MPS July Newsletter

Briefly recapping what was, to put it mildly, a tumultuous quarter, stock indices tumbled in early April in the wake of US President Donald Trump’s announcement of so-called reciprocal tariffs, only to then swiftly recover when a 90-day pause on the higher rate reciprocal tariffs, with a separate temporary agreement with China, was subsequently reached. US equities posted their highest daily gain since 2008, while US tech stocks chalked up their best daily rise since 2001, demonstrating once again that the largest moves to the upside often occur after substantial declines. The ensuing recovery into the quarter end resulted in global equities ending the first six months of 2025 in marginally positive territory, with the MSCI All Country World Index up around 0.7% for the first half of the year (all returns in sterling unless otherwise stated).

Strategy returns

This supportive backdrop was mirrored in a positive return from each Building Block fund used to construct the strategies. Combined, these gains led to total returns of between 2% and 4.5% across the strategies during the second quarter, depending on the risk level in question.

On a relative basis, pleasing absolute and relative performance was generated by the US equity allocation. In contrast, the European and UK equity allocations lagged their respective markets, with the exposure to financials and industrials underperforming in both instances.

Elsewhere, we saw a positive contribution from the strategies’ commercial property and listed infrastructure holdings, hedge and absolute return funds delivered a positive return but lagged their respective index, while fixed interest allocations were again up, but broadly flat versus their comparators.

Activity

A full breakdown of our activity over the quarter can be found within the Q2 Investment Review document, so please take a look for a more in-depth understanding of the changes implemented during what was a busy quarter. 

Turning to June in isolation, within the UK equity allocation we reduced exposure to the energy and materials sectors, trimming the holdings in BP and Anglo American in favour of names within the financials sector. Proceeds were used to increase the existing position in Barclays, in the wake of strong Q1 results and a reiteration of the company’s financial targets, with a new holding in asset manager M&G also introduced following the company’s announcement of its partnership with Japanese insurer, Dai-ichi Life. As part of this move, M&G will become Dai-ichi Life's preferred asset manager partner in Europe, with new fund flows expected from the tie-up, including half from Dai-ichi Life’s balance sheet (thereby ensuring strong visibility). Furthermore, the company intends to acquire a circa 15% stake in M&G through on-market transactions. We see this commitment, together with the already-attractive dividend yield and move to a more formal progressive dividend policy at the FY24 results, as highly supportive for the stock.

Staying within the UK, we exited our remaining holding in the Janus Henderson UK Smaller Companies fund. This decision was taken following the announced retirement of the fund’s lead portfolio manager. We chose not to replace the holding with an alternative small cap allocation.

Elsewhere, we adjusted the mix of names within the consumer staples sector, reducing Diageo in favour of adding to British American Tobacco, which continues to offer a high dividend yield while trading on a low valuation. In contrast, Diageo has proven a challenging stock to own in recent years, and while we retain exposure to the company, which continues to own the broadest and most recognised collection of premium drinks brands in the world, we took the view that some of the position could be better deployed elsewhere in the current environment.

Within the European equity allocation, we added to our position in SAP, the global leader in business management software. We also introduced a new holding in Talanx, the German-based insurance company operating globally across non-life insurance, life insurance, and reinsurance. Demonstrating attractive earnings growth and a growing track record of outperforming guidance, alongside a resilient balance sheet and a best-in-class outlook for dividend growth, this addition was partially funded through a reduction in existing insurance holdings, Sampo and Allianz. The overall allocation to the insurance industry was increased by trimming other sector exposure, notably consumer discretionary and healthcare.

Lastly, within the North American equity allocation we reduced the strategies’ (overweight) position in Amazon, taking profits while also reducing the position in healthcare company Merck. We used these proceeds to add to chipmaker AMD, which has rallied strongly into the quarter end, as well as Microsoft, to leave us broadly neutral in our weighting to the tech sector, albeit with a continued tilt towards software and services over semiconductor businesses.

Outlook

US equities have rebounded strongly since April’s lows, moving from the verge of bear market territory to new highs in just a couple of months. Corporate earnings have held up, with notably strong performance from some of the largest tech names, while economic data has remained largely solid.

In the wake of this strong recovery seen in markets (the fastest ever by a US market following a sell-off of 15% or more), we believe it sensible to sound a note of caution and to avoid getting too carried away. Ongoing policy uncertainty, downward revisions in this year’s earnings growth expectations and elevated multiples leave us reluctant to chase this rally by increasing risk, with markets arguably more prone to corrections around risk events.

Having trimmed equity allocations into this recovery in May, the strategies are now neutrally weighted to risk assets. Alongside this reduction, we have also diversified regionally, adding to European stocks at the expense of their US counterparts. Nevertheless, we remain positive on the quality of the individual companies owned within the strategies’ US equity exposure, recognising the unique characteristics and structural strengths of these businesses, and having the ability to be selective at the stock level remains crucial to our positioning.

Finally, we see continued merit in exposure to alternative investments, with the broad range of hedge and absolute return fund strategies held (and added to in Q2) providing attractive diversification benefits. We also note a specific opportunity within the UK real estate investment trust sector, perceiving this to be a timely opportunity to add to an unloved segment of the market trading at a considerable discount, while simultaneously offering an attractive combination of income and the renewed prospect of capital growth.