With the Federal Reserve expected to further cut interest rates in 2025, investors with excess cash in money market funds and high-yield savings accounts may be looking to redeploy money.

At Janus Henderson’s investment outlook event last week, analysts at the asset management company recommended allocating that cash towards small-caps, international stocks, and bonds of short or intermediate maturities.

Here’s why.

Small Caps May Get a Lift from Lower Rates

Lower interest rates are generally thought to boost small-cap valuations, since smaller companies typically have more debt than their larger counterparts.

The Russell 2000 (RUT) index of smaller companies is up more than 18% since the start of this year, and has gained over 9% since the Fed cut rates for the first time in more than four years in September. But the benchmark S&P 500 has risen even more in 2024, climbing some 27%.

Small-caps “have been left behind as we’ve experienced the rush of the mega caps,” said Marc Pinto, Janus Henderson’s head of Americas equities. “It’s also an asset class that we think lends itself very well to active management.”

Consider Tweaking The 60/40 Portfolio

Adam Hetts, the firm’s global head of multi-asset, suggests adding a bit of risk to the traditional 60/40 equities and fixed-income portfolio.

He recommends a 63/37 portfolio, tilted a bit further toward U.S. equities with the help of more small- and mid-cap stocks.

“We think that we’ve got a good horizon here, in terms of time, for these rate cuts to transmit into a stable economy and then pass through into more of these interest-rate sensitive sectors and boost small- and mid cap,” said Hetts.

While he advocates for cutting back on fixed-income, he says bonds can offer a ‘margin of safety’ if a recession does materialize.

Rates Have Fallen, But There Are Still Opportunities In Fixed Income

Although the Fed has cut interest rates by 75 basis points this year, yields on Treasurys largely remain in the 4% to 5% range.

For that reason, Jim Cielinski, global head of fixed income, is optimistic about short- and medium-term bonds.

“Lean towards shorter duration if you’re worried at all about the re-ignition” of inflation, said Cielinski. If inflation rises, the Fed may respond by increasing the federal funds rate again.

Longer-duration bonds could be a good option for those who need a hedge in their portfolios, he said.

International Equities Could Make a Comeback

While U.S. equities have had a stellar year, the performance of international stocks has been more of a mixed bag.

An example: the Fidelity Global ex U.S. Index Fund, which tracks the performance of large- and mid-cap stocks in international markets excluding the U.S., has gained just 9.5% in 2024, substantially trailing the S&P 500.

Pinto sees opportunities in both developing and emerging markets, noting that there are international companies focused on themes the firm is bullish on, like artificial intelligence and healthcare—though he has a word of warning.

“People keep waiting for the year when international is actually going to outperform the U.S. and and maybe that day never comes,” said Pinto.