Year-ahead commentary is challenging for us: We don’t have a crystal ball, and we believe predictions contribute more to investment mistakes than outperformance. But the New Year does offer opportunity to consider recent experiences in long-run strategic terms.

(If our look ahead to 2025 sounds similar to what we published in 2024, 2023, and 2022, it’s because we believe in a consistent approach to risk management. Although our philosophy is consistent, the themes for the coming year are fresh – as you’ll see below.)

Looking back at our 2024 commentary, we’ve identified three key 2025 risk factors and ways to manage them:

• • Bonds: Interest rate risk remains a stumbling block for investors – and the best solution remains a resilient, systematic approach.

• • Stocks: Artificial Intelligence (A.I.) and machine learning has created new opportunities in portfolio construction – from the individual stock level to the level of asset allocation.

• • Macroeconomics: Humility remains the watchword when it comes to global events and their impact on investment returns.

Bonds: Interest Rate Risk Requires Systematic Management

Since 2022 many investors have sought to pick up fixed income tailwinds by anticipating a rate cut cycle that has been frustratingly late and slow to arrive. The Fed Funds target rate has held at 5.33% for much of the year and sits now at 4.64%. The yield curve remains quite flat, with the 10-year Treasury at 4.19%, having bounced from a 2024 low yield of 3.53%.

Fits and starts to rate cuts on the policy agenda are evidence for an uncomfortable reality: Interest rate directions are unpredictable. Although five years of post-COVID history have taught us that surprises

have just as much influence on interest rates as policy agendas, many investors have a hard time resisting the temptation to make discretionary directional calls on where rates are going next.

We reiterate the importance of fixed income strategies with a history of reasonable performance regardless to the interest rate environment. After all, we believe the true method for navigating rate uncertainty is real diversification, not consultation with a crystal ball.

Stocks: Artificial Intelligence Supports Increased Relevance of Quant Strategies

Machine learning and artificial intelligence models are becoming more commonplace. Everyday people increasingly rely on large language models and algorithms to help them do everything from take meeting notes and organize their calendars to choose what to watch next on TV. We believe that, increasingly, powerful AI prediction models will support broader adoption of quantitative investment strategies that help with everything from picking individual stocks to deciding the optimal asset allocation within a portfolio.

Many investment portfolios can benefit from systematic, AI-driven processes that identify reasonable sources of return and diversify portfolios’ exposure to traditional assets’ risk profiles.

We’re not predicting any kind of sci-fi investment utopia: Despite the robots’ best efforts, there’s still no free lunch. But there’s an ever-increasing opportunity to solve problems that have seemed unavoidable within traditional 60-40 portfolios.