What do fund managers look for when economic conditions are tough?

It has been a rocky start to 2025, as financial markets have digested a new political and economic landscape. All investors need to live with short-term volatility, but fund managers will often do their best to help smooth the ride. How do fund managers navigate a more difficult environment?

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Finding resilient companies becomes particularly important in tougher conditions. While struggling businesses might be able to limp on in more robust economic times, their weaknesses will be exposed by a rougher climate. This will be reflected in sliding share prices. But there are plenty of companies that can, and do, transcend the economic environment – and may even get stronger. They tend to share a number of characteristics. 

How do interest rates affect indebted companies?

Interest rates have been a key factor in the economic slowdown experienced over the last 18 months. If interest rates are low, it allows companies with high debt to stay in business because the cost of repaying that debt is lower. As interest rates rise, that debt becomes more expensive and takes up a larger share of a company’s costs. 

This is often one of the biggest risk factors for companies. Their profits drop, they cannot pay their debts and eventually, they go bankrupt. As Warren Buffett said: “only when the tide goes out do you discover who's been swimming naked”¹.

This is why across all the BlackRock investment trust portfolios, we are looking for companies with low debt and strong balance sheets. We want to ensure companies aren’t vulnerable to every central bank move.

Why is pricing power important? 

Pricing power is another priority for our fund managers. Pricing power is the ability for companies to raise the prices of their products and services. They may be able to do this because they have a strong brand, or their products are in high demand, or, as in the case of areas such as healthcare, their product is unique.

While inflation has been easing, it has not gone away completely. If companies can’t pass those additional costs onto their customers, it will hurt their profitability. Equally, during tough economic conditions, the pie gets smaller. If customers don’t have a compelling reason to buy a product, they won’t. We want companies whose revenues are defensive and enduring. 

A position of strength

Companies that go into a tough climate in a strong financial position can capitalise. Their indebted, weaker competitors may go bust, allowing agile companies to occupy the space they have left behind, buy their competitors or take over the strategic assets they leave behind, all at a cheaper price. Good companies will often emerge from difficult conditions in a stronger position than they went in.

This is also where a strong management team can be vitally important. A good, experienced management team will understand how to adapt the business to changing conditions, to make strategic acquisitions or sales. They will know which areas to prioritise and where to cut back. They will understand how to put the company in prime position for the recovery when it arrives.

The BlackRock approach to investing

Fund managers with a depth of resources can look at a company from all sides, talk to its competitors, its suppliers and its management team. The fund managers across BlackRock’s range of investment trusts can call on a skilled global analyst team, with specialists across every sector and in every region. We believe this gives us a real edge in tougher conditions. We run high conviction portfolios and the portfolio will always reflect the fund managers’ best ideas. 

Holding ​investments ​in ​​an ISA can ​​boost​ your ​returns​​: any investment growth ​​should compound​ faster​ because it is not subject to tax​. At BlackRock, we have a breadth of investment trusts covering the UK, including growth and income options, but also a range of international markets.

Our view is that good companies should be able to thrive in all conditions. The key is finding them. At BlackRock, we have built the infrastructure to look for these opportunities across the globe.