Is it time for active Equity Funds again? 

Trump’s tariff threats have been unsettling the markets for a couple of months. However, the country-specific tariffs announced last week exceeded even the wildest scenarios. It is difficult to rationally explain their magnitude. The markets have long held the view that Trump uses tariff threats as a negotiation tool. Since there is no certainty about their final duration or size, there is a risk that they will hit the US economy hard, causing the markets to price in rising inflation and an increased risk of recession.

At the time of writing, the markets are recovering from Monday’s crash. From this year’s peak levels, the S&P 500 index has fallen by 21.5%, and the VIX index, which measures market volatility, has closed above the 40 level for several days in a row. Although the price movement already meets the criteria for a bear market, the IT bubble, financial crisis, and the coronavirus crash were even larger.

The movement has also been reinforced by the fact that a huge amount of capital has moved to passive index products in recent years. This has so far been a successful strategy due to the growing US economy and a technology sector with the largest profit growth. As the growth and strong performance of the MAG-7 companies have continued, capital flows to index products have increased. When a lot of capital accumulates in the same products, the consequences are also greater when a correction occurs and investors either take profits or reduce their equity weight. This time, the trend change came from Trump’s trade policy. Currently, the US has a weight of about 70% in the world index, and the MAG-7 companies have a weight of almost 30% in broad indexes.

Active management has faced headwinds in the years following the covid pandemic due to the aforementioned market trend. But is it again time for active equity management based on stock picking?

Looking at the year 2025, for example, Nordic and European small caps have clearly outperformed the broad world index in terms of returns, not to mention the US stock market. The Fondita Nordic Small Cap fund has returned 6 percentage points, and the Fondita Nordic Micro Cap fund has performed 8 percentage points better than the MSCI World index. Fondita European Micro Cap has returned as much as 10 percentage points better than the world index. If we compare the returns to the S&P 500 index, an additional 3 percentage points of return difference can be added in favor of our Small Cap funds! The best return, however, has been achieved by the Fondita Finland Micro Cap fund, which invests in Finnish micro-cap companies, with an excess return of as much as 15 percentage points compared to the S&P 500 index.

This shows why it is good to diversify part of one’s portfolio into small caps with good growth, which do not go hand in hand with passive indexes. Looking back at 25 years of history, small caps have given twice the return of the world index. In the current turbulence, one can also think that small caps are not as affected by import tariffs because a larger part of the business is often domestically driven. European companies also benefit from Europe’s extensive investment plans aimed at the defense industry and infrastructure, as well as climate and environmental solutions.

Markets will certainly continue to be volatile, but this also creates opportunities for long-term investors.

Fondita’s Portfolio Managers 

Janna Haahtela, Marcus Björkstén and Kenneth Blomqvist