Key trends and top-performing funds so far in 2025

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We’re halfway through the year and for investors it has been very eventful. This week’s episode takes a look back at key trends that have played out so far. Joining Kyle to help unpick it all is interactive investor’s Sam Benstead. The duo give their take on the investment lessons from the US tariffs causing stock markets to slump in the first quarter, talk through trends within the funds industry, and crunch the numbers to reveal the best-performing funds and sectors year-to-date. 

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to the latest episode of On the Money, a weekly bite sized show that aims to help you get the most out of your savings and investments. We're now at the halfway point of the year, so this week's episode is taking a look back at the key trends that have played out so far in 2025. We're going to be looking at the investment lessons that were learned from the tariff turmoil that caused stock markets to sell off earlier this year, and we've also crunched numbers to look at the top performing funds and sectors year to date. And all that data is to the time of this recording, which is on the 27th June.

Joining me to unpick all of this is interactive investor’s Sam Benstead. Alongside myself, Sam regularly interviews fund managers and writes lots of news analysis articles related to funds, investment trusts and ETFs. So, Sam, let's start off with tariffs, which have dominated the headlines. They caused stock markets to become more volatile, particularly in the first quarter this year. Let's take a step back. Could you give an overview of why US President Donald Trump's tariff policies caused the US stock market and by extension the global stock market to suffer sharp falls from around mid-February to 8th April? And could you also detail the extent to which both US and global markets fell over that period?

Sam Benstead, fixed income lead at interactive investor: So the real key period was between 19th February and 8th April. And what started out as lots of optimism when Donald Trump was elected for the second time, quite quickly turned into pessimism when investors realised that his pre-election promises of tariffs were actually probably going to come true and could be way worse than investors were anticipating. So we had this big build up to what he called Liberation Day on the 2nd April, and people were expecting relatively modest modest tariffs. But what they got was a big presentation with lots of graphics on high tariffs on almost every country in the world.

And if actually Donald Trump went through with these, it would have caused a really deep global recession and would have been a massive shock to stock and bond markets around the world. So during that key period from the 19th February to the 8th April, the S&P 500 dropped -19%, the Nasdaq composite dropped -24%. UK shares fell about -10% over that period, so they were relatively well protected versus the US. And we had this capitulation on that key week on Wednesday, Thursday, Friday when the Liberation Day tariffs were announced. That caused a really key moment in bond markets when actually investors went from buying bonds causing yields to fall to suddenly dumping US bonds and causing US bond yields to rise, which of course increases the cost of the government deficit in The United States. And at the same time, we had an unusual environment where, actually, the US dollar was falling at the same time that bond yields were rising, which is actually pretty typical of an emerging market confidence crisis where everybody just wants to get their money out of that market.

But things, turned quite quickly when the bond market was collapsing. I think it was the influence of the Treasury Secretary Scott Bessent that actually, you know, made him whisper in Trump's ear saying, this is a bit too much. Things are getting very panicky. This is not good news at all. And Trump actually announced a ninety day pause in tariffs, which sparked a huge reversal in the stock market losses.

And, actually, if you now look back at the year-to-date, you hardly know anything happened during those critical few months in in February, March and April. The S&P 500 in dollar terms is up 5% this year. The FTSE All Share, excluding dividends, is up 6%. But, actually, your portfolio might not look quite so rosy because the dollar is down -9% against the UK pound. So that means if that that if you own US assets via an index fund tracking the S&P 500 or a global stock market fund, which is 70% invested in the US, you are still not back to even quite yet.

Kyle Caldwell: And as you mentioned, Sam, what sparked that market recovery was Donald Trump announcing a ninety-day delay on implementing tariffs for most countries. And then following on from that, we had The US and China announced the reduction in the tariffs that they were imposing on each other. And, of course, we also had the US/UK trade deal. A key lesson for me, Sam, during that tariff turmoil was the power of diversification. Over that period, if you owned a mixture of different investment types, both shares and bonds, your portfolio was typically well protected against the stock market volatility.

So if you look at the performance of multi-asset funds year-to-date, so funds that sit in the 0% to 35% Shares sector, which is the safest of the multi-asset sectors. The average fund is up 2.4% year-to-date. And if you are willing to take a bit more risk, the average fund in the Mixed Investments 20% to 60% Shares sector is up 2.9%. So this shows to me that bonds worked very well as a defensive ballast during that turmoil. And if you were patient and held on, then year-to-date, you are in positive territory if you had a mixed investment approach.

Sam Benstead: Yeah. And I think these these difficult market periods, any 20% drop, in theory, you might think you can withstand that psychologically. But, if you have all of your all of your wealth and your pension and your your ISA and you see a big 20% drawdown it may be much more painful than you think. So having a spread of of of different assets and outsourcing that to a fund manager is a very sensible decision. And if you're investing in a fund run by someone else, you actually should have confidence they are going to protect you be invested sensibly rather than picking everything yourself where you can own all that all those decisions and you see your decisions actually leading to a stock market drop, that can be quite a difficult thing to go through.

Another key takeaway for me was that money market funds actually were a very sensible place to be invested, and we've seen money market funds really rise in popularity this year. One in particular, the Royal London Short Term Money Market fund has been one of the most-bought funds for every month this year. So what are money market funds? Well, they're effectively a cash savings account that you can own in an investment wrapper. So your General Investment Account, your ISA, or your SIP, and you're paying a normally very low fee, can be 0.1% a year for a professional fund manager to deliver a cash like return for you.

And to do this, they invest in ultra safe short-term bonds maturing in just a couple of months. They also put money away with banks and overnight deposit tools and generally have access to lots of ultra safe money market instruments to generate a return on your behalf. And returns are typically in line with the Bank of England base rates. So because of that, about halfway through the year, money market funds are up just over 2%, which makes sense given that the Bank of England interest interest rate has been 4.5% this year until a couple of months ago. If you look at that in the context of inflation, inflation has been about 3% this year, so you are getting a positive real return.

I interviewed fund managers managing money market funds during all the tariff tension and when stock market is in bond markets were falling. And they said there's been no impact on money market instruments. It's been business as usual, no volatility, and they're just delivering that safe return for you. So holding cash in account has been a very good tool against stock and bond markets falling as you would expect, and yields have been ahead of the inflation rate this year.

Kyle Caldwell: And as well as money market funds, other defensive investment types performed well during the tad of turmoil. Well, I say they perform well, they performed as one would expect and hope that they would. We often talk about the trio of wealth preservation investment trusts, which are Capital Gearing (LSE:CGT), Personal Assets (LSE:PNL) and Ruffer Investment Company (LSE:RICA). All three of them did fulfil their mandate of protecting capital during that period that we just spoke about from mid-February to 8th April.

However, star of the show has been gold, which we will come onto later on in the podcast, as spoiler alert it has been gold funds that have dominated the top-performing funds in the first half of this year. But before we get to that, we will turn our attention to a couple of trends and themes we've spotted in the first half of this year. The first one is the defence sector. So we've seen investors up exposure to defence as a geopolitical hedge.

And another factor at play is that some investors have been viewing the increases in European defence spending as a potential opportunity. It's a sector that's been running hot. So, for example, Germany's biggest weapons maker, Rheinmetall, has seen its share price soar by nearly 200% since the start of the year. We've seen among customers of interactive investor, Sam, two defence-focused ETFs climb up the popularity rankings. Could you talk through them?

Sam Benstead: Yeah, of course. So, actually, I identified four ETFs tracking the defence sector with a couple launching more than a year ago and two launching this year. So the ones for the full 2025 record are HANetf's Future of Defence ETF Acc (LSE:NATO), which has risen 38% this year. And then the other one with a longer record is the Invesco Defence Innovation ETF (LSE:DFNX), which is up 16% this year.

Two ETF launched in March, so that's the VanEck Defense ETF(LSE:DFNG) and the WisdomTree Europe Defence ETF (LSE:WDEP), and both are up more than 20% since launch. So amazing returns from the sector. And as always, an ETF is a very efficient way of getting access to a theme without having to do your own stock market research. And I'm normally sceptical of ETFs when they launch, particularly thematic ETFs because there's generally a hype cycle. The big fund managers get on board with this. They see demand for a product, and then they launch it. And, actually, by the time they they've launched a product, often it's too late and you see a bit of a drop in the ETF before before the theme comes back around again. But this time around, think the defence theme has much further to go. We had a NATO summit this week, and all the NATO members announced big increases in in spending on defence. And there's only a limited number of defence companies out there, so naturally all this capital go goes into those companies.

And before this boom over the past couple of years, they were super, super cheap as well. No one wanted to own these shares. So even though we've seen this big run up, fund managers have been telling me that actually these companies still look good value. And if all this spending actually comes to fruition, it should be extremely good for these companies still. One of those was Alec Cutler at Orbis, who's a very savvy value investor, and he started buying defence shares a few years ago. And he told me recently that actually he still likes the sector and it still has further to run.

Kyle Caldwell: So that's certainly been a trend within the ETF space. Now let's switch to investment trust trends. So it has been a very eventful six months for the investment trust industry. US activist investor, Saba Capital, attempted to oust the boards of seven investment trusts early this year. Now while it wasn't successful in its campaign, it has had success elsewhere as Middlefield Canadian Income (LSE:MCT) has proposed converting into an ETF or offering shareholders an exit close to the value of its investments, which is the net asset value, NAV.  

Now the reason why Saba has circled the investment trust industry is due to the fact that investment trust discounts are at historically wide levels, and they've been at those wide levels for a couple of years now ever since interest rates rose and peaked at 5.25%. This has lowered demand for investment trusts. And as a result, lots of investment trusts are trading on discounts, and the average investment trust discount is over 10%, and it has been like that for a couple of years as I've just mentioned. Now while Saba wasn't successful in its campaign, four of the seven trusts that it did target made changes. So some of them have merged with open-ended funds, some have announced tender offers, which give shareholders the opportunity to exit at close to NAV, which in effect removes the discounts that the investment trust are trading on for those investors. So it could be argued that, actually, Saba has been successful in its campaign because boards have introduced those measures, given shareholders an opportunity to exit at a better price rather than seeing their investments languish on a stubbornly wide discount.

Sam Benstead: It's been such an interesting thing to watch play out this year. You've been you've seen this big American activist hedge fund go on the attack against relatively sleepy, archaic part of the investment world where a lot of these boards can potentially be accused of being a bit lazy and not doing enough to close discounts. And I think the impact overall for shareholders has has been brilliant. It's shaken it up.

We've seen lots of discounts narrow. And, you know, if you were if you were sitting in one of these investment trusts, you've now got the option to get out at at NAV. I think that's been a very good option. And, of course, you don't have to take up that right, and you can hold on to the shares. But, generally, I think it's been a good thing, and I don't think it's over yet as well. I think we'll see Saba come out with some more high profile attacks on investment trusts.

One of the other trends we've seen this year in the investment trust world is scale becoming more and more important for boards. There were a couple of recent mergers announced in the European investment trust sector with the proposed combination of Henderson European Trust (LSE:HET) and Fidelity European Trust Ord (LSE:FEV). In addition, there is the proposed merger of European Assets (LSE:EAT) and the The European Smaller Companies Trust PLC (LSE:ESCT. The two big recent announcements have come hot on the heels of the completion of another big merger in the first half of 2025 with Henson International Income Trust combining with JPMorgan Global Growth & Income (LSE:JGGI).

So as you mentioned, Kyle, the fact that investment trust discounts have been stubbornly wide for a couple of years now is prompting boards to become more and more proactive to try and increase demands. Ultimately, the bigger the investment trust, the greater the chance of higher demand due to the likelihood of it being on the radar of both retail investors and wealth managers. And for wealth managers, this is particularly important as the minimum size they tend to look at is £300 million for an investment trust due to the amount of money that they run on behalf of clients. Basically, if they are large investors, they cannot commit a large sum of money to investment trusts with a smaller amount of assets for liquidity reasons as it can prove problematic to sell a large sum when investment trust is less popular and not seeing much demand.

Kyle Caldwell: I can only see these trends accelerating over the next couple of years. I think scale will become more even more important for boards. At the moment, for wealth managers the minimum size they tend to look for investment trust is around £300 million. Over time, that will likely increase, in turn putting pressure on the more potentially subscale investment trusts. For a retail investor, that doesn't mean that you can't consider investment trusts that got £100 million or £200 million of assets. And in some cases, some may be potentially hidden gems. However, one thing that I'd look out for is the bid offer spread when it comes to size because for smaller investment trusts the bid offer spread can be, on occasion, quite wide. So that's something retail investors should bear in mind and take a look at when they're doing their wider research.

Let's now turn to the best-performing funds and fund sectors since the start of the year. Let's focus on sectors first. So, Sam, I I ran the numbers. And at the time of this recording, As I mentioned earlier 27th June, the top five overall sectors and their performances are Latin America, the average fund is up 15.8%, followed by European Smaller Companies, the average fund is up 13.2%. Then it is Europe excluding the UK, up 11.6%, then Europe including the UK, with the average fund up 9.6%. And then in fifth is UK Equity Income in which the average fund is up 8.2%.

Sam, are you surprised to see Latin American funds in top position? It's, of course, a very specialist fund sector. It's very high risk. I don't think many investors will have much exposure to it. And if they do have exposure to it, it should ideally be a small amount of exposure as part of a well diversified portfolio. Can you put your finger on the reasons as to why it has performed so well?

Sam Benstead: Yes, I was also surprised to see Latin America there. It's not a sector I've read much about this year, and it's also a bit of a yo-yo sector. It can have really good years followed by really poor years. Like you say, only really worth a small allocation unless you have a really strong view on the investment sector.

But I did some digging, and there are a few factors that stood out. So the first one, and I think this is the most important one, is that a weaker US dollar has been good for a lot of the mining and oil and gas companies that operate in Latin America. And these types of companies generally make up the lion's share of the investment market. So a weaker dollar means that because these commodities are priced in dollars, it means they can sell more of these assets to overseas buyers. So it's generally been good news for profits at a lot of the mining and oil and gas companies in Latin America.

And the other reason, and it's a bit like the UK, is that there's just been a rotation out of the US market into better value markets, and Latin America is definitely better value after a poor 2024 and a poor 2023. So, generally, this move to cheaper assets, better value shares has been good news for Latin America in the same way that it's been good news for UK.

Kyle Caldwell: However, I wasn't surprised to see European funds among the top-performing sectors in the first half of 2025. Europe has been performing well for the past 18 to to 36 months. While investors may find some of the sectors less exciting, for example Europe offers less technology exposure. However, these defensive areas, the likes of healthcare, financial services, defence, they've they've been performing well in a periods in which economic growth has been sluggish because they offer stable performance due to the consistent demand for their products and services. So on a three-year view, the average European fund is up 40.3%. This compares to the average return of 28.2% for the average UK equity fund.    

Sam, let's continue with the UK. While the average UK fund has underperformed the average European fund over three years, we have seen an upturn in performance of late for the UK. The UK Equity Income sector was the fifth best-performing sector in the first half of 2025. Sam, what have been the key performance drivers for UK funds?

Sam Benstead: So for me, the biggest driver of returns has been that value shares are back in fashion. So investors are taking money out of the pricey US market and looking at better value opportunities, particularly in Europe and in the UK. As the UK market has been cheap, there's lots of great value opportunities there, and that has been boosting share prices. But while shares have been cheap and that's been attracting assets, the market is still very underpriced versus the US. I think there's going to be continued demand for UK shares for that reason. You've also got a pretty punchy dividend yield on The UK FTSE All Share at about 3.5%.

So in a world of really high geopolitical uncertainty and volatility, getting that dividend yield has also been appealing to investors. I think another thing that stands out about the UK market is that we're quite insulated from trade wars with the US. So we have this UK/US trade deal. Generally, relations are quite strong. And also The UK market isn't full of complex multinational manufacturing companies similar to Apple in the US or car companies across Europe.

So, actually, if we do see a big turndown in global trade, the UK market could look quite competitive in that environment. Will this continue? I recently wrote a story for our website on ‘three reasons the UK outperformance can continue’ and brought in a few views from leading UK value investment managers. Their view is that, yes, the UK market is still cheap. As well as, this installation from trade wars is a good thing for the market. And the final thing they said is that actually global investors are seeing this opportunity and flows coming back into The UK will be good news for share prices.

Kyle Caldwell: And in terms of the worst-performing fund sectors, the bottom three are North American Smaller Companies, the average fund is down -11.7%. Then Health care, the average fund is down -10%. And then the India/Indian subcontinent sector in which the average fund is down -7.2%.

North American Smaller Companies being the worst-performing sector is not much of a surprise. If you invest in smaller companies, they can, of course, offer greater rewards compared with larger firms, but they do carry greater risk. When there's a downturn, smaller company shares do tend to fall further, and so it proved in the first half of this year when there was a pickup in stock market volatility. There was also quite a lot of expectations that US domestic stocks would perform well with Donald Trump returning to the White House. The expectation was that Trump's American first policy would boost the demand for domestic stocks and The US economy. However, this has not played out so far, and I think that also has played into the fact that North American Smaller Company funds have had a tough time in the first six months of 2025.

Let's now turn to the best-performing funds in the first half of the year. Sam, I did mention earlier, I gave it away, gold funds have stood out as the best performers. Could you run through some of the fund names and explain why gold continues to shine?

Sam Benstead: So definitely, let let's start with the gold price. So it started the year at $2,625 per ounce. It's now at nearly $3,300 an ounce. So that's a 25% increase in US dollar terms this year. And and why is gold rising?I think there's two main reasons. The first one is what you would expect. So we've had a lot of worry in markets this year, trade tensions, war The Middle East. As gold is a proven hedge against uncertainty, it often rises when investors are afraid.

But that's just one part of the story. I think the most important part actually is this idea that government deficits are rising. Inflation is still quite high. There's lots of spending being announced by governments, lots of borrowing, and all this just means that there's an increased money supply, an increased supply of dollars, an increased supply of pounds swirling around the economy. And, actually, that's just a reason for inflation to be longer for higher. And in a time of inflation, what you really want is a fixed asset where the supply isn't going to increase, and gold is the thing that investors turn to during those times. So because they're worried about the money supply rising, gold being fixed in supply is rising versus fiat currencies. So that, I think, has been behind the rise in the gold price this year.

But if you dig into the data, gold price up about 25%, but gold miners has to have done even better. So it's funds that have been investing in gold miners that have done incredibly well this year. So what are the risks and opportunities with gold miners? Well, for me, they can just be viewed as a levered bet on gold. So a rising or falling gold price leads to big swings in the profits or losses at these gold miners. There's also a few other things to be aware of when when investing in gold miners. So there's the risk that managements do something very positive or very negative at a specific company. Companies can find new reserves, which can be a boon for profits, but also gold mines can get caught up in local issues around mines, particularly in the emerging world. So this also increases the risk and opportunity of gold miners over gold.

And in terms of funds that invest in gold miners that have done really well this year, so I'll just name three of them, the top three in terms of returns year-to-date. And at number one is the SVS Baker Steel Gold & Precious Metals fund, which is up 52% this year. Then Hanetf AuAg Gold Mining, an ETF with stock market ticker ESGP, is up 49% this year, while the Jupiter Gold & Silver fund is up 47%.

Among the other top performers, there are a few other thematic funds. I think this is typical really. So when funds track a niche theme, it's often boom or bust because they're very concentrated bets on a specific type of the stock market. So alongside all these gold names, we've seen funds investing in banks, defence, Polish shares, and Korean stocks do well this year.

Kyle Caldwell: And for investors that have not had exposure to gold and now have FOMO and are thinking about having some exposure now, there's, of course, always the danger of buying in potentially at the peak after a strong run. What are your thoughts, Sam? Is it now too late to join the gold party?

Sam Benstead: I don't think so, but there's a risk of trying to make a short-term bets on the price of a metal. But if you think, actually, I like the story of gold. I like this idea that it holds its value when normal currencies do not, and you want to to add a long term allocation portfolio, say three or 4%, I I don't think now is a bad time to try and make that decision as long as you're investing for the long term and not looking to make a short term profit. So how would you do that? There's the gold mining funds, which as I explained, are a bit riskier, but actually, I think the most I think the purest way of adding to gold to a portfolio is to do it with an ETF that is backed by physical gold. So one of those features on our Super 60 list, and that's the iShares Physical Gold ETC, stock market ticker SGLN. That I would say is the best way of doing it. Try and keep the allocation fixed. So actually, if you see gold go up a lot, you might want to trim to try and keep that allocation at 3% or 4%. If gold is falling a lot, then actually you might want to buy more to try and get that allocation at your desired amount.

Kyle Caldwell: Well that’s it for this episode. Thanks to Sam, and thank you for listening to On The Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it. And if you get a chance, please do leave us a review or a rating on your podcast app too. You can join the conversation, ask questions, tell us what you'd like us to talk about via email on OTM@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the Interact Investor website at ii.co.uk, and I'll see you next week.

On The Money is an interactive investor (ii) podcast.