MPS August Newsletter

Strategy returns

The MPS strategies delivered positive returns in July. Those with the largest allocations to equities –US stocks in particular – fared best, with gains of 5% at the top end of the risk spectrum. This tapered down to a return of around 0.75% at the lower end, as equity strength was offset by the more lacklustre performance of the fixed interest holdings.

At the security selection level, the month saw pleasing outperformance from our North American equity allocation, while a rally of over 3% in the dollar against the pound further lifted total returns. This earnings season has so far supported our active approach to this critical market, with contributions from overweight names including Microsoft and NVIDIA alongside strong returns from less headline-grabbing names including chipmaker AMD, equipment rental company United Rentals and life sciences tools and diagnostics manufacturer Thermo Fisher. Amid this year’s volatility it is important to remember that many of the best companies in the world are listed in the US. Our view remains that investors should continue to have exposure to these names – including those within the so-called “Mag 7” that continue to drive innovation and earnings growth – while avoiding paying a premium for US stocks that fail to exhibit these characteristics.

Across the other allocations, the UK equity allocation finished broadly in line with the market, up around 3.8%. The European allocation lagged the market, returning around -0.5% with the region itself also underperforming as investors digested a number of disappointing earnings updates. Within the allocation several names came under pressure including consumer discretionary stocks Richemont and Adidas, specialised food ingredients supplier Kerry Group and lithography equipment (the machines that make semiconductor chips) manufacturer ASML Holdings. Despite these short term falls, we retain conviction in these holdings, seeing these headwinds as temporary in nature. Finally, returns from the Asia Pacific (including Japan) and emerging markets exposure were healthy, with the allocation up over 4% in aggregate.

Trading activity

July was a relatively quiet month for changes, following an active second quarter.

• We added to the equity market sensitivity of our hedge and absolute return allocation, bringing this up towards a neutral stance.
• We also introduced a new idea within our emerging markets equity allocation – the Heptagon Driehaus EM equity fund – seeing an opportunity to add a conviction recommendation following a period of relative weakness. The fund’s current exposures reflect a growth bias and tilt towards quality factors, with the team investing across the market-cap spectrum and reflecting a current marginal bias to mid-cap names.

Outlook

We enter August retaining a constructive outlook, although as mentioned last month, several factors continue to curb the temptation to get too carried away by recent market moves. On a positive note, around 2/3rds of US large caps have so far reported results at the time of writing. Overall these have been strong, with over 80% beating consensus forecasts with a blended earnings growth rate of over 10%. We have also seen a flurry of major trade deals, and while these confirm tariff rates well above their previous run rate, they nevertheless bring with them a degree of clarity and an elimination of the worst fears caused by April’s announcements.

In contrast, as we enter what can be a choppy month for markets, are the potential headaches caused by tentative signs of an economic slowdown, ongoing policy and geopolitical volatility and relatively stretched US equity valuations. The latest US jobs report and the largescale downward revisions to previous months’ figures – not to mention the Head of the Bureau of Labour Statistics’ unexpected dismissal – checked investor enthusiasm on 1 August, causing doubt as to the robustness of the US labour market.

To summarise, these considerations have shaped our decision not to aggressively chase the recent rally. The strategies retain a neutral equity allocation, with a focus on the opportunities that continue to present themselves at the individual company level. Elsewhere, an overweight allocation to sovereign bonds provides ballast in the event of the economic outlook taking a turn for the worse, while selective alternative investments – most notably an increased exposure to Real Estate Investment Trusts (REITs) – merit their position within portfolios.