I believe in the principle of radical uncertainty and tend to view most prognostications about what might happen in the coming 12 months with some scepticism. I tend to favour those who suggest that tomorrow looks a bit like today but with a few extra bells and whistles attached.

Nevertheless, there are several trends, challenges and issues that investment trust investors might want to focus on in the coming 12 months. I know they tend to preoccupy many finance professionals and, of course, none of us have any idea how they’ll play out, but thinking through how you might respond is a useful exercise.

Let’s kick off with the elephant in the room: Saba. Just before Christmas, the US hedge fund revealed its master plan to target seven investment trusts. I’m no expert on most of the equity funds involved, so I can’t opine on whether it’s good or bad news for investors, but the development generated considerable attention and mainstream news coverage. Investment trusts found their way into newspapers which wouldn’t traditionally cover trusts.

These articles may also have helped to anchor the concept among the great unwashed mass of non-trust investors that maybe some investment trusts are too cheap, and that the discounts on offer – with the average for the trust universe running rather high at 15% – might represent an opportunity. The great test then of whether Saba is successful in my book is whether we see that average aggregate discount across the broad equity funds space head back into the single figures, maybe to about 8-10%. If it does, then Saba will have done all of us a service.

The proposed Saba consolidation also makes one wonder when the same exercise will happen in the alternative assets universe. There are all sorts of profoundly sensible reasons why a push to consolidate into a few über vehicles hasn’t happened yet – with funds tending to choose the orderly wind down instead. But too many of these wind-downs take too long, and there must be a private assets manager out there with a sterling reputation and an existing flotilla of trusts thinking through how to swoop down and round up some likely suspects.

Analysts at Panmure Liberum reckon that the existing flotilla of 21 alternative energy funds is far too many and I wouldn’t be surprised to see an apex predator emerge soon, perhaps sponsored by one of the big multi-asset fund houses that owns a number of funds and wants to see something meaningful happen. If that happens, expect many of those yawning wide discounts to narrow sharply.

‘Trump trade’ concerns

Stepping back from the trusts space specifically, the big challenge for all asset allocators, private or professional, is the need to think through what to do about the Yanks. The Trump Trade has been a blessing to US equities, but it has prompted massive concerns about concentration risk, especially in the seven tech names we all know and love (and own via global equity funds).

Will 2025 be the year that the rally broadens out, as it started to do in late 2024, to include smaller companies? Or should investors try to diversify away internationally from the 65-75% weightings for US stocks in most global benchmarks? I note with interest that Alliance Witan (ALW ), for instance, is running its North American exposure – which includes Canada – at well below 65%.

But might we all be missing the known unknown: that Musk means business and that the US Treasury bond markets have got the wrong end of the stick? The consensus bet is that the US budget deficit will get even bigger after all those Trump tax cuts. But what happens if Trump decides not to poke the inflationary bear and cuts back the deficit drastically (helped by tariffs and massive spending cuts), prompting a new age of austerity? That scenario, which I would suggest is a very real possibility, would be fab news for US Treasuries but might be worrisome in the short term for US equities. Have we all priced in that risk?

After many years of huge US government fiscal pump-priming, such a drastic policy reversal might give the US Federal Reserve room to cut interest rates slightly more aggressively. That, in turn, might provide some positive momentum for interest rate-sensitive stocks and sectors, with real estate a possible beneficiary (although the real estate sector is powered by much more than just interest rates). It could even give a bit of breathing space for the Bank of England to do likewise.

Talking of broadening out trades, might 2025 be the year that equity income shines? The UK investment trust market has real depth in dividend-focused equity funds, with lots of choices and a deep pool of experienced managers. They did well in 2024 as a group, but growth equities have consistently outclassed them. If markets prove much more volatile in 2025, then the regular dividend income could come in handy again.

Growth stock themes

Back in the world of growth stocks, two big megatrends are playing out: AI and GLP-1 receptors. I’ve spent a fair bit of time chatting with friends in both sectors over the holiday break, and both communities are terrifically excited. Over in AI, the talk is of the next generation of models emerging out of Open AI this year, with rivals (especially Musk-financed ones) not far behind.

But the really excitable, meme-enthused folk are chattering away about the cross-over between quantum computing and AI, while the more engineering-focused say that Nvidia might surprise to the upside with its order book for 2025.

Clues as to what might happen next will start to emerge in the portfolio of technology funds such as Polar Capital Technology (PCT ), where manager Ben Rogoff is all over the AI space, or Manchester and London (MNL ), run by Mark Sheppard, another AI enthusiast.

Over in biotech land, everyone and their aunt is onto the next generation of GLP drugs, with the next wave looking at new forms of existing treatments, maybe in pill form or via monthly injections. But lurking beyond this first generation of mass-market treatments are a wave of earlier-stage programmes which are looking to fine-tune many impacts of the GLP on existing conditions, such as addiction or even cancer. I advise watching the portfolios of biotech funds such as RTW (RTW) or Biotech Growth (BIOG ) for their next big bets on the obesity treatment revolution.

Will EMs stay cheap?

Emerging markets (EM) used to be regarded as a sub-component of the growth stock universe, but those days are long gone. EM equities have tended to be highly volatile, with a wide return dispersion between regions (and countries) but most national markets trading at low valuations – with India the apparent champ in terms of returns, and high ratings.

What happens next will, I suggest, be entirely determined by what the US does under Trump. How big and how bad will the trade war be? What impact will it have on the US dollar? Will Trump do a deal with China, allowing it to reflate its economy more aggressively? I have no inside track on what will happen, but what I would observe is that many parts of the EM spectrum, ranging from poor old Mexico, through Vietnam to China, look reasonably priced if the global economy picks up speed in 2025. Whether that value is realised is entirely dependent on impending trade wars.

I’ll finish with one final, slightly repetitive point: active ETFs are popping up all over the place with more and more funds targeting classic investment trust niches and aimed at the private investor. Just before the Christmas break, for instance, American Century announced that it was launching (via Avantis) a listing of its Emerging Markets Equity UCITS ETF on the London Stock Exchange.

In years gone by, this might have been an investment trust, but more and more big managers are choosing the flexibility of an active ETF wrapper. Will the investment trust sector mount a proper rearguard action and fight back in 2025?

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances.