News & Insight • Market Insights

03 July 2025 | William Buckhurst

Thoughts on 2025 - The Halfway Point

YFS VP Portfolio Funds

Over the first six months of the year, the Vermeer Partners Portfolio Fund returned +1.75% and the Growth Portfolio Fund (which will have a higher equity content and, therefore, higher risk profile) returned +0.21%. The estimates for the ARC GBP Steady Growth PCI were +1.33% and the ARC GBP Equity Risk PCI +1.06%.

Since launch (16^th October 2023), the Portfolio Fund has returned +10.47% while the Growth Portfolio Fund has returned +8.88%. The estimates for the ARC GBP Steady Growth PCI were +15.57% and the ARC GBP Equity Risk PCI +17.69%.

The estimated historic dividend yield on the Portfolio Fund is 3.05% and on the Growth Portfolio Fund it is 2.63%.

“The lamps are going out all over Europe”

At the end of last year, we wrote about the tension between historical patterns and the possibility of change – “Everything must change so that everything can stay the same”. Our theme then was the US stock market's relentless rise—climbing a wall of worry and defying sceptics. This gave rise to the idea of US exceptionalism, and many of our clients – quite understandably – asked why we did not have greater exposure to the US? Sitting in our offices in a gloomy, dark December, Sir Edward Grey, British foreign secretary in 1914 (as well as accomplished fly fisherman and ornithologist) came to mind:

“The lamps are going out all over Europe; we shall not see them lit again in our lifetime.”

In truth, our performance in the second half of last year reflected the more measured approach of a balanced and diversified portfolio—across both styles and regions—rather than one that was “all-in” on the US generally, and on technology / AI specifically.

“Main Street, not Wall Street”

But this past quarter has come to feel like a condensed replay of that trend. Just as it appeared that a US President—who has repeatedly claimed to represent “Main Street, not Wall Street”—was about to derail markets with a set of surprise tariff proposals far more aggressive than expected, he changed course.

In a strange and frankly unsettling moment, on a warmer, brighter London afternoon on April 8^th, Trump posted on social media “THIS IS A GREAT TIME TO BUY!!!” Then, possibly unnerved by a sharp spike in US bond yields (perhaps Wall Street does matter after all?), he abruptly announced a pause on nearly all the additional tariffs he had outlined only days earlier in the White House Rose Garden. Markets responded accordingly: from April 8th to the end of June, US equities in dollar terms rose by 24% and the technology-heavy NASDAQ by 32%.

TACO

We particularly enjoyed the acronym coined by Financial Times columnist Robert Armstrong: TACO or Trump Always Chickens Out. The so-called “TACO Trade” has been staggering particularly given that we still do not have full visibility on whether the tariffs reignite on July 9^th; Nvidia, Broadcom, Microsoft and many other so-called “AI-winners” have returned to all-time highs, and it feels as though US exceptionalism is back in vogue. But valuations are stretched again – US equities trade on around 22x forward earnings (and a lofty 3x sales), while European equities trade on just 15x. Trump’s policies have yet to impact inflation or growth in any meaningful way – and while earnings forecast may be set to slow, the market seems unperturbed. We are still of the opinion that – even if it is short-lived – tariffs will have an inflationary impact and this cannot be ignored.

But we must ask: what is one quarter, really?

It’s worth remembering that since we cautioned against going “all-in” on the US late last year, European equities have still significantly outperformed US markets year-to-date. Political developments have helped: since Trump’s re-election in November and the CDU/ CSU victory in Germany’s February elections, led by Friedrich Merz, there is a sense of renewed policy clarity on the continent. Germany’s constitutional debt brake, which mandates a largely balanced central government budget, is now set for reform. The proposed modification will create fiscal space equivalent to approximately 0.7% of GDP. German stock indices are up over 30% since the start of the year.

But while this provides some flexibility at the margin, it’s unlikely to fundamentally alter Germany’s and – more broadly – Europe’s economic trajectory which may well return to its prior trend. There are still significant structural headwinds in Europe: weak demographics, low investment and productivity, rising competition with China and a trailing position in the global technology race. It is all very well Germany looking to borrow and spend but, as one example, Spain, another major European economy, declined to sign NATO’s spending deal illustrating how disparate Europe remains. And while Trump looks to have succeeded in his aim to get most of his allies to spend more on their own defence, Europe’s defence spending focuses heavily on imports rather than domestically produced goods and so is unlikely to have a pronounced growth multiplier. At the same time, Europe’s export-oriented growth model will be curtailed by the rise in global protectionism.

The trade-weighted dollar

As sterling-based investors, there is another major factor to consider: the US dollar. More than equity or bond markets, it is the world’s reserve currency that is feeling the full impact of Trump 2.0’s policies. Uncertainty around tariffs – oscillating positions that ultimately point to higher trade barriers – has dampened inward investment into the US. At the same time, threats to the Federal Reserve’s independence, coupled with a ballooning fiscal deficit (the “Big, Beautiful Bill” is estimated to add $3.3 trillion to the deficit), are fuelling investor concerns. Finally, capital flows from the US – no doubt exacerbated by Trump’s proposed 3.5% tax on remittances by foreign workers – is contributing to a weaker dollar.

So far, the administration appears to be getting what it wants: the trade-weighted dollar has dropped to a three-year low. However, the dollar remains the world’s reserve currency and is the most widely used currency for international trade and foreign exchange. Although its safe-haven status has been called into question in recent months, we may be somewhat closer to a floor as we end the first half of the year. We feel more confident saying that from a sterling perspective given the UK’s own parlous fiscal position.

And, geopolitics

Finally, it would be remiss not to mention geopolitics over the last quarter. Escalating tensions between Israel and Iran resulted in all-out missile attacks followed by, even more alarmingly, a US targeted airstrike against Iranian nuclear facilities. Yet stock markets, and even the price of oil, remained remarkably sanguine. Although a form of ceasefire has now been agreed, we do need to remain alert to the threat that global instability can pose.

US equities have rebounded sharply since April, but we do not believe this signals a return to US exceptionalism—or, to borrow the words of Sir Edward Grey again, that "the lamps are going out in Europe". While the US continues to represent a significant portion of our portfolio, we remain well-diversified across growth and value styles, asset classes, sectors, and regions. Our equity allocation currently trades at 19x forward earnings, falling to 17x the following year—broadly in line with global equity indices. As such, we do not believe we are overly tilted towards either growth or value.

In an increasingly uncertain world, we find that few asset classes adequately reflect this uncertainty – perhaps with the exception of the bond market. That is why we continue to maintain a diversified portfolio. Many of our strongest investment ideas remain US based, but Europe and the UK still play an important role.

Portfolio Activity

Over the last quarter, we made a number of changes to both Funds and equity exposure (a broad – and to an extent crude – measure of overall risk) continued to creep up.

• We exited a long-term underperformer, Zimmer Biomet, and added a new holding in Schneider Electric. Electrification is – we believe – an important theme for investors going forward.  If something can be electrified, it can eventually be decarbonized via wind, solar and energy storage. Schneider Electric is a French-listed global leader in electrical distribution and automation capitalised at around £100bn. It enjoys a top two position in many of the markets it operates in, particularly low voltage products such as switch board and circuit breakers and Uninterruptible Power Supply (UPS) systems. Put simply, Schneider, along with Siemens which we already own, is a clear beneficiary as the world continues to electrify. In addition, it is currently enjoying a huge tailwind from data centres – essential to AI model training and digital services – which are among the fastest-growing electricity users globally. Schneider is a high-quality business that has historically grown, and is forecast to continue to grow, organic sales at around 7% a year. The company is well managed and has low levels of debt.
• We reduced the holding in IBM which has performed very well for us since we bought it last year, but is now trading on a higher rating for what is still a slower expected growth rate.
• We introduced a new holding in KLA Corporation and topped up the long-term holding in Keyence. KLA provides inspection and process control equipment for semiconductor manufacturing. This allows fabrication plants (“fabs”) to identify any defects and ensure quality. Given there are over 1,000 steps in making an advanced chip, this is incredibly important. KLA dominates the process control market – no.1 market share with around 57% of what is estimated to be a $14.3bn market, and it is 6.5x larger than its nearest competitor. At the time of purchase, the shares traded on 24x forward earnings which look appealing for a business that operates in a secular growth market and had grown its top line at almost 20% every year for the last five years.
• We trimmed the holding in Odyssean Investment Trust (a UK small cap portfolio).
• We topped up our investment in the Driehaus US Smaller Cap Growth Fund.
• We topped up our holdings in Ashtead Technology and Disney.
• Finally, we took some money off the table in long-term winners, Experian, Linde, Sony and L’Oreal – all of which have performed very well for our us but are now trading on fuller valuations.
• The Portfolio Fund in particular, which invests on a more balanced, multi-asset basis as well as targeting a higher income yield, has benefited from takeover approaches for both Bilfinger Berger Global Infrastructure (BBGI) and Urban Logistics.
• We used cash proceeds from these to initiate a new position in another infrastructure fund, International Public Partnerships (INPP). INPP is a quality set of social / core infrastructure assets that we first bought on a 20%+ discount to NAV and a 7% dividend yield that has consistently grown over almost 20 years.