Key takeaways:
- International markets outperformed expectations as leadership broadened beyond US tech mega-caps, while Europe and Asia benefitted from rate cuts, fiscal support and exposure to AI hardware investment, reinforcing the value of a globally balanced approach.
- Tariffs and technology volatility favoured active management — from defensive exposure early in 2025 to selective additions in consumer discretionary, financials and Asian hardware as fundamentals improved.
- Moderating inflation, stronger earnings, low leverage and potential financial deregulation underpin a positive outlook for dividends, with scope for further growth as economic momentum broadens.
Definitions
Active investing: An investment management approach where a fund manager actively aims to outperform or beat a specific index or benchmark through research, analysis, and the investment choices they make. The opposite of passive investing.
Capital: When referring to a portfolio, the capital reflects the net-asset value of a fund. More broadly, it can be used to refer to the financial value of an amount invested in a company or an investment portfolio.
Capital expenditure: Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment, or vehicles in order to maintain or improve operations and foster future growth.
Diversification: A way of spreading risk by mixing different types of assets or asset classes in a portfolio on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.
Dividend: A variable discretionary payment made by a company to its shareholders.
Dividend payout ratio: The percentage of earnings (after tax) that are distributed to shareholders in the form of dividends in a year.
Equity: A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bond. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Interest rates: The amount charged for borrowing money, shown as a percentage of the amount owed. Base interest rates (the Bank Rate) are generally set by central banks, such as the Federal Reserve in the US or Bank of England in the UK, and influence the interest rates that lenders charge to access their own lending or saving.
Leverage: Leverage has multiple meanings:
- The use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.
- Leverage is also an interchangeable term for gearing : the ratio of a company’s loan capital (debt) to the value of its ordinary shares (equity). It can also be expressed in other ways, such as net debt as a multiple of earnings, typically net debt/EBITDA. Higher leverage equates to higher debt levels.
- For investment trusts, the Company’s leverage sum of financial gearing and synthetic gearing. Where a company utilises leverage, the profits and losses incurred by the company can be greater than those of a company that does not use leverage.
Mega caps: The largest designation for companies in terms of market capitalisation. Companies with a valuation (market capitalisation) above $200 billion in the US are considered mega caps. These tend to be major, highly recognisable companies with international exposure, often comprising a significant weighting in an index.
Risk-adjusted return: A calculation of an investment’s return or potential return that takes into account the amount of risk required to achieve it. Typical risk measures include alpha, beta, volatility, Sharpe ratio, and R2.
Valuation metrics: Metrics used to gauge a company’s performance, financial health, and expectations for future earnings, e.g. P/E ratio and ROE.
Volatility: The rate and extent at which the price of a portfolio, security, or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility, the higher the risk of the investment.
View transcript
What surprised you most in international markets in 2025?
Charlotte Greville: 2025 definitely surprised a lot of investors. Many expected another dominant year for the US, but international markets ended up delivering the strongest returns, with performance broadening beyond the US mega cap tech names.
The AI story was still very much alive and capex continued to be spent, but growth spread into hardware, which is actually an area that is mostly serviced outside of the US.
Tariffs were harsher and more widespread than expected, and this created volatility in pressured exposed sectors. Ultimately, companies navigated tariffs surprisingly well and the consumer proved more resilient than anticipated in the second half, driving strengths in parts of consumer discretionary.
Overall, the year gave us a clear reminder that diversification really does matter. We actually benefited from these shifts. We were positioned for international strength, particularly in Europe, where rate cuts, fiscal support and softer regulation boosted sentiment.
What drove the strategy’s performance in 2025?
Greville: We anticipated the tariff risks and leaned into defensive sectors such as staples and utilities early on. We later pivoted to consumer discretionary as it became clearer that the consumer was holding up better than expected.
Financials continued to surprise on the upside on a higher rate environment and potential softening stance from the EU regulator and our increased exposure to European banks really paid off.
Finally, we used volatility in the technology sector to add to Asian hardware names. What is sometimes misunderstood about the AI thematic is that more than 50% of spend is going on the hardware, which is mainly made in Asia. An area of very attractive dividends and diversification beyond US mega caps. All of this helped us to deliver strong income, attractive returns and a globally balanced portfolio for our clients.
Do you see international markets keeping up this momentum?
Ben Lofthouse: 2025 was a strong year for international markets, but we do see the prospect for another good year in 2026. There are several reasons for that. One of them comes from the fact that interest rates were reduced in many countries last year, and there’s normally a delay between those interest rates being cut and that benefit coming through to both consumers and into the economy.
Inflation has been moderating, so it’s not that long ago that we were really dealing with the inflation problem. And the clear signs now around the world that inflation is in a more manageable space. And then the final thing is there were a lot of investments announced last year in areas like AI investment, but also government stimulus in regions like Europe and the US. And those things take a while to get put into place to actually get spent. And we expect that money to be spent this year.
Where do you see the biggest opportunities in 2026?
Lofthouse: Well, we continue to have large exposures to the financial services sector and the technology sector. There are tailwinds that were helping them last year continue this year. But we also see the possibility for the markets to broaden out into other sectors.
The higher interest rate environment from versus a few years ago caused some of the sectors like healthcare, consumer staples and real estate to really underperform last year. So, they look very, very cheap versus the historic multiples. So, we expect to find some opportunities there. And then we’ve also seen, despite the heavy investment from AI companies, many other areas of the market like construction, housebuilding have been very weak for numerous years, so there’s a potential for a rebound in those as well.
What’s your outlook for dividends this year?
Lofthouse: The outlook for dividends is good. We’ve seen GDP growth being revised positively in the second half of last year. So, despite all of the uncertainty around tariffs, economic growth has generally surprised to the upside. This tends to be good for profits of companies. And when profits of companies improve, dividends tend to improve as well.
We’ve also, as I discussed earlier, expect to see some financial deregulation, which could free up some capital from financial services firms, which again is positive for their ability to pay dividends and generally are kind of broadening out of economic growth. We would like to hopefully see that come through in dividend growth.
The final thing is that we’ve not seen listed companies really take on very much debt over the last four or five years. Obviously, there’s been lots of uncertainty, but the advantage of that is actually dividend payout ratios are quite low and balance sheets look very strong.
