Shift to Europe

The idea: I’d go with a 60/40 portfolio, but not a traditional one. Between tariffs, uncertainty about growth in the US and the shift in spending we’re likely to see coming out of Europe, I’d put 40% in European equities and 60% in a basket of diversified global fixed income.

The strategy: We’ve seen dramatic flows into Europe this year and I don’t think we should fight that. The spending package being discussed by the European Union and the big spending plans in Germany will likely lure more people into European equities. We’ve seen what happens when fiscal spending turns on and growth balloons underneath it. But an outstanding question is whether Hungary signs on to the EU spending package.

The reason I’m only 40% in European equities, with a tilt toward value, is because the stock/bond correlation has normalized and bonds are playing more of their traditional role in portfolios — we’ve started seeing yields move lower when equities move lower. Also, the extra return you can expect to get from stocks over Treasuries is just over 1%, so you’re not getting paid much to take equity risk. As well, we’re seeing almost every central bank more willing to cut rates to support growth, and over time that should lead to lower yields and be supportive of global fixed income.

Within the 60% fixed income basket is 10% in asset-backed securities along with commercial- and residential mortgage-backed securities to get that sensitivity to interest rates. Then I’d have 10% in US and European investment-grade corporate bonds and 20% in high yield, skewed toward higher quality. The last 20% I’d put in emerging market corporates and sovereigns.

The big picture: A worry in US markets is whether or not we start to move toward a lower-growth narrative. It all hinges on what the consumer does at the end of the day and the soft data we’re seeing are definitely spooking the consumer. A 10% correction in the US could be healthy, but trade concerns could be the catalyst for a more severe reaction. US policy has been so supportive for equity momentum, but there is a sea change happening. The shift in fiscal spending coming out of Europe is a very favorable backdrop. What if we have a European exceptionalism trade play? We haven’t spoken about that for many, many years.

Invest in Mid-Cap Software

The idea: We’re bullish on the opportunity surrounding software in 2025 for reasons including valuations, fundamentals and increased M&A activity. The AI craze is very bullish for software but dollars have been going to Nvidia and building out servers and networks and data centers and all the infrastructure you need. To monetize that network, you really need to move into software. Mid-cap software has been underperforming, and from a value perspective, software looks very attractive. It’s also scalable and there’s a persistent need to become more efficient, to be faster and smarter.

The strategy: We use a fund, Scalar Gauge, to invest in smaller and mid-cap names in software. It’s a concentrated equity fund that targets lesser-known public names and has a track record of investing in companies that get acquired. For 25 years the portfolio manager, Sumit Gautam, who used to work in private equity, has focused on software, investing in public and private markets. From his PE background, Gautam knows what that industry is looking for when they acquire software companies. He’s become a go-to source for finding companies that are at an inflection point and trading lower than they should, and he brings in private equity to help them be acquired. Over seven years, 40 of the companies the fund has invested in have been acquired.

The big picture: From a markets standpoint, there was a lot of optimism around the election surrounding the perception of a pro-business administration with lower regulations and lower taxes. When you turn a page into a new year and the initial excitement is over, people say ‘wait a minute, this is a lot to digest.’ I think that’s what we’re seeing, a digestion period in the markets. I’m usually the most bullish guy, and I’m still that way, but the next several months will be choppy and we will see huge up and down days.

Explore Commercial Real Estate

The idea: We expect stock returns to be more muted in the next 10 years. So, when we think about how investors can get the return they need, for those who are already well-diversified, we very often look further into private markets. One place to deploy capital would be an area where there’s been dislocation, and commercial real estate certainly ticks that box. In the industry, everyone became accustomed to zero interest rates and lots of money flowed in. Rising interest rates shocked the system, and as a leveraged asset class, it’s very sensitive. So, there’s a great opportunity to start deploying capital here in a thoughtful way.

The strategy: We think commercial real estate prices have reset to a new reality. With debt coming due and lenders likely to offer less attractive terms, solid properties that have issues with their capital structure may be available at a discount.

Multifamily housing, especially in undersupplied markets, is exciting. There are areas where multifamily housing starts are expected to drop, and we’ve seen how multifamily prices can be below replacement costs. When that happens, you don’t get a lot of building. But in the right real estate markets — like in the South — that could be an interesting place to put capital. The ability to raise rents to hedge against inflation helps too.

We favor a diversified approach to real estate, and funds that have a history of basically being stock pickers in real estate make a lot of sense. A fund structure that allows you to wait for the right opportunities is important. With illiquid assets you should be thinking about decade-long timelines, though funds will start to return capital sooner.

The big picture: We come at investing from an asset allocation point of view and we expect public market performance to be muted. As such, commercial real estate is an asset where we feel we can get an illiquidity premium and a better return from private markets. It’s an asset that doesn’t behave very much like stocks and bonds, and that’s very important in markets like this. You want a Plan B in terms of diversification.

Look to Private Credit

The idea: Public markets have been extremely expensive while there is quite a lot of private opportunity waiting in the wings, including in private credit. I think the public equity market has been overdue for a correction. So I look at what provides decent long-term risk-adjusted returns in a world that seems to have more macro uncertainty on a lot of levels. With the right managers, private credit is compelling.

The strategy: The biggest use of private credit is to fund and support private-equity deals and leveraged buyouts. There’s a lot of pressure for these deals to happen. Globally, PE funds are sitting on $2.5 trillion of dry powder and have to spend it. When they do, they will almost certainly be using private credit. Private equity funds are also keen to sell out of their more mature portfolio companies as M&A markets have been slow for a couple years. Currently, there is a $3 trillion base of un-exited leveraged buyouts globally; and the LBO loan value across North America and Europe coming due this year and in 2026 is a combined $300 billion. The economics of PE firms mean their incentive-based compensation will get compressed if they don’t exit within a standard five- to seven-year window, and a lot of investments made six to eight years ago need to be realized. Buyers are often other PE funds or are PE-backed businesses, so an exit frequently means private credit can get involved.

The best private credit funds are astute at sourcing and really well-known as good partners. They’re facing an increasingly competitive landscape because more capital is coming in and that’s compressed yields a bit. But first lien LBO loans that used to yield in the single digits have gone as high as 10%. As the private credit market matures, firms are looking to offer more junior capital solutions to their private equity clients, and those solutions provide juicier yields in the double-digits, but have more risk. A couple of seasoned private credit managers I regularly speak with point to particular opportunity among the set of companies that PE bought in the 2021 frenzy of expensive LBOs fueled by lower interest rates. As rates have risen, even good businesses are now struggling to cover higher interest costs.

The big picture: In the US public markets, the compression in the equity risk premium has been a red flag. I think this is the year that the Street looks at the money that has been pumped into AI investments by the mega-cap companies and says “show me the money,” the ROI, and there’s a risk that it takes longer than hoped. The whole US equity market is highly levered to mega-cap tech. I anticipate less volatility in the private markets. There’s growing opportunity for accredited investors to diversify into PE and private credit. Individual investor allocations to these “alternatives” are still only under 5% but funds are making it easier for high-net-worth individuals to back them.