Key Takeaways
- UK stocks delivered a standout return of 24.8% in 2025, benefiting multi-asset portfolios with a home bias, while Europe ex-UK equities surged 26.6%.
- Most categories fell short of their Morningstar target allocation indexes, which delivered higher returns.
- Currency movements played an important role in shaping returns for UK investors in multi-asset funds.
2025 proved rewarding for UK multi-asset investors. Returns across the Morningstar GBP allocation categories were firmly positive, extending the recovery that began in 2023 and 2024. While the average fund in most categories lagged its respective Morningstar index, overall outcomes were encouraging, particularly for investors who remained invested through the sharp drawdowns of 2022.
The strength of 2025 was most evident in balanced and higher-risk sectors. The average fund in the GBP allocation 40-60% equity category returned 10.3%, its strongest annual showing since 2019. Higher-risk strategies delivered even stronger results, with the 60-80% and 80%+ equity categories returning 11.5% and 12.1% respectively. The flexible allocation category also posted a robust 10.5% return, thanks to an increase in average equity exposure. More cautious investors benefited too, with returns of 7% and 8.2% from the 0-20% and 20-40% equity categories.
That said, most categories fell short of their Morningstar target allocation indexes, which in all but the most cautious category delivered higher returns. This gap is not unusual and reflects the combined effects of fees, asset allocation decisions, market timing and security selection.
Looking beyond a single year, trailing three-year returns now look much healthier. Annualized three-year returns range from around 5-6% for cautious strategies to nearly 11% for equity-heavy portfolios. This improvement reflects solid performance in 2023-2025 and the fact that the double-digit losses of 2022 have dropped out of the calculation.
Five-year returns remain more subdued, particularly for lower-risk funds with higher bond exposure. The legacy of 2022 is still visible, with five-year annualized returns of just 1.6% for the 0-20% equity category and 2.4% for 20-40% equity. By contrast, equity-heavy categories have largely worked through that difficult period, with five-year returns rising to 6.9% for the 80%+ equity group. This uneven recovery underlines how damaging the bond selloff of 2022 was for diversified portfolios, and how long its effects can persist.
UK and European Stocks Outperformed
One of the defining features of 2025 was a shift in equity market leadership. After dominating returns for much of the past decade, US equities took a back seat. UK stocks delivered a standout return of 24.8%, benefiting portfolios with a home bias, while Europe ex-UK equities surged 26.6%. Emerging market equities also performed strongly, returning 20.8%.
By comparison, US equities returned a more modest 8.9% in sterling terms, with global equity returns similarly restrained. Several factors explain this reversal. US equities entered 2025 with elevated valuations after years of strong performance, particularly among large technology and AI-related companies. As expectations became harder to beat, returns normalized. April’s tariff turmoil added to sharper losses for US equities in the first four months of the year, leaving them further behind before recovering later.
UK and European equities benefited from cheaper starting valuations, improving economic sentiment and a recovery in sectors such as financials, industrials and energy, which play a larger role outside the US. Emerging markets were supported by easing global financial conditions and improving growth prospects in parts of Asia and Latin America. Broader regional participation was positive for multi-asset portfolios, even if it did not always translate into index outperformance.
Global value stocks outperformed growth in 2025 as valuations were more attractive, interest rates stayed relatively high, economic growth supported cyclical sectors, leadership broadened beyond US mega-cap growth stocks, and currency movements worked in their favor. The year highlighted how different environments reward different styles, reinforcing the case for diversification across both value and growth.
The Impact of a Weaker US Dollar
Currency movements played an important role in shaping returns for UK investors. The US dollar weakened against sterling in 2025, reducing sterling returns from unhedged US equity holdings. As a result, UK-based multi-asset funds with significant US exposure experienced an additional performance drag unless currency risk was actively hedged.
While it’s standard practice to hedge all the foreign currency exposure from overseas fixed income, managers have different philosophies when it comes to the currency risks of their overseas equity holdings. Some funds, such as the Vanguard LifeStrategy range, leave this unhedged, while many others such as the BlackRock MyMap range hedge back a meaningful amount of major foreign currency exposure like the US dollar with the aim of managing risk.
The dollar’s loss of favor in 2025 is a reminder that currency can meaningfully influence outcomes, particularly when market leadership rotates away from the US given its prominent weight in portfolios.
Interest Rates Were Cut as Assets Classes Performed
Markets navigated a complex macro backdrop. Major central banks, including the Federal Reserve and the Bank of England, adjusted policy as inflation pressures continued to ease. In several respects, markets defied expectations. Many investors anticipated lower returns after two strong years, yet most asset classes delivered solid gains. The absence of a major economic downturn and resilient corporate earnings supported risk assets despite ongoing geopolitical and political uncertainty.
Funds Exposed to Gold Benefited
Outside equities, returns were mixed but generally positive. Sterling cash returned 4.4%, and bonds staged a recovery after several difficult years, though performance varied by type. UK gilts returned 5%, while UK corporate bonds did slightly better at 6.7% amid stable credit conditions. Index-linked bonds lagged again, returning just 1.4% as inflation expectations normalized. Global core bonds hedged to sterling delivered a respectable 4.6%, providing diversification benefits.
Gold also played its role as a diversifier, supported by geopolitical uncertainty and central bank demand, but typically remained a small allocation where used, and therefore not a primary driver of multi-asset returns. One exception was the Gold-rated Trojan Fund and closed-end equivalent Personal Assets Trust PNL, whose managers Sebastian Lyon and Charlotte Yonge prefer to have a weightier allocation to gold than most peers. Holding around 12% in gold in 2025, the metal was the asset class with the largest contribution to their performance over the year.
