"Who would have thought shooting an Archduke would have caused a World War"

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I have always said that every year there will be roughly half a dozen events that might cause stock markets to fall. Today’s risks include geopolitical tensions such as tariffs and rising protectionism, which in part is causing a move away from the US Dollar; ongoing wars, excessive government spending and the inevitable inflation that is likely to follow, forced sellers of leveraged equities, private credit and counter party risk and the concentration risk surrounding AI companies. In addition, Japan’s economy is undergoing a significant regime shift, away from decades of ultra-low yields to higher ones which will have broader implications to the global market in both bonds and equities. Having the world’s cheapest source of funding that allowed investment managers to leverage against this carry trade, means a possible rush to unscramble their positions into a strengthening yen that can lead to consequences. We will have to see if the situation stabilises otherwise it could create market stress and an aversion to risk assets.  

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I’m not suggesting markets are about to tumble - quite the opposite. Mid-size companies within the US Russell 3000, which had suffered stagnant growth for the last three years have suddenly seen an acceleration in earnings growth over the last half of 2025 to a year on year rate of 11%, which suggests a broadening of market leadership over the mega-caps. Furthermore, Mike Wilson of Morgan Stanley, who correctly called the bottom of the 2020 market and the top of 2021,  believes that a new regime appears to be taking shape with governments more willing to drive stronger growth and tolerate higher inflation to work down elevated debt levels. In the wake of helicopter money policies in the early 2020’s these trends could endure for 20 to 30 years echoing the post World War 2 economic environment. As a result, investors should be willing to tolerate a higher multiple for equities versus bonds as they offer the only credible way to preserve the real value of assets.

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The purpose of the heading, which is a quote I heard made by Warren Buffett, is to demonstrate that most major drawdowns are not caused by a single obvious shock but arise when an apparently contained event exposes hidden fragilities in a tightly connected system and with this is mind, how should families and long-term investors be best positioned.  

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At this time of year, the question I am most often asked by those who are not already clients is how we have performed, usually so that they can compare it to another wealth manager. But this is always the wrong question to ask. My reply is invariably the same - it depends on what the client’s mandate is?  

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There is a reason why there are four Sterling based ARC Private Client indices as they risk graded, ranging from those investors who want 100% equity exposure and are willing to accept a higher level of volatility, down through varying degrees of fixed interest exposure, all the way to the cautious index which might have little or no equity exposure. But even then, fixed interest is not risk free either.  For many investors, income matters more than growth and maintaining a rising dividend stream takes precedence. In this case the performance comparison is irrelevant. Ideally, of course, you have both. Others simply do not need to take significant risk at all – why risk it when you have everything you already need? A modest inflation proofed return might be entirely sufficient.

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For many, the objective is not outperformance but continuity, and the right question should be; what keeps us solvent, liquid and in control during a market downturn? History offers plenty of lessons. Excessive leverage, driven by greed, was a key contributor to the 1929 crash. Liquidity stress caused by factors outside investors’ control, often driven by hedge funds and banks, played a central role in the 1987 crash, co-incidentally my first serious foray into the world of financial services and investment – and again in 2008. The key is not to become a forced seller and to withstand drawdowns when others cannot. If this means underperforming during speculative bubbles then so be it. Bubbles burst eventually. For this reason we always encourage our clients have more cash than they might think they need and accept that this comes with an opportunity cost.

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We deliberately shun the model portfolios favoured by our competitors as these are designed for their convenience rather than client outcomes. Instead, we construct bespoke portfolios for each client, primarily through active managers who can avoid companies that have become excessively expensive due to indiscriminate passive investment inflows.  We see ourselves as stewards of your life savings. This means we take care in the construction of your portfolio without taking risks that don’t need to be taken, but also not following the herd. Our approach is best described as "plain vanilla”, less nouvelle cuisine, more, good food cooked well.

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Despite creating bespoke strategies, we have created four strategies from our "buy” list of around 70 managers and to keep track of how we are doing against the competition. I was happy to tell the last person who asked me about our performance that we once again outperformed all of the ARC Private Client indices in 2025.

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Alongside Investment Management,  we offer a comprehensive range of complimentary services to support our client’s broader financial objectives.  Click her to view.

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Comments from James Scott-Hopkins, Founder of EXE Capital Management.

The views are those of the author only. The above does not constitute a recommendation to buy specific funds or assets and advice should be sought from your financial advisor as to the appropriateness of this in your portfolio. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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