Investment themes for 2025
Investment
Investment returns over 2024 resulted in another great year for DB pension scheme funding levels, both for the corporate sector and, in particular, the public sector. 2025 brings a new economic landscape – what does this mean for pension scheme investors?
Economic landscape:
Equity markets are at all-time highs but are heavily concentrated, credit spreads are historically tight and long-term gilt yields are at levels not seen for almost 20 years. All of this has been beneficial for most pension schemes, many of which have accelerated their journey plans.
Despite the powerhouse of the USA’s economy continuing apace, growth elsewhere is sluggish and 2025 brings a new set of risks:
- Uncertain political landscapes: Trump administration, deadlock in Europe, disinformation threats, deglobalisation
- Global conflicts: risk of escalation in Russia/Ukraine or Middle East, or from potential new flashpoints such as China/Taiwan
- Economic fundamentals: richly priced assets based on high equity P/E ratios or tight credit spreads, and concentration risks from the Magnificent 7
- Environmental and social challenges: stalling international cooperation on climate change, the rise of right-leaning populism
These could have implications on inflation, government borrowing costs and the continued US growth story which markets are firmly pricing in.

Our themes for 2025:
We believe now is the time to reassess investment strategy and asset allocation. Our themes for 2025 are:
- Reallocating profits from expensive growth assets into fresh opportunities;
- Keeping dry powder ready for a better environment to deploy risk;
- Tackling structural challenges facing pension scheme investors
This doesn’t necessarily mean reducing return in exchange for lower risk assets, as we’re still seeing some great investment opportunities in non-traditional markets.
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Reallocating profits from expensive growth assets into fresh opportunities
Equity rebalancing and/or restructuring
Banking recent profits and managing Magnificent 7 concentration risks.
US Equities have returned c50% over the last two years, principally driven by the dramatic growth of the ‘Magnificent 7’ stocks, which now make up around 35% of the US stock market (which itself represents 70% of public equities globally).
The growth of those seven stocks is largely attributed to one theme – artificial intelligence. This represents a significant concentration risk for equity investors, but simply reducing exposure to these stocks may not be the ideal solution given their dominant market position.
To manage these risks, we have explored several strategies to bank recent profits and rebalance equity portfolios. We believe targeted downside protection strategies could provide a solution to concentration concerns. Alternatively, investors could reallocate to high-returning non-traditional asset classes where the risk premiums look more attractive.
Insurance-linked assets
Accessing uncorrelated returns tailored to your risk appetite.
Insurers need capital to back the policies they underwrite. Investors who provide this capital receive a share of the insurance premiums – regular contractual income – which is uncorrelated to equity or credit markets, diversifying portfolio risks.
Specialist investment managers can offer products tailored to suit different preferences for investment risk, liquidity tolerance, and underwriting sector (such as reinsurance, catastrophe bonds or life policies – the latter offering particularly high premiums).
Whilst care should be taken to understand the risks, we believe there is an attractive opportunity for investors to access value in non-traditional markets.
Secondary market opportunities
Sellers looking for liquidity creates opportunities to purchase illiquid assets at a discount.
As the private assets market has grown and investor liquidity needs have risen, a viable secondaries marketplace has emerged. An attractive supply/demand dynamic exists for long-term investors to take on the assets of investors who can no longer tolerate the illiquidity (e.g. DB pension schemes looking to buy-out or rebalance).
Not only has this created a greater supply of deals with attractive pricing, secondaries assets tend to be more diversified with less blind pool risk and shorter maturities.
Keeping dry powder ready for a better environment to deploy risk
Dislocation strategies
Capturing market opportunities from periods of high volatility.
Volatility in markets is a key risk for investors. But it can also create opportunities, particularly if forced selling causes markets not to operate efficiently during ‘out of model’ events.
However, it can be difficult for pension schemes to be nimble enough to capture opportunities that arise when there is a market dislocation. Dislocation funds present a solution designed to capitalise on these market inefficiencies, offering a unique and diversified source of returns beyond traditional asset classes, particularly during a downturn, but dry powder is necessary to supply the capital.
Diversifying credit opportunities
Seek shorter maturity credit in global markets to outperform corporate bonds.
Investing in credit involves managing two main risks – price volatility from credit spread movements and losses from credit defaults. Shortening the duration of credit mandates in a low spread environment makes these risks more predictable and manageable.
Schemes are increasingly shortening duration by switching low yielding corporate bonds for more attractive securitised assets (e.g. ABS). However, to date most of these assets have a European bias. Diversifying into a global markets, particularly US assets that meet EU risk requirements, can enhance returns whilst accessing a broader range of securities.
Furthermore, ABS products with leveraged exposure to the highest quality tranches can amplify the return advantage over investment grade corporate bonds whilst retaining significantly reduced underlying default risk.
Alternatively, switching medium maturity corporate bonds for ultra short high yield bonds offers higher returns for similar levels of total risk. This greater spread sensitivity of the high yield asset is mitigated by shorter spread duration for similar overall price volatility. Similarly, the higher default risk in a given year of the lower rated assets is offset by the shorter holding period.
Collateral efficiencies
Broader collateral pools, synthetic products and segregated mandates can improve LDI efficiency.
In the post gilt-crisis regulatory environment LDI is not the highly efficient leveraged tool it once was. Using broader collateral pools and alternative sources of leverage can recapture some efficiencies.
Synthetic equity and credit products are increasingly accessible offering cheap and efficient ways to add risk market exposure or diversify sources of leverage in the event of higher repo borrowing costs. Collateral can be pooled with LDI and FX hedges to increase efficiency.
Additionally, Schemes with corporate bond allocations can use credit repo or credit collateralised gilt repo to further broaden the collateral pool and reduce the risk of selling interest rate sensitive assets at a time of rising yields.
Finally, consider whether a segregated LDI arrangement with greater flexibility over minimum collateral levels could free up assets for capital constrained schemes.
Tackling structural challenges facing pension scheme investors
New funding code
Understand investment risk over your journey plan to ensure funding code compliance.
The Pension Regulator’s new DB funding code outlines the criteria for fast track or bespoke funding regimes. To ensure your scheme benefits from the reduced governance requirements of the fast-track route, there are a few actions you should make sure you have taken:
- Ensure you are not exceeding the maximum supportable risk for your scheme
- Ensure your journey plan considers the covenant reliability period for your current level of risk
- Ensure the journey plan allows for de-risking to a low dependency position by the point of significant maturity
These aspects need to be documented in a Statement of Strategy.
Schemes taking a bespoke route will need to follow these principles but are afforded greater flexibility to account for scheme specific features (such as asset backed funding arrangements) but risk taking must be justified and may be more likely to see regulatory review.
End game options
Is insurance or a purposeful run-on right for your Scheme? Prepare accordingly.
Pension scheme funding positions have dramatically improved in recent years. An insurance buy-out has historically been the only endgame, but new regulations and market developments mean a purposeful run-on to generate a surplus to share with members and/or sponsor is now a genuine alternative.
We have developed the tools that can help schemes assess the right target for their situation and seize the benefits of the new DB landscape. Importantly, we provide flexibility to adapt scheme plans if conditions change, to shift between run-on, insurance or somewhere in between.
For schemes committed to insurance, it’s important to refine your investments to provide the best match to insurer pricing in the run-up to a transaction. Crucially, our experience executing risk-transfers with all major insurers across a range of scheme sizes, suggests the received wisdom of a very high allocation to corporate bonds may no longer be appropriate.
Illiquid asset secondary sales (i-FLO)
i-FLO facilitates secondary market sales at similar or better pricing, typically quicker execution times, and very competitive fees compared to a broker.
Many pension schemes are looking to offload illiquid assets, either because they are overweight these assets following rising gilt yields since 2022, or because of a desire to liquidate their portfolios in order to buy-out.
Isio’s proprietary secondary sales platform i-FLO allows schemes to sell these assets at a similar or better price, for a very competitive fee and typically more quickly than would be possible under a traditional brokerage model.
Through our manager research and transitions teams we have extensive relationships with the main players in private market secondaries universe. These managers form a panel of counterparties who are able to directly bid on assets, offering similar or better pricing to that achieved by a broker, without the associated high fees.
Want to know more? Get in touch.

Chief Investment Officer

Partner & Head of Investment

Partner