MPS July Newsletter

MPS Strategy Performance

Against this backdrop, the MPS strategies posted pleasing gains over the quarter, with total returns ranging from between 2-3% at the lower end of the risk spectrum, to more than 15% at the highest risk level. These moves brought year-to-date returns back to positive territory across the board, as the pessimism sparked by Q1’s geopolitical developments gave way to an optimism founded upon a more stable situation in the Middle East, resilient economic data, and a strong earnings season predicated on the accelerating growth in AI capital expenditure.

The quarter was notable for several interesting themes.

• Firstly, stock markets generally performed much better than bonds. While equities were buoyant, bond market returns were far more muted, reflecting inflation concerns that have eased but not disappeared, alongside the possibility of a more hawkish stance by central banks.
• Secondly, there was a clear contrast between the performance of UK equities and their international counterparts. The technology-heavy US market and emerging Asian markets led the way, delivering strong double-digit gains.
• In contrast, the UK, with its greater exposure to resources, value stocks, and fewer technology companies, returned just over 4%.

In short, the characteristics that helped the UK outperform in the first three months of years became something of a headwind in the more growth-led environment of the second quarter.

Turning to the drivers of strategy returns, and Information Technology (“tech”) was a significant contributor, with positive security selection across the strategies.

• In the US, strong relative performance came from holdings such as Palo Alto Networks, the cybersecurity business; Advanced Micro Devices (AMD), the chip designer; Taiwan Semiconductor Manufacturing Company (TSMC), the leading chip manufacturer; and KLA Corporation, which provides process control and inspection equipment used in semiconductor manufacturing.
• Within the European allocation, ASML, the world's leading producer of semiconductor photolithography equipment, and Infineon Technologies, which specialises in power semiconductors, automotive chips, industrial electronics and secure connectivity solutions, also contributed positively.
• Meanwhile, across Asian & Emerging Markets we saw strong returns from several of the strategies’ fund holdings. The position in Veritas Asian was the standout performer, with the fund’s returns driven by stock selection and market allocation, particularly its significant exposure to the sharply rising South Korean and Taiwanese indices.

Importantly, returns were not driven solely by large technology companies, with the strategies maintaining a balanced sector exposure consistent with our investment philosophy. Positive stock selection within the European and US Consumer Discretionary sectors added value, while the allocation to US smaller companies contributed strongly, returning over 24%. Elsewhere, an “underweight” allocation to the relatively weak US Consumer Staples sector proved beneficial, while holdings such as Marks & Spencer and Coca-Cola HBC within the UK allocation also made a positive contribution, highlighting the importance of stock selection across regions. Beyond equities, the strategies' fixed interest exposure delivered modest gains, while the allocation to hedge funds, property, and infrastructure holdings also generated positive returns.

There were several areas that held back returns. The strategies' Industrials exposure in both the UK and Europe was a headwind, with an “underweight” position in Rolls-Royce Holdings (which performed strongly over the period) and share price weakness in Alstom both detracting from performance. In the US, the Health Care allocation lagged, driven by holdings in Zoetis and Medtronic. Energy stocks also fell as oil prices declined by around 30% amid positive developments in the Middle East. Despite this, we continue to view the strategies' exposure to the sector as a useful hedge against any renewed geopolitical tensions.

Activity

Turning to portfolio activity, June was a busy month on the desk, capping an active quarter under the bonnet of the funds.

Within the US allocation we trimmed exposure to Netflix, reduced the position in alternative asset manager Ares after a strong rally since we topped it up in March, and exited the remaining holding in Zoetis, the global animal health company. The latter has been a disappointing position: the company’s May update came in below expectations, and 2026 guidance was reduced because of softer growth in the “companion animal” (pet) market. Our view is that it may take several quarters for the outlook to stabilise, so chose to reallocate the proceeds into higher-conviction existing holdings.

We also initiated a position in Micron, a leading designer and manufacturer of memory and storage chips. While the stock has performed strongly, this has been supported by robust demand from AI and data centres, improved industry supply discipline, and stronger memory pricing. Micron is also securing a greater proportion of sales through long-term customer agreements, which could help reduce earnings volatility over time and, if successful, support a rerating of the stock.

Away from the US, we reduced the allocation to the Baillie Gifford Japanese Income Growth fund and used the proceeds to top up the existing holding in M&G Japan, the strategies’ largest exposure to this market. Finally, within fixed interest, we trimmed conventional gilt holdings across the strategies, adding to existing credit funds to further broaden the range of exposures.

Outlook

The first half of the year has been a useful reminder of two key investment principles: the value of diversification; and the importance of avoiding knee-jerk reactions during periods of elevated volatility.

Indeed, despite the unsettling environment, equities have delivered strong returns. On balance, our base case remains one of positive economic growth, with inflation modest but still above target. Put together, these should continue to provide a supportive backdrop for risk assets.

Earnings growth, particularly in technology, has been impressive, and we expect that to continue, supported by strong demand for AI services and infrastructure. As a result, we remain constructive in our outlook, with that view reflected in our tactical preferences. At the headline level, we continue to favour equities over fixed interest. Within equities, we prefer the US, Europe, and emerging markets over the UK and Japan. At the sector and security level, Semiconductors and Semiconductor Equipment remain favoured over Software & Services names, while UK Materials, selective Real Estate holdings, and a healthy allocation to Energy provide additional sources of return.

That said, risks remain. A further flare-up in the Middle East is still possible, and political change in the UK, alongside uncertainty around the future direction of Federal Reserve decision making, means the policy backdrop remains an important area to watch. For multi-asset portfolios, bond allocations remain high quality and liquid in nature. Although developed sovereign debt has delivered relatively lacklustre returns so far in 2026, if economic growth were to slow, then we would expect this allocation to come into its own. We also continue to see merit in holding diversified sources of return that are less closely correlated to mainstream asset classes. In this space, hedge fund and absolute return strategies continue to play an important role in portfolio construction.

To conclude, the second quarter was a strong period for markets and for the MPS strategies. We remain constructive, but selective, and continue to believe that a diversified, actively managed approach remains the right way to navigate an environment where opportunities remain attractive, but risks have not disappeared.