Fund selectors are preparing portfolios for an investment landscape defined by elevated valuations, geopolitical uncertainty and the challenge of sustainable returns after two strong years for equities as we head into 2026.
As Titan Square Mile’s CIO Mark Harries puts it: “Entering 2026, investors face both opportunity and crosswinds.”
Here are six themes for the year ahead based on views from discretionary fund managers, multi-asset portfolio managers and CIOs for wealth management firms.
1. Managing US exceptionalism
An ongoing theme into this year is the assessment of investor exposure to US equities and concentration within mega-cap tech firms. After a number of strong years, and increasing dominance within US indices, asset allocators are continuing to monitor exposure levels and question whether is it too early to exit completely amid intensely rising demand for artificial intelligence (AI) or are the bubble red flags becoming too large to ignore?
Dan Kemp, chief research and investment officer at Morningstar, warned that investors have become too comfortable with concentrated exposures and flags the risk of a late-cycle “melt-up”.
“We’ve got used to having big concentrations in portfolios – in the US, in tech and in credit – and those concentrations can unwind. It has been much safer for asset managers to be very near those large-cap tech stocks in recent years but if they have a melt-up, that concentration is a risk.”
Paul O’Neill, CIO at Bentley Reid, said his team has responded by tilting portfolios defensively after “the two strong years that we’ve had”.
“If you split the market into cyclicals and defensives, if you look at the US market in particular, the gap between the two is now bigger than it’s been maybe in the last 50 years,” he said. “Healthcare is very underowned and because it’s not very sexy, it tends to outperform in downturns.”
Bentley Reid has reduced exposure and rotated towards more defensive US healthcare exposure via broad, lower-valuation vehicles, while maintaining market-weight exposure to US mega-cap technology only through passive holdings – iShares US Equity Index fund is named. But O’Neill added: “We have enough exposure, we wouldn’t be increasing it.”
Meanwhile, James Klempster, deputy head of multi-asset at Liontrust, reiterated concerns about US valuations and concentration, despite a broadly constructive stance on risk assets. He described the firm as “neutral” on the US, with a deliberate underweight to magnificent seven. “Markets tend not to remain concentrated and highly valued, they have a way of unwinding that”, he warned.
David Lewis, investment manager within the Merlin Funds team at Jupiter, also added that much of the US market’s outperformance over the past decade has been driven by rerating rather than superior fundamentals. “5% of the 7% annual return gap between the US and the UK came from rerating,” he said. “You can’t rely on that over the next 10 years.”
Investors are also mindful of the wider repercussions of an ‘AI bubble’. Daniel Casali, chief investment strategist at UK wealth manager Evelyn Partners, said: “AI-related equities have surged in recent years on expectations that heavy investment in data centres and software will deliver strong returns. If spending slows and revenue generation from investment disappoints, it could trigger broader economic weakness and a sharp correction beyond AI-linked stocks.”
2. Renewed case for regions outside US
Against this backdrop, fund buyers said they are continuing to look for unloved and under-owned opportunities beyond the US – namely the UK, Japan and emerging markets.
Klempster pointed to the UK as “attractive and unloved” with the Liontrust multi-asset team maintaining a positive stance. “There’s no reason why the UK can’t continue in this vein,” he said, noting that global companies listed in London continue to trade at valuation discounts. Kemp agreed the global nature of the UK large-cap space is a source of value adding “with a very different mix from the US”.
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Lewis also flagged UK, saying the Jupiter Merlin funds have exposure to Man Income, Jupiter UK Income, Jupiter UK Growth and Evenlode Income.
He also highlighted Japan as another regional opportunity. “There’s a corporate governance revolution going on,” he said, while also highlighting rising dividends, buybacks and a renewed focus on return on equity. “This is beginning to bear fruit.” The funds have holdings in Morant Wright Japan, Morant Wright Nippon Yield and M&G Japan.
China and broader emerging markets are also on their radar albeit with a more cautious tone. O’Neill said Bentley Reid holds a Chinese allocation on valuation grounds, while Klempster added Asian emerging markets remain “pretty unloved” despite improved performance in 2025.
Evelyn Partners’ Casali also said emerging markets could continue to outperform in 2026, supported by stronger earnings growth and currency dynamics. “EMs outperformed developed markets (DM) in 2025 and could do so again in 2026, supported by stronger EPS growth and a weaker US dollar.
“Importantly, China’s push for AI self-reliance and large-scale infrastructure projects is lifting investor sentiment and narrowing the EMs equity valuation gap with DMs.”
However, Kemp cautioned buying EMs will still give investors significant exposure to tech and AI: “If you buy a broad emerging market index today, about 9% of it will be [Taiwan semiconductor company] TSMC. If you’re trying to diversify away from large-cap tech and AI, that may not be the best way of doing it.”
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3. Defensive equity positioning and diversification
Geopolitical risk was already high heading into 2026 before the news of the US’s action against Venezuela which captured its president, with US president Donald Trump vowing to “run the country” until there is a proper transition of power. Following the Russia and Ukraine conflict, and rising tensions between China and the US, fund selectors have already been considering how to shield portfolios as much as possible.
Titan Square Mile’s Harries said: “In what continues to be an unsettled world, geopolitical shocks could lead to energy or food supply disruptions and general market uncertainty. This in turn could potentially risk a return to higher headline inflation.
“It goes without saying that Trump and the political landscape will be influential.”
Rather than exiting equities, fund selectors have been adjusting how they approach risk. O’Neill said Bentley Reid continues to hold Fundsmith, despite recent underperformance, because of its quality bias and defensive characteristics. “There should be a little bit of a shift towards quality in a prolonged sell-off,” he said.
Meanwhile, Jupiter’s Lewis emphasised the importance of maintaining exposure across various investment styles. “At times value managers will work, at times growth will work, and at times compounders will work,” he said. “We want a bit of each of them all the time.”
William Marshall, CIO at Hymans Robertson Investment Services (HRIS), highlighted valuation dispersion and concentration risk as reasons to maintain diversified equity exposure rather than doubling down on narrow themes: “Looking ahead to 2026, first, we must fix the roof while the sun shines. This means revisiting portfolio diversification and guarding against concentration risk while markets are strong.
“Second, embrace smarter implementation. Factor investing is gaining traction as a way to lower costs, enhance diversification, and improve outcomes. It moves the conversation beyond the traditional active versus passive debate.”
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4. Fixed income repositioned in investment toolkit
With higher bond yields vulnerable to inflation surprises, fund selectors are largely reassessing the role of fixed income in multi-asset portfolios. Looking across the fixed income spectrum, bonds had a more subdued 2025 and investors are continuing to monitor central bank policy for pace and timing of rate cuts.
Klempster said: “Even boring government bonds have a really useful portfolio construction role to play”, while Bentley Reid is avoiding corporate credit, with O’Neill arguing spreads remain too tight. “Until they widen out, we won’t be buying any,” he said.
Morningstar’s Kemp agreed on credit: “Credit spreads are very narrow, and you’re not getting much return for the additional risk you’re taking on.”
Jupiter’s Lewis is favouring the active managers within high yield fixed income: “You’re getting paid to wait,” he said, noting that active managers can avoid the asymmetric downside embedded in credit indices.
5. Alternatives: diversification or return enhancement?
Views on the use of alternatives were more divisive, but gold in particular continues to attract investor interest.
Evelyn Partners’ Casali said bullion is a source of resilience amid geopolitical and fiscal uncertainty, driven by sustained central bank demand and concerns over debt sustainability.
“Gold’s rally to record highs is driven by structural demand led by central banks in emerging economies. Globally, net bullion purchases have accelerated since Western sanctions on Russia in 2022. At the current pace, central banks are on track to buy around 1,000 tonnes for what would be the fourth consecutive year in 2025, compared with an annual average of 48 tonnes sold between 1970 and 2021.
“This trend reflects a clear preference for security over returns, driven by declining confidence in the US dollar system and concerns about secondary sanctions. In addition, with Western public debt continuing to rise and gold’s proven role as an inflation hedge, as evident in 2022, when equities and bonds fell while gold held steady, holding bullion provides resilience amid geopolitical and financial uncertainty.”
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O’Neill said Bentley Reid’s alternatives exposure also includes gold for defensive purposes, alongside trend-following funds, catastrophe bonds and volatility-linked funds. “Trend-following funds are genuine diversifiers and they are very liquid, so you can’t get locked up. We hold the Fulcrum Equity Dispersion fund, to mitigate that market volatility.”
Absolute return funds are also gaining traction, particularly those with demonstrably low correlation to equities and bonds, with Lewis pointing to Merlin funds’ position in the Jupiter Merian Global Equity Absolute Return fund.
6. Governance and discipline take centre stage
This year fund selectors appear to be placing increasing emphasis on governance, implementation and decision-making discipline.
HRIS’s Marshall urged investors to prioritise governance in investment decision making in the current environment: “While rarely in the spotlight, robust governance can add meaningful value through better oversight, compliance and operational efficiency. Those who combine these principles with a long-term mindset will be best positioned to deliver resilient results for clients in 2026.”
He also underscored the importance of strong governance frameworks by saying “successful investing demands discipline, and a long-term perspective, not knee-jerk reactions to short-term headlines”.
Klempster also emphasised the importance of discipline as something DFMs need to look for in fund managers as well as exercise themselves.
He said: “We think tactically over a 12- to 18-month horizon and we start from the top down. We go through periods where we’re quite active, and others where we’re already set up and don’t see a compelling reason to change. We review things regularly, but we’re careful not to make changes aggressively — we do it in a cautious and phased way.”
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