Monthly Research Letter | January 2026

January 2026 saw continued divergence between high-growth technology/aerospace sectors and traditional value segments. The primary shift in the risk environment is the persistent, high concentration of alpha within a limited number of "super-performers," as driven by the ongoing AI boom. This is particularly evident in the performance of specific US tech stocks like NVIDIA and Microsoft, and UK defense/aerospace names like Rolls-Royce and BAE Systems.

FX movements remain a critical factor for a London-based investor. The sustained strength of the USD, DKK, and EUR against the GBP over the last three years created a material tailwind for unhedged international exposures. The S&P 500 has seen a 77.9% growth in USD terms since January 2023, while the Nasdaq is up over 123.2% in the same period. The FTSE 100 hit a new record high above 10,000 in early January 2026, benefiting from strong performance in defense and mining stocks.

• US Markets (S&P 500, Nasdaq, Dow Jones): These indices have experienced exceptional growth since January 2023, primarily driven by the "Magnificent Seven" tech stocks, especially those involved in AI development and infrastructure like NVIDIA. The Nasdaq Composite nearly doubled in value in USD terms, while the Dow Jones also reached record highs.

• UK Market (FTSE 100): The UK market saw a resurgence, breaking the 10,000 mark for the first time in January 2026. Much of this performance was concentrated in defense (BAE, Rolls-Royce) and energy sectors (BP, Shell), providing a different return profile than the tech-heavy US indices.

• European Markets (DAX, CAC 40, Euro Stoxx 50): European indices also performed strongly, with the DAX and CAC 40 reaching new records as of early 2026. Performance was driven by sectors like software (SAP) and specialized healthcare (Novo Nordisk), though some luxury and auto sectors showed signs of technical weakness during the period.

• TCI Holdings: The specific stocks held by TCI Fund Management, such as GE Aerospace, Microsoft, and Visa, performed strongly and were favored by the Kelly criterion due to robust fundamentals and sustained momentum, contributing significantly to the backtested returns.

• Japanese Market (Nikkei 225): The Nikkei 225 had an exceptional run, rising from approximately 26,000 in early 2023 to over 50,000 by late 2025, benefiting from corporate governance changes and a weaker Yen.

Why the Core Framework Remains Appropriate

The core framework utilises the Continuous Kelly Criterion to illustrate how an investor might size positions to maximise long-term capital growth, adjusted for a UK investor's currency base. The framework remains appropriate precisely because it provides a disciplined, mathematical approach to capital allocation rooted in probabilistic thinking and risk balance, rather than emotional reaction to market noise.

By demanding an explicit edge and accounting for volatility (variance/covariance), the model inherently discourages chasing trends without a quantitative foundation. The results of the backtest illustrate how a disciplined application of this risk-management methodology performs when applied consistently over time, regardless of short-term market fluctuations.

What We Are Deliberately Not Reacting To

We are deliberately not reacting to calls that the artificial intelligence stock rally is a "bubble." Our model portfolios are driven by backwards-looking data (last 4 years of daily returns) and quantitative metrics (excess return/variance ratio), not forward-looking forecasts or market sentiment. We maintain a calm, non-urgent stance, anchoring our thinking during periods of high volatility and concentration.

We are also not reacting to the recent strengthening of the GBP in late 2025. The monthly rebalancing strategy inherently captures these FX adjustments systematically, preventing a rushed, sub-optimal reaction to short-term currency swings.

Why Position Sizing and Risk Balance Matter More Than Ideas

In long-term investing, survival of capital matters more than having a perfect market prediction. The Kelly framework highlights discipline under uncertainty:

• Capital Survival: The primary goal is avoiding ruin. The model naturally allocates less to highly volatile stocks and more to those with a clear, persistent edge.

• Discipline under Uncertainty: By adhering to a fixed, quantitative system (monthly rebalancing, specific filters), the investor avoids ad-hoc decision-making driven by fear or greed.

The model portfolios below illustrate different approaches and risk profiles for educational and informational purposes only. Investors may choose to replicate or adapt these strategies based on their own circumstances. We cannot advise on personal circumstances.