In 2025 the Quaker Growth and Income Fund returned 12.3% net of fees, nearly at its 3-year average and reflective of a strong year for markets overall. Behind the headline numbers, however, was a complex picture that calls for a closer look. The past year was challenging for active management, as the lion’s share of stock returns came from a narrow, thematic sector of the market nicknamed the Magnificent Seven, composed of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Perhaps the most surprising aspect of 2025 was that the economic slowdown anticipated by many economists following the April 8 tariff announcements (aka “Liberation Day”) never really materialized. Instead, tepid inflationary pressures, resilient consumer spending, and a surge in AI-focused corporate investment buoyed growth expectations, allowing equity valuations to expand and driving the S&P 500 Index to record levels.
While large-cap U.S. equities posted respectable returns, with the S&P 500 Index gaining 17.9%, they lagged their international peers significantly. Volatile U.S. trade policy, a surge in foreign infrastructure spending, cuts in foreign interest rates, and a weakening U.S. dollar drove strong advances in the MSCI ACWI ex-U.S. Index and Emerging Markets Index, which gained 32.4% and 33.6%, respectively.
Within small- and mid-cap segments of the market, a sharp rally in low-quality, unprofitable, and speculative companies created an insurmountable headwind for outperformance by quality-focused active investors. In fact, active small-cap managers posted their second-worst year ever relative to their benchmarks. That said, the narrow, low-quality speculation that punctuated much of 2025 appeared to lose steam in the fourth quarter, as the long-awaited broadening of market leadership emerged and higher-quality, economically sensitive companies began to show meaningful outperformance.
With inflation fluctuating within a relatively tight consumer price index (CPI) range between 2.2% and 3.0% and the unemployment rate rising modestly from 4.0% to 4.5% over the course of the year, the Federal Reserve found sufficient confidence to reduce the federal funds target rate three times in the second half of the year, ending 2025 at 3.75%. These rate cuts, combined with continued economic growth, allowed bonds to perform well after several sluggish years. The Bloomberg Aggregate Bond Index recorded its best year since 2020, appreciating 7.3%, while the Bloomberg Global Aggregate Bond Index gained 10.7%. How much further the federal funds rate may decline remains uncertain, as the Fed balances the risk of tariff-induced inflation against a weakening labor market.
As we enter 2026, investors are confronted with a mixed set of economic indicators. The Conference Board’s Index of Consumer Confidence has declined steadily since July 2025 and is signaling a potential economic slowdown. The Index of Leading Economic Indicators remains in negative territory, having fallen 4% over the past eleven months, while nonfarm payroll growth has decelerated, with a sharp decline in the fourth quarter relative to earlier readings.
On a more optimistic note, global GDP growth is expected to accelerate to nearly 3% annually in the first half of 2026, driven by front-loaded fiscal stimulus in both the U.S. and China. U.S. industrial production accelerated in the second half of 2025, and corporate earnings are projected to grow 12.4% in the first half of 2026, following 12.8% growth in 2025.
Fund Updates
The concentration of returns in the Magnificent Seven and the rally in lower-quality small- and mid-cap stocks posed a significant headwind for Friends Fiduciary’s active managers, who emphasize investments in stable, high-quality companies. As a balanced fund with meaningful allocations beyond large-cap domestic equities, the Quaker Growth & Income Fund posted respectable 12-month net returns of 12.3%, though this trailed its blended benchmark return.
The fund demonstrated notable strength in its international equity allocation, which represented 23% of assets and returned 32.0%, closely matching the 32.4% gain of the MSCI ACWI ex-U.S. Index. Fixed income was another bright spot, with the fund’s bond allocation returning 7.3%, in line with the Bloomberg Aggregate Bond Index.
Performance improved meaningfully in the fourth quarter, with the fund posting a net return of 2.3%, modestly ahead of the benchmark’s 2.2% gain. We were encouraged that six of the thirteen underlying managers—representing 58% of the fund’s total allocation—outperformed their respective benchmarks during the quarter.
The Quaker Growth & Income Fund will pay its next semiannual distribution in June 2026 at a rate of $1.26 per unit, compared to $1.21 per unit paid in December 2025. This distribution represents a 4.0% annualized rate and is calculated using a trailing three-year rolling average of unit value. The annualized rate is approved annually by the FFC Investment Committee and Board of Directors and is set at a level intended to be sustainable over the long term while preserving the purchasing power of the fund’s principal. Constituents may withdraw more or less than the semiannual amount, and withdrawals may occur at any time during the year.
Other Funds
Full-year net performance for the Quaker Index Fund showed a gain of 16.6%, modestly trailing the S&P 500 Index return of 17.9%. The fund delivered strong performance in 2024, with a net-of-fees return of 22.2% versus 25.1% for the S&P 500 Index. In accordance with Quaker guidelines, the fund excludes companies involved in weapons, alcohol, tobacco, fossil fuels, and for-profit prisons.
While the absence of fossil fuel exposure was the largest positive contributor to relative performance in 2025, it was offset by the fund’s overweight to underperforming financial stocks, lack of exposure to money-center banks, and exclusion of military-industrial companies that performed well during the year. Like the Growth & Income Fund, the fourth quarter showed relative strength, with the fund returning 3.0% compared to 2.7% for the S&P 500 Index.
Since its inception in 2021, the Quaker Green Impact Fund delivered its best calendar year, posting a net return of 15.7%. While the fund trailed its blended benchmark return of 20.0%, performance improved in the fourth quarter, with one of two active impact managers and the green indexed component both exceeding benchmark returns.
Both the Quaker Core Bond Fund and the Short-Term Investment Fund outperformed their respective benchmarks on a gross basis and modestly underperformed net of management fees. The Core Bond Fund posted a net return of 6.9% versus 7.3% for the Bloomberg Aggregate Bond Index, while the Short-Term Investment Fund returned 5.2% compared to 5.3% for its benchmark.
Conclusion
As we turn the page on a challenging investment environment in 2025, investors face a range of conflicting macroeconomic signals, from rising unemployment to better-than-expected manufacturing activity. While the extensive build-out of artificial intelligence infrastructure stimulates construction activity and consumption, analysts warn that financial stress among lower- and middle-income households could destabilize the broader economy.
Economists at JPMorgan Chase anticipate a “jobless expansion,” in which productivity gains continue to support wage and wealth growth. Conversely, persistent weakness in the labor market may point to increased economic fragility. The combination of accelerating business investment, softening employment growth, geopolitical uncertainty, and the risk of tariff-induced inflation presents meaningful crosscurrents that could result in increased market volatility in 2026. Nevertheless, we believe that our commitment to asset-class diversification and a disciplined approach to balancing investment styles, managers, and geographies remains the most effective way to participate in market advances while mitigating the impact of inevitable market downturns.
Thank you for your continued support.
Richard Kent, CFA
Chief Investment Officer