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Marketing Communication
Market Update
Markets began the year on a positive note in January, with the MSCI All Country World Index rising 2.9% in US dollar terms, driven by a nearly 9% gain in emerging markets. US small caps outperformed, and value stocks continued their recovery versus growth stocks. Commodity prices saw unusual volatility, with gold, silver, and copper reaching new all-time highs and oil rebounding due to geopolitical tensions, including US military action in Venezuela, conflict with Europe over Greenland, and threats of intervention in Iran. Concerns about the Federal Reserve’s independence, heightened by a criminal investigation into Chairman Powell, pushed government bond yields higher, though the nomination of Kevin Warsh as Powell’s successor helped ease fears and led to a correction in commodity prices. Despite a partial recovery, the US dollar remained down 1.5% in trade-weighted terms since the start of the year. Stock markets were buoyed by a solid global economic cycle and expectations of Fed rate cuts, with corporate profits revised upward and projected to grow by double digits for a second consecutive year, though elevated valuations warrant caution.
In February, global equity markets continued to rise, with the MSCI World All Countries Index up 1.3%, bringing year-to-date gains to 4.3%. Gains were driven by markets outside the US, as the S&P 500 fell 0.8% and lagged other developed and emerging markets, which were up more than 14%. Value, small, and mid-cap stocks outperformed growth and large caps, particularly as tech companies weighed on performance. Safe assets rallied alongside equities, with falling government bond yields, rising gold prices, and a stronger Swiss franc, reflecting heightened risk of US and Israeli military action against Iran and concerns about credit quality. The US earnings season remained robust, but the announcement of over $600bn in artificial intelligence (AI)-related investment by US hyperscalers raised questions about future profits. The US Supreme Court’s ruling against Trump’s tariffs under the International Emergency Economic Powers Act led to a decrease in effective US tariff rates, supporting the global business cycle.
March saw a sharp reversal, with the MSCI All Countries World Index falling 7.1%, erasing earlier gains and leaving first quarter performance at -3.1%. Bonds also declined as yields rose on fears of renewed inflation and more restrictive central bank policies. The shift in sentiment was triggered by the US and Israel’s war against Iran, resulting in the closure of the Strait of Hormuz and threatening global supply chains, especially for energy, agri-food, steel, and semiconductors. The US, less dependent on these supplies, saw its equities and bonds outperform and the dollar strengthen, while non-US markets and currencies suffered. Notably, gold prices fell despite expectations of safe haven demand, as investors and central banks sought liquidity to address emergencies. Nevertheless, medium- to long-term fundamentals for gold remain supportive of a gradual price increase.
Q1 2026 was dominated by the US-Iran conflict, which triggered extreme market volatility. Asian stocks suffered their worst month in 17+ years in March before rebounding on hopes for resolution. Oil prices surged via disruption through the Strait of Hormuz. Central bank policy shifted dramatically—European Central Banks (ECB) markets moved from pricing cuts to hikes, while the Fed held steady. US core inflation slowed to 2.5% in February before the war.
Fund Performance & Positioning
In terms of performance, during the first quarter the Fund returned -6.65%. During this period, the S&P 500 fell by -4.63% and the MSCI All Country World by -3.20%. In Europe the DJ EuroSTOXX delivered -3.83% for the quarter, whilst in Asia the Hang Seng produced a return of -6.05%, all in local currency terms.
The portfolio delivered a -6.7% return during the 2026 Q1 period, underperforming the reference benchmark which returned -0.8%. The portfolio's underperformance was driven by negative security selection effects and for this quarter asset allocation effects, whilst foreign exchange impacts were marginal.
The portfolio's underperformance was primarily driven by security selection across equity holdings, particularly in technology names that faced mixed market reception despite strong fundamentals. While the portfolio benefited from strong performance in semiconductor equipment and materials companies that capitalised on artificial intelligence (AI) infrastructure demand and Merger and Acquisition (M&A) activity, these gains were more than offset by weakness in software and consumer technology stocks. The portfolio's positions in Investment Grade fixed income and property provided some defensive characteristics, but the equity-heavy allocation amplified the impact of negative stock selection during a challenging quarter for growth-oriented investments.
From an asset allocation perspective, the fund kept an overweight to equity relative to fixed income during the quarter. Within our fixed income exposure, the largest share of assets was allocated to high quality investment grade debt, with some exposure to the high yield and Emerging Markets debt. During the quarter we did experience extreme volatility within the rates markets. The Iran war fundamentally shifted central bank policy expectations. The Bank of England and European Central Bank kept its deposit facility rate unchanged in March, but market pricing swung dramatically from expecting rate cuts to fully pricing in rate rises. Our core view at present remains that implied higher rates are unlikely to be realised, hence we maintain our positive view on Investment grade debt, with spreads well behaved. We continue to concentrate on the high-quality IG names, whilst maintaining a reduced allocation to US Treasuries. Our overall yield from the fixed income component stands at 4.29% and here we are taking on board 2.7 years of duration with an overall credit rating of A. Relative to the benchmark we are underweight duration and hold a credit rating quality two notches higher. We continue to see good opportunities at the short to middle of the curve.
Within our equity allocation, our names did come under pressure, given events that unfolded during the quarter. We first saw several software names retreat as potential artificial intelligence (AI) disruption to their business model. This then saw several key AI related names move lower, later amplified by events in the mid-east. Despite this, we had some key performers: BE Semiconductor fielded takeover interest and worked with Morgan Stanley to evaluate approaches, with Lam Research and Applied Materials reportedly among potential bidders. Micron Technology announced a $24bn investment over 10 years to build a new NAND facility in Singapore and reported second-quarter results that were much stronger than expected. Shin-Etsu announced a $3.4bn investment through US unit Shintech to expand PVC production capacity in Louisiana, with construction expected to be completed in 2030. The company reported that AI-related demand in the semiconductor market continued to be strong, while demand in other sectors has started to rise. These gains were to a degree offset by our key detractors for Q1 2026. Here we saw Snowflake, despite good numbers, came under pressure for software names. Whilst Samsung a clear winner in the memory space for Q1, concerns over DRAM pricing dynamics saw performance tail off into March.
Outlook
The quarter's defining event was the US-Israel military strikes on Iran, which escalated into a full-scale conflict. The war disrupted critical energy infrastructure, with tankers attacked near the Strait of Hormuz, the world's most important oil and gas shipping chokepoint. Airlines canceled hundreds of flights as airports across the Middle East shuttered, with Emirates and Qatar Airways among the hardest hit. By late March, President Donald Trump indicated the US could withdraw from Iran within two to three weeks, sparking optimism that the conflict might be nearing conclusion.
Looking ahead, while current headwinds are expected to persist for some time, the overall market backdrop remains fundamentally robust. Despite all the volatility experienced across risk assets the MSCI World in USD terms was down by 3% for Q1. Regional indices’ performance varied with technology sector being hurt the most. In our view and supporting our longer run thesis, markets are looking through the current “fog of war” and focusing on fundamental support. These support levers we see as: robust earnings growth, with revisions edging higher, support from fiscal measures, through the US tax refund season, offsetting domestic fuel prices. Whilst the forward interest rate expectations outlook has evolved, we find it hard to expect central banks to raise rates, as the narrative shifts from inflation to potential growth via demand destruction through higher energy prices.
Furthermore, Financial conditions remain broadly accommodative, with stress indicators such as the VIX index and high-yield credit spreads, which have edged higher, but well below previous geopolitical events. Importantly, we are not seeing the typical pre-conditions for larger selloffs, such as renewed Fed rate hikes or clear signs of economic slowdown or recession. Even significant market downturns in the past, like the bursting of the dot-com bubble in 2000, occurred alongside broader macroeconomic slowdowns rather than in isolation. As a result, the key drivers of recent market resilience continue to be in place.
Whilst we remain optimistic, we are also aware of the tail events which could arise during 2026, and here we are able and willing to put in place protection if needed. Lastly, we accept we may not be past the “peak” in geopolitical uncertainty, however, from experience we have found these periods of volatility have proven to be a good opportunity to add to high conviction themes.