Investing in 3D

“The four most dangerous words in investing are: 'this time it's different’.” - Sir John Templeton

This famous and oft-repeated quote is a warning to investors against believing that apparently unprecedented market conditions or new technologies make historical lessons obsolete. Sir John Templeton was cautioning that market cycles repeat themselves and ignoring history leads to investors potentially making decisions for the wrong reasons or falling into pitfalls that have been unearthed in previous market cycles.

There is no doubt we are living, working and investing in a period of profound change and uncertainty; this is across geopolitics, society, technology and the economy. The past year alone has brought surprises in the form of tariffs, conflict between the US and Israel and Iran and vacillations over NATO and Greenland.  But is it different this time? Or are these crises new variations on historical themes?  Before answering this, we will start by examining these transformations and then analyse what they mean for investing and portfolio management and could anything be different this time?

“When the facts change, I change my mind.”  Probably misattributed to John Maynard Keynes.  

Francis Fukuyama published an essay on The End of History in the summer of 1989 and followed this up with the book entitled The End of History and the Last Man in 1992. Simplistically, this put the case for the triumph of liberal democracy over all other forms of government. The essay and book were published as the cold war was ending and the world was at the start of an unprecedented period of peace between the major powers, notably in Europe. For the 25 to 30 years that followed, globalisation and free trade largely dominated, along with wealth creation, technological and medical advancements, and a growing political consensus. 

This is not to discount tragic events and conflicts such as 9/11, the so-called war on terror, the Arab Spring, and conflicts in the Middle East, Africa and Asia; but developed countries enjoyed stability and prosperity to an extent they had not seen before.

It is clear this has changed. It is now impossible to rule out potential trends or events because they are seen as outside of what is rational or possible; on the contrary, what was viewed as implausible is now actually often coming to pass. Indeed, the US and Israel’s attack on Iran in late February 2026 and Iran’s response can be placed firmly in this category, but it is not an isolated incident.  There has been a brutal conflict in Europe for four years and if it carries on to June, it will have lasted longer than the First World War. Old political alliances are under strain or negotiation, and domestic politics have become polarised. Liberal democracy and long-standing institutions are under substantial pressure.

Part of this process is the fragmentation of globalisation, including the rise in tariffs that is putting pressure on free trade, as countries around the world are becoming ever-more insular. This is bringing new challenges at a time of an already changing economic landscape: inflation has ‘normalised’ at higher levels than for the past 10 to 15 years and interest rates have followed suit, while global growth remains under pressure. In contrast, the rise in globalisation had brought synchronised growth and disinflationary forces.

Stock markets are contending with the end of US exceptionalism, market concentration, high valuations in some areas and rapid momentum shifts caused by huge volumes of news flow and highly liquid capital flows.  
It is hard to argue that AI will not be transformational for so many parts of our lives. This brings amazing possibilities but also great uncertainty. AI could dramatically change the employment, business and social environment in the years to come and is already being attributed to partly causing the rise in youth unemployment. Socially, the developed world is grappling with ageing populations and falling fertility rates, which is shifting population pyramids towards obelisks. What do these transformations mean for investors?

What has changed?

While huge and disruptive geopolitical shifts can have outsized long-term consequences for society, we should not make the mistake of over-exaggerating the significance to markets. Even relatively important events such as military conflict or the Brexit vote may have had an impact on society and the economy, but they did not have a profound impact on the stock market over the medium, let alone the long term. 

On average, companies have demonstrated an ability to navigate the political rollercoaster. Furthermore, many companies in the UK, for example, generate a majority of their revenues overseas and so are not always significantly impacted by domestic politics. The diversity of businesses in an index also helps with resilience - one sector may be significantly affected by a political development or policy but they may help other sectors on average they will likely be navigated successfully in time. 

What about the risk of unforeseen events, which are often characterised as ‘black swan’ events in a nod to the book by Nassim Nicholas Taleb? As we highlighted earlier, what seem to be irrational or not possible events are actually happening. For every black swan event we have experienced in markets, however, there have been innumerable postulated ones that did not materialise. The hit rate of black swan hunting is so poor the broad (and sensible) consensus is that trying to guess the next one cannot form the bedrock of an investment strategy.  

But while we expect equity markets will remain the most effective way to generate growth in excess of inflation over the long term, this does not mean investors can ignore these transformations. As ever with change, there will be opportunities and challenges; winners and losers.  

“History doesn’t repeat itself but it often rhymes”. Mark Twain is often reputed to have said this.

These transformations are new but, as the famous quote suggests, this does not mean we have to change our approach to investing. We have been somewhere like here before.  Unless there is a thesis that the changes we are seeing materially increases the probability of all businesses going bust or destroys their ability to be profitable, then the long-term history of stock markets remains a reasonable guide to their future returns. It is plausible that profitability is crimped by the new technology or by geopolitical changes but there is an equally cogent argument that AI could herald a new era of super profitability and efficiency in equity markets (not just for the AI behemoths but for any business that can harness AI well). And geopolitical tensions have been a regular feature of human (and stock market) history.  

While we are confident and consistent in our adherence to our long term investment philosophy, we do adapt the application of our process as the need arises such as is in our asset allocation, fund selection, blending of styles and managers, and portfolio construction. It would be unusual to experience such seismic shifts in the world without at least seeing a change in the dominant asset classes, sub-asset classes and sectors.

What are we doing to adapt?

A lot of commentary is currently dedicated to discussing whether this period is a repeat of the 1970s, 80s, 90s or even earlier periods in history. It may be instructive to take lessons from the past, but we must also recognise the limitations to this in a period of profound societal and technological change. What is interesting is to look back at points in history when market leadership changed. What was the outcome of that?  

One example is the build up to and the aftermath of the dotcom bubble. This is not for the usual reason that it is a reminder of the perils of concentrated and highly valued markets, but rather because we can look at what happened next. The fascinating feature about the early noughties’ bear market, and arguably any period of serious market tumult, is that it does not destroy the possibility of making money everywhere. But it did, at least temporarily, destroy the opportunity to make profit somewhere. Investors positioned away from the epicentre of the bust were not unscathed initially but they benefited once the immediate shocks had subsided. The spotlight of opportunity moves on and capital follows its gaze. With it, new markets find themselves the net recipient of flows and, as ever, where there is a surfeit of demand compared to supply, the price goes up.  

Thinking about it another way, consistent and trending markets will tend to continue to favour whatever is in vogue. Changes of environments will provide an opportunity for whatever was out of favour to return to the fold. Profound change should, therefore, be a source of optimism for the unloved. The churn of assets should favour where there is value as participants look for ways to exit crowded, popular and expensive parts of the market. History rhymes.  

Where could there be value in stock markets today? Last year showed us that most markets outside the US were relatively unloved and relatively (and in many cases absolutely) cheap. Regionally, markets such as the UK, Europe ex-UK, Asia ex-Japan, Japan and emerging markets were cheap in an absolute sense at the start of 2025. The flow out of the US and into these markets benefited them over the course of the year. Arguably, all of these markets have moved from being absolutely cheap to relatively cheap but they are still attractive. Could the reversal of a generational flow into the US, tech and growth carry on? We think it could and we are positioned to take advantage if it does.  

One area where we can channel our anti-Templeton and conclude this time really is different relates to the nature of capital flows. Over the past 20 years, the volume of passive investments has grown enormously. These instruments are a useful tool – one that we use gladly where appropriate – but it is worth bearing in mind that passive investing is, generally speaking, price insensitive. The vanilla market capitalisation weighted index is indifferent to valuation and prospects. It represents an injudicious allocation of capital which is wonderfully efficient but may also be equally naïve. 

Today’s concentrated, expensive markets are historically unprecedented in the sense that in the past, the majority of money clustering into a trade was done so actively. This time it is at least balanced between active and passive. Now a large chunk of new investor flows go to passive vehicles and so arguably they represent the marginal buyer. Perhaps this is better because where there is dispassion, there is also less hubris. But the risk in today’s concentrated markets is the converse, namely that the same dispassion could result in less scepticism, allowing valuations en masse to move out of kilter with reality. Where the risk lies here will only be evident with the benefit of hindsight.    

In conclusion, the Liontrust Multi-Asset investment team believes we have evolved from the Exceptionalism Era to the Unexceptionalism Era and that a 3D approach to investing will help to navigate the challenges posed by this transition. 3D stands for Diversified, Differentiated and Disciplined. 

Diversified

Diversification is the closest thing to a free lunch in investing. Investors should look to take on the risks they believe they will be rewarded for and diversify away from the ones that will not. This does not work perfectly all the time (as 2022 shows all too starkly) but it does work well most of the time. The Exceptionalism Era obscured the benefits of diversification due to the relative underperformance of value, smaller companies and the world against the US. 

Last year, however, showed that diversification can provide a risk management cushion and help returns. It is also worth remembering the power of compounding here – and crucially the impact of compounding negative numbers. An asset that loses 50% of its value has to gain 100% of its new value to break even. Any pound that can be saved on the way down makes the upside easier. The trick is finding the sweet spot because being too risk averse may mean that we fail to capture sufficient market upside and we compound too low a return. Diversification can help to shave off the extremes of these returns sources to provide adequate returns over the short term that compound into great returns over the long term.

Differentiated

Ultimately, if we are now in the Unexceptionalism Era, it would be foolish to presume that the sub-asset classes and regions that were predominant in the Exceptionalism Era will continue to be so. They may do well - and they could still outperform - but they are unlikely to have it all their own way. Equity markets will likely continue to be the main driver of long-term investor returns as a result of their historical ability to generate returns in excess of inflation.  

The differentiated approach to global equities today is to take an active view by  assessing markets judiciously, on the basis of their fundamentals and long-term prospects rather than simply presuming that because the US led the way in the Exceptionalism Era it will continue to do so now. This is why the Liontrust Multi-Asset investment team believes in the importance of being Actively Different.  

We build our bespoke SAAs (Strategic Asset Allocation) annually based on long-term expected returns, risks and covariances rather than rolling forward what has gone before. This results in SAAs that are created from first principles and are significantly different from market weighted ones. 

On a quarterly basis, the team applies our longstanding TAA (Tactical Asset Allocation) process. The purpose of the TAA is to methodically move portfolios away from markets that we believe have less attractive risk and return characteristics for the next 12 to 18 months towards those with better prospects. The relative attractiveness assessment is based on a large number of quantitative and qualitative inputs. The output of this process is a second layer of Differentiation than would result from the SAA alone and does not reference the allocation that would result from a solely naïve market weight-based allocation.  

Disciplined

The importance of discipline for long-term investors cannot be overstated. There are a number of reasons why discipline is key. 

The first is that for the power of long-term compounding to be rewarded investors must be present in the market. An investment approach that is too fickle will look to use market timing rather than rely on time in the market. The real issue with market timing is that we are generally poor predictors, especially when emotions are involved to cloud the decision. 

A good example of this is catching a ball. Much of what looks like prediction of its pitch is actually maths. Our brains do a quick estimate of the parabolic curve and put our hands in the right place. Add in uncertainty and it becomes less an instance of mathematics and more one of prediction. This is why rugby players struggle to catch a high kick in a squall - prediction becomes a large part of the process.  

Having an investment process that relies less on estimates and more on consistency and patience can help reduce the impact of prediction. This is why the Liontrust Multi-Asset investment team has a long-term, patient investment philosophy that is applied through a robust and repeatable process. Discipline should not be confused with dogma, however. The team ensures that while the philosophy provides a long-term investment framework, the process maintains pragmatism to enable flex as the global investment environment inevitably evolves.  

Whether this time isn’t different, whether we should change our minds and whether or not we will see the rhyme of history in today’s events is yet to be determined.  By remaining Diversified, Differentiated and Disciplined the Liontrust Multi-Asset team believe that the challenges we face today and tomorrow will be navigable and, in time, profitable.