Betting against Uncle Sam is a high-risk strategy

Telegraph

27-03-2025

If you are only just getting round to taking advantage of your Isa and pension allowances for the tax year that runs out next week, you will not be alone. Human nature means we investors are terrible procrastinators. You'd be surprised how many people top up their tax-free investment accounts in the dying minutes of April 5.
If this sounds like you, you are probably also uncertain about where to invest this year's contribution. The no-brainer investment for many years has been a US-focused fund. But the wisdom of that approach is less clear, 100 days into an unpredictable second Trump term. What looked like a glass-half-full tax cuts and deregulation story three months ago, now looks to be a half-empty tariff, inflation, and possibly recession narrative.
But old habits die hard. Professional money managers may be falling over each other to rebalance out of the US stock market, but their retail counterparts are keeping the faith. In February there was an almost unprecedented swing from optimism to pessimism among Wall Street fund managers polled by Bank of America. Even as the big hitters run for cover, however, those investing on their own accounts are busy 'buying the dip'.
Investing after a pull back in the market has tended to pay off. The market generally rises over time, so topping up after a setback should boost your returns. That's the logic behind the almost $70bn (£54bn) of inflows to the US market in the year to date from the retail investors monitored by VandaTrack, a data provider. To put that figure in context, it is barely lower than the $71bn put to work in the same way by the same investors in the final three months of 2024, when the Trump Trade sounded less ironic.
Adjusting to the 'new normal'
Over here, we are seeing a more nuanced picture. In February, the UBS S&P 500 Index Fund and the Fidelity Index US Fund – both, as their names suggest, passive funds designed to track the performance of the US stock market – remained among the 10 most popular funds on our platform. While it is true that the US market only peaked halfway through the month, that still looks more like force of habit than strong conviction in the outlook for US shares.
Less surprising was the presence in the top ten last month of three money market, or cash, funds. Royal London Short Term Money Market, Fidelity Cash and Legal & General Cash are popular among both Isa and personal pension investors. I suspect there are two reasons for this. First, with interest rates finding a 'new normal' around 4pc, investors can expect a decent, inflation-beating return with almost no risk.
Second, there's a seasonal tax-planning effect. If you can't decide whether the recent US underperformance is a blip or the shape of things to come, parking your tax-year-end contribution in cash while you decide what to do is not such a bad idea. Doing so via a cash fund will earn you 1pc to 1.5pc more income than if you were to simply leave the money sitting on the platform while you make up your mind.
Global funds account for most of the rest of our top ten lists. That makes sense to me. The reversal of the regional performance tables I focused on last week shows how easy it is to be on the wrong side of the market's rotations. Investing globally means you will have some exposure to the best-performing markets, even if the price you pay for that is a more pedestrian return than if you were lucky enough to pick the winners each year.
I wonder, however, if investors in the global funds that are taking such a high proportion of the last-minute Isa and Sipp money this year understand the unintentional bet they are placing on the US regaining its position at the top of the leader board. Six out of the ten most popular funds bought by our most successful investors – those who have accumulated at least £1m in their Isas – have a weighting of at least 50pc to US stocks.
'Ten funds for 10 years'
That may turn out to be a shrewd reading of the tea leaves. The market correction since mid-February stabilised last week, and early this week tech stocks led a rebound on Wall Street as investors became more optimistic that Donald Trump's looming tariffs at the start of April may be less aggressive than feared. Betting against Uncle Sam is a high-risk strategy.
The high degree of uncertainty in the final days of the 2024/25 tax year gives me added confidence in the ' 10 funds for 10 years ' strategy that I described a few weeks ago. If, like me, you will be putting new money to work in the next few days to take advantage of what continues for now to be a very generous tax-free Isa and pension investment allowance, you might want to consider some of the following.
For growth: Rathbone Global Opportunities and Brown Advisory US Smaller Companies. For value: Fidelity Global Dividend and Dodge & Cox Worldwide Global Stock. For defence: iShares Physical Gold ETF and International Public Partnerships, an infrastructure investment trust. Because you also don't know whether the US will regain top spot or hand on the baton: iShares S&P 500 Equal Weighted ETF and Fidelity Special Situations. And because whatever happens this year, the world will continue to evolve: Fidelity Global Technology and Lazard Emerging Markets.
All the usual caveats apply. I don't know anything about your personal circumstances, so this is not advice. It's what I'm doing. I hope you find it useful.