MPS October Newsletter

Conditions proved more challenging for bonds, with stubborn inflation, tighter central bank policy and growing corporate debt issuance among the factors driving yields higher. UK government bonds (‘gilts’) returned -2.8%, although the sell-off was far from confined to a market that has attracted considerable attention in recent years. Sovereign debt losses were also seen across the eurozone, US and Japan, with their respective central banks all raising interest rates during the quarter. This backdrop also weighed on commercial property returns over the period, while hedge fund strategies delivered mixed results.

Most MPS strategies enjoyed positive returns over the quarter. Higher-risk portfolios delivered the strongest outcomes, supported by rising equity markets and strong stock selection, while returns moderated in lower-risk strategies due to their greater exposure to fixed income assets.

US equities were the standout contributor to returns, with the North American Equity fund outperforming the broader US market with a return of more than 5%. UK equities also made a positive contribution, rising just under 1.9%. In contrast, European equities declined as investor sentiment towards the region weakened later in the quarter, although the strategies’ positioning helped limit losses relative to the broader market.

At the sector level, while Information Technology ('tech') continued to dominate headlines, returns were supported by a broader mix of sectors, highlighting the benefits of maintaining a diversified portfolio. US Health Care was the strongest-performing allocation, supported by a positive earnings update from Thermo Fisher Scientific, though gains were broad-based across the sector. Energy holdings including Shell, Chevron and BP also contributed positively, benefiting from higher oil prices amid ongoing geopolitical tensions. UK mining stocks and European defence holdings further supported performance, while rising bond yields weighed on the rate-sensitive utilities sector.

Within the tech sector, leadership broadened beyond semiconductor stocks following their stellar second-quarter performance, with software and services names taking the lead. The strategies' exposure to Microsoft and Palo Alto Networks performed particularly strongly. Meta also benefited from a positive response to the launch of its Muse agentic AI software, which strengthened investor confidence in the company's AI strategy and potential for future revenue growth. Among semiconductor holdings, NVIDIA, the allocation's largest position, performed well, recouping ground after lagging some of its peers in the preceding quarter.

Fixed-interest holdings faced a testing environment, with persistent inflation, tighter monetary policy and higher bond yields resulting in declines of around 1.75%-2.5%, depending on the strategy's risk profile. However, losses remained relatively contained given the income available from current yield levels. We continue to view bonds as a valuable source of portfolio diversification and an increasingly attractive source of income. While this is not yet sufficient to shift our tactical preference away from equities within each strategy's risk profile, the current environment is creating selective opportunities.

Lastly, the strategies' hedge fund and absolute return exposure made a positive contribution, taking year-to-date returns for the MI Quilter Cheviot Diversified Returns Fund to more than 5%. This has provided valuable support to lower-risk strategies during a year in which fixed income assets have continued to face headwinds.

Activity

Turning to portfolio activity, in September we added a new holding in Landsec, one of the UK's largest real estate investment trusts (REITs). The company provides exposure to London West End offices and UK shopping centres, two areas of the property market that have proved more resilient than many investors expected. While we remain measured in our outlook for the sector, the purchase reduces the underweight position created by our exit from Segro in August following the agreed takeover by Prologis.

Elsewhere in the UK, we increased our position in Rolls-Royce, funding the purchase by trimming BAE Systems and AstraZeneca. Importantly, this does not signal lower conviction in either holding; both remain among our preferred investment ideas. Rather, the changes reflect selective portfolio rebalancing.

In Europe, we introduced a new position in Kingspan, the building materials group, funded by the sale of Schindler. Kingspan's insulation, roofing and critical infrastructure businesses stand to benefit if the prolonged downturn in European construction activity is nearing an end. Its exposure to cooling, ventilation and energy-efficiency solutions for data centres also provides a structural growth opportunity linked to continued investment in AI. While Schindler remains a high-quality business, we believe Kingspan offers a more attractive combination of cyclical recovery potential and long-term structural growth.

Outlook

Despite the adverse headlines that have dominated this year, 2026 is shaping up to be another positive period for equities. Given the apparent disconnect between prevailing negativity and buoyant markets, it is entirely natural for clients to question whether stocks have been driven higher by complacency or misplaced euphoria. We would argue neither is true. Instead, returns have been largely underpinned by robust fundamentals rather than rising valuations. The global economy and US consumer have demonstrated remarkable resilience, while corporate earnings have continued to exceed expectations. Businesses, particularly across the Pond, are performing better than anticipated and, with earnings growth outpacing recent market gains, headline valuations (the price investors pay for those future cashflows) have actually fallen in recent months.

That is not to suggest the risks have disappeared. Given the challenging geopolitical backdrop and continued upward pressure on bond yields (to name a few of the current concerns), there are certainly reasons for caution. However, there are also grounds for optimism. Opportunities remain available across a broad range of regions and, increasingly, sectors, and we continue to position portfolios to capture them.

It is for these reasons that we remain constructive in our outlook as we enter the final quarter, albeit measured in our positioning. Equity allocations remain diversified and selective, reflecting our desire to participate in market opportunities while remaining mindful of pockets of exuberance. Technology remains an important, but not dominant, exposure and, within the sector, selectivity across the AI value chain remains key. Holdings span ‘hyperscalers’ and cloud service providers, chip designers, equipment manufacturers and foundries, memory and data-storage producers, as well as data-centre real estate.

Across the strategies' fixed income allocations, we continue to favour high-quality holdings that offer attractive income characteristics, alongside the potential to provide portfolio protection should the economic outlook deteriorate. Investor sentiment towards bonds remains notably subdued, meaning that even a modest improvement in inflation trends or expectations for fiscal and monetary policy could provide a meaningful tailwind for the asset class.

Finally, we remain firm in the merits of incorporating exposures with return profiles that are less closely correlated to traditional asset classes. In an environment where market leadership can shift quickly and macroeconomic uncertainty remains elevated, hedge fund and absolute return strategies continue to play an important role in portfolio construction, helping to enhance diversification.