Ask the Managers: Diversification, AI and the Search for Opportunity
Markets are giving investors plenty to think about. From the scale of investment in AI and the opportunities emerging beyond the US, to higher bond yields and increasingly attractive annuity rates, the investment landscape looks very different to just a few years ago.
Following our recent Ask the Managers webinar, we’ve brought together some of the key questions raised by advisers and investors. Below, the IBOSS Asset Management team share their thoughts on the themes shaping portfolios today, where they see opportunities and why diversification remains central to our approach.
With so much of recent market performance linked directly or indirectly to the AI boom, are investors becoming too dependent on one underlying theme?
The growing influence of AI is understandably leading to more investor questions, not just about the technology itself, but how deeply it is becoming embedded across the economy. In reality, AI is beginning to affect almost every company in some way, whether directly or indirectly, making it difficult to completely separate winners from losers. While some stocks offer more obvious exposure than others, even experienced fund managers who are closest to businesses often acknowledge that it remains unclear which companies will ultimately emerge with a lasting competitive advantage.
Rather than trying to predict the eventual winners, we believe diversification remains the most sensible approach. Our portfolios already maintain a degree of underweight exposure to US equities, reducing reliance on some of the market’s most richly valued AI beneficiaries, while also investing across Asia and Emerging Markets where the same themes are present, often at more attractive valuations. AI is increasingly unavoidable, but investors do not need to be all-in on a single theme. Remaining diversified helps reduce concentration risk while ensuring participation in the opportunities technological innovation may create over the long term.
With questions growing about the huge amounts of capital being spent on AI, what would make you question whether the AI boom can continue?
While enthusiasm around AI remains extremely strong, there are also reasons to question whether the current pace of investment can continue indefinitely. A growing concern is that some of the largest technology companies are committing vast amounts of capital to AI infrastructure, with increasingly significant debt obligations both on and off-balance sheet. With long-term obligations looking very different to just a few years ago when their debt levels were significantly lower. At the same time, despite widespread agreement that the technology itself is impressive, there is still relatively limited evidence that the industry is generating profits commensurate with the scale of investment being made.
There is also the possibility that AI becomes increasingly commoditised over time. If similar capabilities can be replicated at a lower cost, competitive advantages may prove less durable than investors currently expect. As Chris Metcalfe (IBOSS Asset Management CIO) has previously observed in early 2025, when technologies become cheaper and more accessible, businesses tend to adopt the lowest-cost solution available.
For investors, this reinforces the importance of diversification. AI may prove transformational, but the range of potential outcomes remains wide. Maintaining exposure to the theme while avoiding excessive concentration can help investors participate in the opportunities without becoming overly dependent on a single market narrative.
Emerging Markets have been a major beneficiary of the AI boom, where are you positioned in that context and where are you finding opportunities away from AI?
Talk about positioning outside of concentration in EM? Same concentration risk in EM?
Emerging Markets have been a major beneficiary of the AI boom, but much of the debate continues to focus on the obvious beneficiaries and the so-called “picks and shovels” supporting the theme. The challenge is that AI now seems to have a positive, negative, or sometimes completely misplaced influence on the perceived value of almost every asset. The reality is we simply do not know who the ultimate winners will be until we have the benefit of hindsight.
For that reason, we remain cautious about concentrating too heavily on any single AI narrative. Outside of China and India, we continue to see a broad range of opportunities across Emerging Markets, just as we did before the current AI enthusiasm. We are also seeing signs that capital is beginning to flow more widely beyond the US after many years in which America has attracted a disproportionate share of global investment. Even a modest reallocation of capital away from US equities could have a significant impact elsewhere. In our view, diversification remains the most sensible way to participate in these opportunities while avoiding excessive concentration risk.
With some significant moves in bond yields over recent weeks, has this opened up better opportunities for fixed income investors?
In our view, the answer is yes. The starting point for fixed income investors today is far more attractive than it was just a few years ago. In 2021, investors were willing to buy US Treasuries when 10-year yields were around 1% to 2%. Today, yields are closer to 5%, due to ongoing concerns around the size of the US government’s debt burden. While those concerns are valid, the reality is that debt levels were already elevated several years ago. The key difference is the level of income now available to investors.
Periods of market stress often create opportunities. We saw this following the UK gilt market turmoil in 2022, when rising yields ultimately proved an attractive entry point for long-term investors willing to look beyond the immediate headlines.
The same argument can be made today. By investing at current yield levels, investors can lock in a significantly higher income stream than was available for much of the past decade. While political developments and market volatility may drive short-term moves, the higher yield environment has materially improved the long-term outlook for fixed income. As a result, bonds appear considerably more attractive than they have in recent years and, relative to previous periods, offer a much stronger foundation for future returns.
After several false starts for investors adding duration, why is the case for owning longer-dated bonds any stronger today?
The case for holding longer-dated bonds is stronger today because the market is starting from a much more attractive yield backdrop than it was during the era of ultra-low interest rates. While concerns around government debt levels remain valid, these risks are now widely recognised and are, to a large extent, reflected in market pricing. Investors are being better compensated for taking duration risk than they were when yields were near historic lows and the potential for further capital appreciation was limited.
Importantly, successful investing is rarely about identifying the exact turning point. Markets can remain unsettled for longer than expected, and timing those shifts consistently is extremely difficult. Instead, investors should focus on the balance of risk and reward. With yields significantly higher than they were a few years ago, longer-dated bonds now offer a more attractive combination of income potential and diversification benefits. While uncertainty remains, today’s valuations provide a stronger foundation for long-term returns and make the case for duration more compelling than it has been for some time.
With annuity rates looking increasingly attractive, what role should annuities play alongside investment portfolios in retirement and decumulation?
With annuity rates currently at levels not seen for many years, annuities are being considered more closely by advisers and clients looking for greater certainty around retirement income.
We don’t see annuities and investment portfolios as an either/or decision. With rates where they are today, annuities can provide something genuinely valuable in retirement: certainty of income and protection against longevity risk.
The trade-off is that you typically give up flexibility, liquidity and some potential for capital growth. For many investors, therefore, a sensible approach may be to use an annuity to secure some essential expenditure, while retaining a decumulation portfolio for flexibility, discretionary spending and longer-term growth.
With cash and bonds now offering much more meaningful yields, what is the case for taking equity risk today?
We’ve talked about the case for fixed income and annuities. What is interesting is that, even though the hurdle rate for equities is arguably higher today, investor appetite for equities remains incredibly strong.
You can see that in what investors are currently buying. Global equity trackers such as Fidelity Index World and Vanguard FTSE Global All Cap feature among the best-selling funds this year, while global passive strategies feature prominently across the major platforms.
Go back 15 years and the landscape looked quite different. There was far greater prominence of UK equity income, strategic bonds and corporate bonds, alongside the era of the ‘star’ active manager. For example, Invesco Perpetual High Income alone was a £10.8 billion fund in 2011.
The long story short is that portfolios are already more heavily weighted towards equities than they have been historically, while other asset classes have become a much smaller part of the average portfolio. For example, the average balanced managed fund in 2011 had around 50% invested in equity-like assets; today that is closer to 70%.
So, for us, the key consideration isn’t necessarily whether portfolios have enough equity risk. It is whether the equity risk they already have is sufficiently diversified, particularly as we move into a period we expect to be more volatile and uncertain.
How could the US midterm elections affect markets?
The outcome of the midterm elections is likely to influence market sentiment, but the bigger consideration is what they mean for the final two years of the current presidential term. If the administration performs well, it may have a stronger mandate to pursue its policy agenda. Equally, a weaker result could make implementation more challenging and increase reliance on executive action. However, in both scenarios, the reality is that time becomes an increasingly important factor.
With only a limited period remaining before attention shifts to the next presidential election, there is likely to be greater urgency to secure agreements and deliver on key policy objectives. At the same time, international counterparts may be more inclined to play the long game, knowing that another administration could soon be on the horizon.
For investors, the key takeaway is that the election outcome itself may be less important than the broader recognition that the current policy window is narrowing. That could accelerate decision-making and policy activity, even if it doesn’t fundamentally alter the long-term market outlook.
Where do you see the best opportunities?
We see opportunities across markets rather than in any single region or asset class. While investors remain focused on geopolitical risks, debt levels and economic uncertainty, much of that caution is already reflected in prices.
We believe fixed income remains one area of interest given the higher yield environment. Higher bond yields provide a significantly better starting point for investors than was available just a few years ago, offering both attractive income and stronger long-term return potential.
Beyond bonds, opportunities remain in areas where sentiment has been particularly weak. There is still scope for further policy support in China, while any improvement in the global energy backdrop could benefit regions such as Europe and Asia that have been disproportionately affected by higher energy costs and geopolitical tensions.
Importantly, the outlook often looks very different depending on where you are in the world. While headlines in the UK and other developed markets can feel overwhelmingly negative, many investors and businesses elsewhere remain optimistic about future growth prospects.
Overall, we believe the balance of risks and opportunities remains favourable in certain areas of the market, although outcomes remain uncertain. A great deal of bad news has already been priced into markets, creating attractive entry points for long-term investors who are prepared to take a broader, global perspective.
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