allocation firmly in your hands, not ours. This is where it belongs (we don’t know your clients, so we shouldn’t be shifting their big-picture asset mix around willy-nilly).

This is why we’re not beating up Fox40 for lagging its peers while Fox60 matched them: They’re in the same sector and it was a better year for equities than fixed income. Something would have gone badly wrong if Fox40 had even matched, let alone beaten, it’s higher-equity sibling.

Fox80 and Fox100, meanwhile, are in sectors which, on average, hold a higher proportion of US equities. And as our diversified portfolios benefit less from US supremacy, this was the big reason why our equity mix lagged in 2024. Hence why our higher-equity funds looked slower relative to their respective peer groups.

As a reminder, ‘Growth’ is our blend of equities and ‘Defence’ is our fixed-income mix. Here’s how that looks:

Now we’ll take a look at what happened within each of those components last year:

Growth component review

2024 was another brutal year for active fund management. Here’s what the Financial Times reported on 30 December:

“Investors pulled a record $450bn out of actively managed stock funds this year, as a shift into cheaper index-tracking investments reshapes the asset management industry.”

There are many reasons for this exodus. One is a vicious feedback loop between performance and inflows: The more money that floods into passive index funds, the more they buy the stocks held in the index. This pushes the stocks’ prices upwards, boosting their performance relative to stuff that isn’t in that index. That improved performance then attracts more capital, and so the loop repeats.

In contrast, active funds are more likely to hold the stuff that isn’t in the index, which generally means smaller companies. This puts them in a negative feedback loop; one that’s powered by capital outflows causing underperformance.

Sure enough, even within an expensive-looking market like the US, the largest companies have become considerably pricier than the smaller ones:

Relative Valuation of U.S. Small Cap Stocks

The further this goes, the worse it gets for active fund managers. Particularly – ironically - the good ones. They are drawn towards cheaper companies and away from expensive ones. Today, that generally means moving away from mega-caps into smaller companies, but market dynamics are currently punishing this Buffettesque behaviour, not rewarding it.

Conditions are similar to the previous trough on that chart, which was 1999/2000: Money was flooding into trackers (classic or closet), active managers were under the cosh (many good managers got sacked or very nearly did), and the market’s largest companies had rallied hard, hiking their valuations.

Then, in March 2000, for no foreseeable reason, it reversed. Good active managers went from villains to heroes as they trashed the freefalling, large-cap-heavy market (and all the funds that were copying it, openly or otherwise).

You’ve probably guessed, but this is setting the scene for our own relaxed-looking returns. We’re committed to holding only properly active funds in our Growth component, so it stands to reason that won’t win in a diabolical year for active managers.

Looking down our list of holdings, most struggled to match mega-cap-biased indices in 2024. And when they struggle, so do we.

To be clear, they didn’t all struggle – some managed to ace it, while others weren’t far off the pace. Much of our time last year (and every year) was spent analysing their performance, asking: Was slow performance justified by tough conditions, or did they drop the ball?

We’re satisfied that, in most cases, it was conditions, but for a few it’s not so clear. These are under closer scrutiny (and we hold less in them while we scrutinise).

This does beg the observation; “Ah! So you weren’t perfect then!”.

Nope – we weren’t. But then we never have been, and never will be either. This isn’t a perfection-friendly vocation. I’d estimate that realistically better execution might have boosted our Growth component’s returns by around a half a percent in 2024. This would have been welcome, but not enough to turn any of our trio of laggards into sector beaters.

For that we need a change in the market tides, just like we saw in 2000. I’m certain we would have lagged in 1998 and 1999 too, but I’m equally certain we would have excelled over the following few years as the tide went out on mega-caps (and the index funds who’d been surfing it). It feels like a similar change is due, though forget trying to time it - markets laugh in the face market timers.

Growth component - holdings

Here’s how the forty active equity funds in our Growth component performed last year. These aren’t the forty that started the year. In fact, we didn’t start the year with forty at all, it was thirty three. Forty is where we arrived after buying eleven new funds and exiting four. This means we’ve reached our current maximum (twenty funds per Downing Fox brain) – so it’s one-in-one-out from here. This is a healthy discipline - it doubles us down on upgrades only.

As if to underline just how much 2024 was a repeat of 2023, our top two performers were the same: Spyglass US Growth, managed by Jim Robillard from San Franciso, and London-based Chris Ford’s Sanlam Global Artificial Intelligence. As their names suggest, both funds are well-aligned with the year’s winning theme; tech, and the winning geography; US.

As you can see, Jim’s year wasn’t plain sailing: As recently as July he was sitting on a 5% loss, but by mid-December his fund had rallied to a +53% peak, before heading south again to end on a still-spectacular 40%.

Given all we said about not overexciting your clients, you might be surprised to see us hold such a volatile fund. But then if you watched our Unheroic Journey video, you’ll know this is what we do: We want specialists who are obsessively focused on high long-term returns, and these types care little about the volatility and tracking error stats they happen to generate.

It’s then our job to make these hard-to-hold funds easy by blending them with others that are on similarly ‘heroic’ but, crucially, different journeys. The peaks of one then mitigate the troughs of another, and the holder’s experience is less Thunder Mountain and more It’s a Small World².

This is borne out by the numbers: Despite holding full-throated funds like Spyglass and taking plenty of supposedly riskier small-cap exposure, Fox100 ended the year 11th out of 543 when ranked for volatility within the IA Global Sector³. Basically, the holder experience was fairly zen, which I’d put down to being properly diversified and not chasing a handful of tech giants just because everyone else is.

At the other end of the year’s performance table sit all four of our European funds. Europe’s Annus Crapilis is one of the few things that is different to last year. Sure, they were well behind the US in 2023 – everything was - but they still managed respectably positive returns. Whereas 2024 was a big miss in both relative and absolute returns.

Within our own stable, the dubious honour of the year’s lowest number went to Stewart Investors European All-Cap, although none of our European picks fared particularly well.

No matter how you cut it, this was a brutal year for the Stewart Investors fund, which puts it under our microscope. The first rule of Fund-Selection Club is to judge on process over outcome, as this helps to prevent luck (good or bad) from clouding the picture. We met with the fund’s lead managers, Rob Harley and Lorna Logan a couple of times during the year, and our verdict was that they were doing everything we’d expect of them. This, in a nutshell, is to invest in high-quality, responsibly-managed companies that aren’t nose-bleedingly expensive.

That said, a fund manager can stick diligently to a good process for an entire career and still come up short. In such cases, the missing ingredient is good judgement: If you don’t have this X-Factor you’re unlikely to add enough alpha to justify your charges. It’s on us to keep digging with the Stewart Investors team to ensure they have it. It’s the hardest part of our job, but it’s the bit that makes the difference.

In their defence, we - and many other fund pickers - are scratching our collective heads over Europe: It used to be a rich hunting ground for active managers, but its markets just don’t seem to work anymore.

I know accusing markets of being broken is a well-worn (and ineffective) excuse, so I won’t labour it. But as I mentioned above, if – like 1999 - markets are in the mood to punish good decisions and reward bad ones, it may be that the best funds of the next ten years have been the worst over the last two. Unless they’re just bad funds, of course. Figuring this out is like watching Inception with a migraine in a room full of toddlers.

We have our European sector review in January, and we’ll be grilling all our managers. They have good pedigrees and appear to have stuck to their guns, but could they have done better? Should they have? We will work it out.

Here’s how the Growth Component is positioned as we move into 2025:

Defence component review

Our investors should feel about our Defence component the way a factory owner feels about their security guard. For almost all of the time he’ll seem like a waste of money. But for one day in a thousand, when he prevents a catastrophic fire or thwarts a burglary, he will be the most valuable part of your business.

With equity markets ripping higher, 2024 was not the ‘one day in a thousand’. In periods like this, all we ask of our Defence component is that it sits quietly and doesn’t detract from the Growth component’s efforts (while – crucially – being ready to go when needed). I’m pleased to report that this is what it did in 2024:

Looking at the other lines on the chart above, you’ll see a couple walked paths that – in the full and rosy glow of hindsight – you’d have preferred our Defence component to have walked too. These are ‘High Yield’ (a.k.a. lower-quality corporate bonds, or ‘junk’ bonds) and ‘Short-Term Money Market’ (basically cash, or near as dammit), as both generated higher returns with lower volatility.

Why didn’t we do the same?

Let’s deal with high yield first: We don’t hold these assets because they’re not growthy enough for our Growth component or defensive enough for our Defence component. Yes; they can look defensive in good years, as they often stand firm in the inevitable handful of smaller equity market sell-offs (which happen a few times every year). This is largely because these bonds are difficult and expensive to trade, so unless there’s something seriously bad going down, their holders won’t bother selling them.

But in years when bad things are happening, like 2008, their holders will try to sell them, and fast too: They don’t want to get caught holding a bunch of loans made to flimsy companies as we trip into recession. This rush for the exits can cause their illiquid prices to drop off a cliff:

We’re serious about wanting our Defence component to act defensively (the clue’s in the name), and high-yield bonds carry too much risk of our defence going missing when we really need it. So we don’t own them. This can slow us down in the good years but gives us backbone in the bad ones. And as it’s the bad ones that your clients really notice, we think it’s important to get them right.

The charts above are also useful for showing why we own gilts today and have done all year. They weighed down our relative performance, and we think they’ll do the same in most years, but we hold them because we think they’ll go up in the event of a deflationary sell-off (as they did in 2008 – see above). The quid pro quo is that they’ll go down if inflation gets worse from here, which is what walloped them in 2022 (inflation being stubbornly high was why they struggled in 2024 as well).

Our Defence component contains a mix of cash (and cash equivalents), government bonds, and a dollop of US dollar exposure. It was the gilt performance that dragged its performance beneath that of cash. We’ve made peace with this, as we view it like an insurance premium paid for potentially more defensive performance in a future recession (in 2008 an equity-gilt mix behaved more defensively than an equity-cash mix, as gilts went up sharply as equities plunged, while cash stood fairly still – see charts below and above).

2022 was the last bad year for markets (‘bad’ as in financial events making the Radio 2 headlines translates into a spate of anxious calls from clients). This was the first year of the Downing Fox models (I joined Downing at the start of that year). By showing what we have achieved so far, the longer-run chart below demonstrates what we’re aiming to achieve going forward: Our Defence component has provided marginally better returns than cash over the past three years, but in the hitting-the-fan markets of 2022, it helped our portfolios to defend better than cash⁴, thereby reducing client-panic levels.

As we roll into 2025, we’re happy with how the Defence component is positioned. We estimate it’s shorter duration than its peers’ equivalents (i.e. it’s less susceptible to rises in inflation and interest rates). So, if there’s a problem with rising inflation, we think it will defend better than most.

Also, it doesn’t hold any corporate bonds, and we’d estimate most of our peers do. So, if there’s a serious recession (as opposed to an inflationary shock like 2022), we believe we’ll hold up well as gilts typically defend better than corporate bonds (particularly high-yield corporate bonds).

We can’t have it all ways though. The conditions in which it will lag are exactly those that caused it to look pedestrian over the last two years: When everything’s basically fine. But if everything’s basically fine, our Growth component should be rising (which it has), our funds’ returns should be positive (which they have been), and your clients should be chilling like a resident (you can be the judge of that). And you, crucially, can get on with your day job.

Here’s how the Defence component is positioned as we move into 2025:

Outlook?

I’ve added a question mark to that subtitle. This risks it sounding like it has AQI⁵, but it’s there to remind us to distrust anyone who claims they know what’s coming. Because no-one does. Not reliably and repeatedly, anyway. If you’d like evidence of this, Google some of the industry’s comically bad outlooks for shock years like 2008, 2020 and 2022.

Making errant outlooks can force you into making the Scooby-Doo defence: If it hadn’t been for that pesky meddling pandemic I’d have had a great year!

This is not a great look. It’s meant to illicit sympathy: It was a pandemic! How was I supposed to see that coming?! And yes; you couldn’t have seen it coming. But it still happened, and it had a real impact on clients’ returns. So, if you can’t reliably forecast because of unforecastable events, then maybe don’t try.

This is why we don’t do outlooks. In fact, we try very hard to avoid having even an accidental outlook. Having a specific expectation of how things will play out risks us positioning the portfolio - deliberately or otherwise - for that one turn of events. And if the future follows a different path, which it probably will, our portfolio is unlikely to prosper.

We think about risks though, of which there are always many: Some in plain sight, others waiting to wallop us from the leftfield. In light of these, we believe our strategy is positioned as well as it realistically can be.

On the equity side, our active managers have picked us out a broad selection of good companies that aren’t threatened by dangerously-high valuations. Looking at many advisers’ CIPs, what worries us is the growing reliance on US mega caps. This might be through openly passive products, or it might be through products that claim to be active but are tip-toeing towards the index because it’s cheap and it’s done well.

My one prediction for 2025, then, is much the same as my prediction for 2024: If the world’s largest companies continue to be the best performers, we will look unexceptional at best. But if they underperform, as they did in 2022, we’re likely to have a better year than our peer groups.

Meanwhile, for those of your clients who can’t handle neat equities, our Defence component stands ready to dilute a severe stock market fall should one occur. Between this and your own calm counsel, we might keep your clients on the financial plan you designed, which is probably the most important thing we can do for them.

Good luck for 2025,

Simon Evan-Cook

Fund Manager, Downing Fox Funds

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References

¹ The funds launched in June 2023, but we have been running the portfolios since the start of 2022 – with the VT Johnston Growth Portfolio and the VT Johnston Cautious Portfolio funds put onto those models on 1st April 2022

² But without the maddening theme tune.

³ Source FE Analytics, 31.12.23 to 31.12.24

⁴ And a lot better than longer-duration gilts, which we didn’t hold at all as 2022 began – we only added them in after they’d begun plummeting. It was our US dollar exposure that helped our Defence Component to rise in 2022.

⁵ Australian Question Intonation, also known as High Rising Terminal, is the habit of making a definitive statement sound like a question by raising the tone at the end.

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This content is intended for financial advisers and has been approved and issued as a financial promotion by Downing LLP. Any subscription to the fund should be made on the basis of the relevant product literature available from Downing, or from the ACD, Margetts Fund Management Ltd and your attention is drawn to the charges and risk factors contained therein. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. Capital is at risk and investors should note that their investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street London EC3R 6AF.

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