Q4 2025 - Market Review
Global equity markets broadly advanced further during the fourth quarter, overcoming a wall of worry, including a 43-day-long US government shutdown that led to a dearth of timely macro data communications from the Bureau of Labor Statistics, among others. That, together with the Trump administration’s apparently relentless effort to seek enemies, both domestically and abroad, caused a few spurts of volatility but not enough for investors to seek refuge in assets safer than equities. In that context, the S&P 500 Net Total Return Index[1] advanced 2.56%, bringing year-to-date gains to 17.43%. The broader MSCI All Countries World Index did modestly better, posting a gain of 3.37% for the quarer and 18.44% for the year. The resource-heavy S&P TSX Composite Index bested most other indices with a gain of 6.25% for the quarter and 31.67% for the year. We highlight that almost one third of the S&P TSX Composite gains in 2025 were attributable to the index exposure to the precious metals sector despite the sector representing less than 10% of the index weight on January 1, 2025. These returns are exceptional in the context of a double-digit decline in the first part of the year. Speaking of which, it is as if the whole tariff tantrum did not happen. To this point, Bloomberg estimates that the effective tariff rate was just under 17% as of November 2025. However, the U.S. International Trade Commission, using a different calculation, estimates that the volume-weighted effective tariff rate is closer to 10%, partly because some announced tariffs have yet to be enforced. Assuming that both exporters have lowered their prices and that importers are doing the same, it explains why there has not been a material impact on inflation. The other reason is that the United States is an extremely diversified, mature economy that is not overly dependent on trade. In fact, the share of imports as a percentage of US GDP has been declining for 20 years and was less than 15% at the end of 2023.
From a style viewpoint, the quality factor underwent a recovery and outperformed the other factors[2]. Some of the highly speculative segments of the markets that posted a strong recovery after the April bottom gave back most of their gains. Examples include quantum computing chips stocks which collapsed despite rumors of a potential US government minority equity participation. Similarly, cryptocurrency-linked stocks declined as Bitcoin appeared to go on sale a few weeks before Cyber Monday. Bitcoin declined nearly 30% during the fourth quarter and losses extended into January. We are perplexed by the performance of cryptocurrencies in a moment when the monetary debasement theme appears to be gaining steam.
Importantly, despite its dominant position in the Artificial Intelligence buildout, US equity markets underperformed most equity markets in 2025. When considering currency movements, the underperformance of US equities was amplified. One year does not make a decade, but we believe that a year like 2025 reaffirms the benefit of diversification across many dimensions. Interestingly, US equity underperformance continued in January 2026.
Fixed income markets appeared edgy at times, but most segments ended posting positive returns during the quarter. Jerome Powell had already announced at Jackson Hole in August that the Federal Reserve would stop its quantitative tightening program but went a bit further in the quarter by announcing that it would resume its US Treasuries purchase program. Separately, an anecdotal rule change affecting the supplemental leverage ratio of banks was announced, thereby allowing banks to hold more US Treasuries on their balance sheet. Some estimate that it unlocks up to 4 trillion of additional asset capacity for the biggest banks, which is close to the anticipated Treasury issuance over the next few quarters. Against this backdrop, the ICE BofA Canada Broad Market Index, the ICE Bank of America Global Government Bond Index, and the ICE Bank of America Global Corporate & High Yield Index gained 1.42%, 0.41%, and 2.11% respectively, during the quarter.
Commodities markets were extremely dispersed during the fourth quarter. The energy sector declined due to ongoing concerns of excess supply while the metals markets, led by a historic surge in the precious metals complex, offset the energy segment weakness. Overall, the S&P GS Commodities Index posted a modest gain of 0.97% during the quarter. The index advanced nearly 10% in January 2026 as frigid weather stressed the electricity grid and induced a rally in the energy sector while the metals sector extended its rally into the new year.
“IT WAS THE BEST OF TIMES, IT WAS THE WORST OF TIMES[3]”
Early January is an auspicious moment to reflect on where we have been to get a feeling for where we might be going. As portfolio managers, one way to conduct this exercise is to think about the risks that can materialize and assess whether these risks appear underpriced or overpriced by market participants based on the overall positioning. Our reflection started around year end, but certain key events that happened since the beginning of the year forced us to update some of our assumptions. Let us review some of those risks one by one, in no particular order.
RISK #1: Enthusiasm surrounding the Artificial Intelligence revolution runs out of steam, causing the Magnificent 7[4] to lead a significant equity market decline.
Interestingly enough, the Magnificent 7 stocks did not carry the markets in 2025 as outrageously as they did in the prior years. In fact, within the group, only Alphabet (Google’s parent company) and Nvidia did better than the S&P 500 in 2025. The five others underperformed. Moreover, the average forward price-to-earnings ratio of the group is around 28, the same level as 5 years ago but, more importantly, quite a bit lower than the 34-plus level reached in late 2021[5]. As such, while the Magnificent 7 have collectively been instrumental in the S&P 500’s fabulous run, their earnings have grown faster than their stock price. Enthusiasm may wane but it now seems to be at least partially priced in. In fact, the bigger risk that market participants seem to be pricing in is that Artificial Intelligence is even more successful than anticipated and that it disrupts the entire legacy software-as-a-service industry. To this point, the US large cap software sector declined approximately 15% in January 2026 and some more in the early days of February. Market leaders like SAP and Salesforce experienced significant declines. Even Microsoft declined 10% in a day. Elsewhere, Oracle continued to decline and is now 50% off its post Open-AI deal announcement high in the summer of last year, while Figma, one of 2025’s most anticipated IPOs lost over 30% in January. The company is down 80% from the close of its first trading day last year and is worth barely half of what Adobe offered to pay for it in 2022…
As it stands, market participants seem more concerned about the stocks that might be disrupted, should the Artificial Intelligence revolution exceed expectations, than about the ones that will suffer should it fail.
RISK #2: The President’s nominee for the Federal Reserve Chairman position[6] pushes the Central Bank to cut rates too low and sparks another wave of inflation or a disruption in the US Treasury market.
Notwithstanding the headlines, the market does not seem overly concerned about this. Implied volatility in the interest rates and foreign exchange markets has been steadily declining since late April of last year and are around multi-year lows. That is another way of saying that market participants feel that short-term political imperatives and ballooning sovereign debt service cost will not prevent the Federal Reserve to do its job, which is to promote stable prices, maximum employment, and financial stability. Maybe participants are right and there’s nothing to be concerned about … but maybe not. For this reason, we continue to favor fixed income strategies that are not overly exposed to long US Treasuries even when the yield to maturity is exceeding cash returns by a decent margin.
RISK #3: A crisis erupts in the private credit space and spreads into the public markets.
This risk has been on the back of many people’s minds for many years. Every isolated incident brings contagion fear. While the vast majority of publicly listed private credit funds are trading at significant discounts to their stated Net Asset Value (“NAV”) (see WHEN EVERGREEN FUNDS TURN RED below), both investment-grade credit and high-yield credit reflect a state of extreme complacency. Credit spreads are essentially at historical lows. Because nobody seems to be concerned, this is another area where protection is inexpensive. Admittedly, we have been more cautious than most in this respect for a while and risk has not transpired.
RISK #4: China’s residential real estate crash persists for a 5th consecutive year and triggers local government and banking defaults that cause a hard landing overseas.
The risk of a contagion associated with China’s underwhelming domestic growth has been a headline risk for as long as we can remember. Still, despite a worse-than-expected decline in fixed-asset investment in 2025, Chinese credit spreads have remained extremely tight, at the sovereign, quasi-sovereign, and corporate levels. Some offshore US$ corporate bonds have been volatile in light of rising geopolitical tensions between China and the United States but nothing particularly eventful. It is worth noting that the Renminbi has been appreciating steadily against the US dollar since 2023. To the extent that market participants are concerned, the markets tell another story, which is that persistent monetary and fiscal easing compensate for real estate and household stress. With that in mind, this is another risk that seems inexpensive to protect against.
Anecdotally, using rare earth leverage, China is the only country that came up with an effective response to Washington’s trade tariffs. Moreover, despite its shrinking trade surplus with the United States, China’s trade surplus for 2025 is an all-time record, which confirms that the country has been able to successfully find new markets for its products and services remarkably quickly.
RISK #5: The rise of Japanese government bond yields forces the Bank of Japan to intervene, and its response triggers another unwinding of the Yen carry trade similar to what happened in July 2024.
This is one risk which seems to have been partially repriced in the last week of January after having been surprisingly ignored until then. To this point, the yield on 10-year and 30-year Japanese government bond yields were trading at levels much higher than what the Central Bank had been comfortable with in its prior interventions. Similarly, the Japanese Yen has been steadily depreciating against all other major currencies and was approaching record lows until it staged a reversal in the last week of the month. Is this a sign that an unwinding has started? We do not think so. Firstly, US and European real rates remain quite interesting, if not better than some time ago, from the viewpoint of a Japanese investor who must take into account currency hedging costs. Secondly, the new Bank of Japan Governor, Kazuo Ueda, has been communicating his strategy with atypical clarity, and the market anticipates slow interest rate increases, which means that tightening conditions are at least partially priced in. Thirdly, the Bank of Japan already owns an estimated 50% of outstanding Japanese government bonds, and the local pension funds and insurers own another 10% to 15% according to some hedge fund sources. Historically, when these institutions became cautious, instead of repatriating foreign assets to Japan, they simply increased their foreign exchange coverage ratio. Since these organizations are subject to strict governance oversight, the same sources estimate that they are probably going to act the same way going forward. Lastly, Yen market positioning does not seem as extreme as it was in the summer of 2024. In conclusion, an unwinding of the Yen carry trade does not seem to be high on the list of risks to be concerned with.
So that’s for the downside risks. There are more. It is in the human nature to worry about those first. We can add to that the sentiment that market participants do not seem exceedingly worried about the possibility that the White House occupant does something that will have a lasting impact. In fact, recent experience suggests otherwise. Greenland threats came and went. Iran threats came and went. Canada threats came and … mostly went. Same with Ukraine after the Thanksgiving deadline for a peace deal passed without a resolution. Even the removal of high-ranking Department of Justice officials and the attempted removal of Federal Reserve Governor Lisa Cook have seemingly gone unnoticed... With that in mind, our assessment is that market participants are sanguine about the market environment overall. They haven’t altered their positioning significantly nor have they sought protection. To clarify, we do not think that the price movement observed in the precious metals sector (until the last day of January that is!) signals fear. On the contrary, as written in the section THE YELLOW METAL’S GOLDILOCK SCENARIO of our third quarter market review[7], we think this is just the new area where speculative frenzy has been unleashed.
But what about upside risks? Could there be positive developments that are unaccounted for or underpriced? Sure. One example is that if observers are optimistic about the impact of the One Big Beautiful Bill on consumer spending and corporate margins, few believe that we will witness a near-term productivity boost if enough nonsensical regulations are removed. But that would be positive if it happened. Another is the possibility that at some point, the British electorate will entrust a new Prime Minister to reverse, at least partly, Brexit. It is worth noting that the re-join camp has been comfortably leading the stay-out camp in recent polls in the United Kingdom. At one point, elected officials might take notice.
Balancing negative and positive risks is a delicate exercise because it is never all positive or all negative. From that standpoint, Dickens’ “it was the best of times, it was the worst of times”, the opening sentence in A Tale of Two Cities, fits in nicely as it is a splendid metaphor about the duality of life in a revolutionary period.
WHEN EVERGREEN FUNDS TURN RED
Alternative investments have been a staple allocation for institutional investors for over two decades. In an early 2025 study, Fidelity Investments estimated that institutional investors held on average 25% of their portfolio in alternative investments[8]. The allocation varies from as low as ≈ 8% for insurance companies to a high of ≈ 46% for large endowments and foundations. We typically like to break down alternative investments in two broad categories: illiquid and liquid. Illiquid alternatives include private equity, private credit, and private real assets (real estate, infrastructure, and natural resources in both equity and credit). According to Preqin[9], illiquid alternatives have grown nearly fifteenfold to nearly 15 trillion globally since 2000. Liquid alternatives, which essentially comprise hedge funds, have grown from approximately 1 trillion to 5 trillion over the same period according to Hedge Fund Research (“HFR”).
In contrast, the allocation to alternative investments is only 5% in individual investors’ portfolios. A combination of factors ranging from regulatory constraints, limited manager access, limited strategy understanding, higher perceived cost, and high commitment minimums, to name a few, have hindered implementation for individual investors. That being said, thanks to the never-flinching innovative drive of the financial industry, this has started to change with the advent of evergreen funds[10]. Like traditional closed-end drawdown private market funds, evergreen funds are designed to pool capital from numerous investors to invest in a range of assets that are not publicly traded. But the comparison stops there. Closed-end funds typically take one to two years to raise capital from investors. They then make investments they hope will appreciate before reselling them a few years later. They typically have a finite lifespan of 7 to 12 years. Evergreen funds, by comparison, are open-ended. They continually raise capital from existing and new investors and have a perpetual lifespan. Other key differentiating features are that investors in traditional closed-end funds must wait until investments are sold to get their capital back and are typically subject to the qualified purchaser rule which requires the investor (entity) having a net worth of at least $5,000,000 US. Evergreen funds, on the other hand, typically provide limited liquidity on a periodic basis subject to certain constraints and do not require investors to have a seven-figure net worth. Some evergreen funds are eligible in registered accounts.
These structural differences influence the type of funds that investors will prefer, depending on their priorities. One of the best articles on the subject was written by Goldman Sachs Asset Management[11] in which the authors argue that investor preferences should be a function of the trade-off across the following four dimensions:
Liquidity & Control: there is no question that evergreen funds have the advantage over closed-end drawdown funds on that dimension. In principle, they provide reasonably predictable, albeit limited, periodic liquidity which is not the case for closed-end funds.
Complexity: this is another dimension where evergreen funds are superior to closed-end drawdown funds. In the case of evergreen funds, investors are typically 100% invested on day one and therefore gain immediate exposure to an existing pool of assets which is visible. Closed-end funds, on the other hand, draw capital over as much as 5 years depending on the opportunity. Estimating the pacing of capital draws and distributions in relation to a desired targeted allocation to alternatives makes closed-end funds inherently more complex.
Availability & Access: traditional closed-end drawdown funds are more advantageous here as the range of strategies available in this structure is much larger. To this point, according to Pitchbook[12], private credit funds comprise roughly 50% of evergreen fund strategies while real assets funds comprise another 25%. Private equity remains a small portion.
Performance impact: measuring the performance impact is slightly complicated because traditional closed-end drawdown funds’ performance is calculated using the internal rate of return (“IRR”) methodology while evergreen funds’ performance is calculated using the time-weighted rate of return (“TWRR”) methodology. To make an apples-to-apples comparison, Goldman Sachs converted the IRR returns to TWRR returns and found that traditional private equity closed-end drawdown funds may offer between 2.25% to 2.75% of excess annualized returns over evergreen private equity funds and by 1.50% to 1.75% for private credit funds. Among the reasons explaining the difference cited by the authors is the fact that evergreen funds need to maintain liquid public assets, including cash, as a provision to be able to meet redemptions. Traditional closed-end drawdowns funds have more efficient treasury operations.
For investors who put high value on improved liquidity and/or simplicity, evergreen funds are preferable. On the other hand, for investors who can offer and prefer broader availability and seek superior performance, closed-end drawdown funds are preferable.
At Patrimonica, we have determined that families prioritized broader access and superior expected performance over other dimensions. As such, our private markets program is predominantly oriented toward traditional closed-end drawdown funds. Additionally, we have implemented various software solutions that greatly minimize the drawbacks associated with having to manage capital calls and distributions of closed-end drawdown funds. Lastly, with respect to the liquidity dimension, having experienced the forced liquidation of many funds during the Great Financial Crisis of 2008, we always doubted the ability of evergreen funds to honor redemption requests. Our general view is that, as long as an evergreen fund experiences net flows[13], it works well. However, when flows turn and remain negative, everything changes. Suddenly, the manager is forced into a dilemma where it has to choose between cutting periodic distributions and/or limit or halt redemptions or sell assets in a disorderly fashion to honor such redemptions. Basically, inherent to these structures is that the liquidity is more theoretical than practical.
Sadly, many evergreen funds have been experiencing this type of ordeal in the past two years. In an article published earlier this year, it was estimated that of the roughly 80 billion dollars invested in evergreen funds in Canada, 30 billion is currently subject to some form of limitation on redemption requests[14]. Our view is that this may be an optimistic number. But the situation is no different elsewhere, from Germany to the United States.
So, what happens when investors who sign up for a structure that promises to provide “some” liquidity periodically find out that the structure can no longer uphold its contractual obligations? Initially, investors (or their advisors) will seek answers and will put pressure on the manager to reinstate redemption payments while the manager will resist from doing so. In a best-case scenario, the situation resolves itself after a few months if enough investors rescind their redemptions request, if the fund gets new subscriptions, or if the portfolio generates sufficient liquidity through income, dividend, or asset sales. In a worst-case scenario, the manager will offer to buy back investors’ shares at a discount to the official NAV.
At the moment, given the steep discounts that have become endemic in the BDC space, it appears that there is quite a bit of distrust in the valuation process of these funds. It is almost as if there was a dual-NAV system. There is an NAV for investors who keep their shares, for the sake of reporting. Then there is a NAV for investors who want to redeem. Guess which one is the lowest? The difference between the two is the real price for immediate liquidity!
Patrimonica’s Investment Team
[1] Local currency returns unless specified otherwise
[2] Growth, Value, Momentum, and Defensive.
[3] Dickens, Charles, “A tale of two cities”, London, 1859.
[4] A group of mega-cap corporations: Alphabet (f/k/a Google), Amazon, Apple, Meta (f/k/a Facebook), Microsoft, Nvidia, & Tesla.
[5] Sources: Bloomberg, Yardeni Research.
[6] We note that President Trump nominated Kevin Warsh for the position on January 31st, but he had not been confirmed at the time of writing this.
[8] Fidelity Investments, A study of allocations to alternative investments by institutions and financial advisors, March 27, 2025.
[9] Preqin, Future of Alternative 2029 Report.
[10] Includes interval funds (unlisted mutual funds with monthly or quarterly contractual liquidity windows), tender-offer funds (unlisted mutual funds which offer to repurchase a portion of unitholder units at the fund’s NAV), real estate investment trusts (listed or unlisted companies that own income producing assets to provide regular liquidity and income) and business development companies (“BDC”) (listed or unlisted companies that lend or make equity investments in other companies).
[11] GS Asset Management, Juliana Hadas, Dan Murphy, “A Closer Look at Private Market Fund Structures”, Perspectives, Issue 10, Q4-2024.
[12] Pitchbook, Q4-25 US Evergreen Fund Landscape
[13] Subscriptions exceeding redemptions.
[14] Source: Bloomberg, “How Gated Real Estate Funds are Reshaping Canada’s Market”, January 12, 2026.
Image at top of page: Les Bulles de savon, 1867 oil-on-canvas painting by Édouard Manet — public domain image — Source: The Metropolitan Museum of Art