Growth Trade Update 08.25

We have made a number of changes to our Growth portfolios to reflect recent developments in global markets, valuations, and trade policy.

Macroeconomic Backdrop

The Trump administration’s broad tariff regime has created substantial uncertainty across global markets. Following the initial shock of the tariff announcements on Liberation Day in April, and the subsequent 90-day pause, macroeconomic impacts were initially more muted than expected, until last week’s surprise revision in US employment data.

As the US accelerated trade negotiations ahead of the deadline, the perceived risk of escalating tariffs declined. However, the change in the effective US tariff rate, from 2% before Trump’s second term to 16-18% now, is significant. While some country-specific deals were well received, markets have responded unevenly as details emerged.

So far, company-level impact has been sector-specific. Some businesses have passed costs onto suppliers or through global pricing. Others have absorbed the pressure, compressing margins. While productivity efforts continue, US inflation may rise as more costs reach the consumer, potentially slowing domestic growth and affecting global sentiment.

Market volatility has been driven by earnings surprises and shifting expectations tied to evolving trade announcements. While AI, reshoring, and tech earnings remain resilient, sectors like semiconductors and pharmaceuticals face risk from pending tariff specifics.

Equity Allocations

Global and US

We’ve maintained our overall US and international equity allocations but increased exposure to select sectors. We reduced small-cap holdings, particularly global small caps, due to concerns about their ability to adapt quickly to macro shifts. As dispersion across sectors increases, we believe active-tilted funds are better placed than broad indices to capture opportunities.

Changes:

• Replaced our enhanced global equity fund with one offering better performance, lower fees, and a higher internal Consumer Duty rating.

• Increased allocation to a global income fund for added stability.

• Removed the US small-cap fund.

• Switched our US income fund to a stronger-performing alternative and increased its weight to add further diversification.

• Eliminated a US large-cap growth fund due to overlap with an existing core growth position.

Europe

European equities performed strongly across the first half of the year, supported by low valuations and Germany’s fiscal stimulus plan. Despite still being at a discount relative to the US, Europe’s forward P/E ratio has now exceeded its long-term average. Risks persist from potential pharmaceutical tariffs, geopolitical tensions (Ukraine/Russia, Israel/Palestine), and competitive pressure from Asian automakers.

Changes:

• Reduced regional European allocations, but maintained an active value-based fund and sector-specific exposures (infrastructure, clean energy, financials), favouring sector over regional bets due to dispersion.

UK

Despite economic headwinds, UK equity valuations remain significantly discounted relative to the US and also below their long-term averages, and dividend yields are attractive. The UK has also benefited from relatively favourable US trade terms (10% tariff vs. 15% for the EU/Japan). Inflation has risen, prompting cautious monetary policy, though a weakening labour market may force the BoE to act sooner. Fiscal concerns persist under Chancellor Rachel Reeves. But if global investors are looking to diversify their allocations away from the US, UK equities could benefit.

Changes:

• Increased UK allocations, including to two well-performing active funds, one with a value bias.

Japan

Japan continues to benefit from economic reinflation, governance reforms, and rising real incomes. The revised 15% US tariff (down from 24%) is a positive development. However, demographic challenges persist, and political instability could delay policy normalisation.

Changes:

• Sold the previous active fund as it was not performing as well.

• Increased exposure through a Euro-hedged active Japan fund, while maintaining or slightly decreasing (depending on the portfolio) the allocation to the index.

Pacific and Emerging Markets

Tariffs continue to impact emerging markets unevenly, with outcomes heavily dependent on geopolitical alignments and sectoral exposure. China has rerouted exports and reduced reliance on the US since the previous Trump administration. In addition, its dominance in rare earth metals, both in raw material supply and processing, gives it a strong bargaining position, particularly in negotiations tied to critical technologies. While Chinese equity markets declined following the April tariff announcement, valuations have reached attractive levels, offering selective opportunities for long-term investors. India, by contrast, remains vulnerable due to ongoing scrutiny of its pharmaceutical exports under US trade negotiations, a large and persistent US trade deficit, and its continued purchase of discounted Russian oil, which has drawn criticism from the US.

Given these developments, we have made the following changes:

• Reduced overall EM exposure.

• Exited our India-specific fund.

• Added a small, targeted allocation to a China-specific fund.

Sector-Specific Adjustments

Infrastructure

In a higher-rate environment, property funds have underperformed, with returns weakening notably since Q2. At the same time, infrastructure continues to demonstrate resilience due to its inflation-linked cash flows and government support in both the US and Europe. As a result, we sold our property holdings and added a US-heavy infrastructure tracker fund, which is well-priced and well-positioned to benefit from ongoing fiscal investment programs. We also gained access to a founder’s share class European-focused active infrastructure fund, which offers strong diversification and exposure to long-duration assets in sectors such as energy, transport, and digital infrastructure.

We believe both funds provide stability and a natural hedge in the current macro environment.

Technology

We have slightly reduced our allocation to the technology tracker fund to manage overlap with our broader US and international exposures. Nonetheless, we maintain conviction in the sector's long-term prospects. AI, automation, and cloud services remain key growth drivers, with strong earnings resilience through 2025. Regulatory scrutiny remains a risk, but innovation continues to support valuations. We retained the value-oriented technology fund in more cautious portfolios.

Sustainable Energy

We exited our industrials fund and instead added a sustainable energy fund. This shift reflects both economic and structural trends. Renewable energy is increasingly mainstream and supported by long-term decarbonisation goals, especially in Europe. Exposure to companies involved in clean power generation, battery storage, and electrification aligns with policy momentum and investor demand. With a meaningful European weighting, this allocation supports diversification away from fossil fuels and taps into investment themes with enduring policy and consumer support.

Financials

We rotated out of the insurance fund and into a dedicated financial fund. US financials are expected to benefit from regulatory rollbacks under the Trump administration and delays in the implementation of Basel capital adequacy requirements. Elevated interest rates are also supportive of net interest margins, while market volatility boosts trading revenue for diversified institutions. This allocation helps balance more growth-oriented exposures with a value-oriented sector that benefits from the current macro backdrop.

Gold

We introduced a baseline allocation to a gold fund, accessed via a unit trust. While not holding physical gold, the fund serves as a proxy for gold prices to offer protection from geopolitical uncertainty and unanticipated policy shifts, such as sudden tariff escalation. This small position enhances portfolio diversification and acts as a strategic hedge.

Fixed Income

Fixed income markets have been marked by a surprisingly heightened level of volatility. US Treasury yields rose after the April tariffs, amid concerns about Fed leadership and fiscal sustainability. UK gilt yields followed suit after uncertainty around Chancellor Rachel Reeves.

The Fed’s June dot plot indicated up to two rate cuts by year-end. However, tariff-induced inflation and labour market pressures have added complexity. Markets are split between a cut in September vs. later in the year. Both the UK and US central banks are cautious but may be forced to act sooner.

In response to the rising levels of uncertainty, we have:

• Increased short-dated bond positions

• Maintained investment-grade and high-yield allocations

• Retained asset-backed exposure

• Replaced government bonds with a low-fee strategic bond fund (founder’s share class) to navigate volatility more flexibly

We feel that in this ever-changing environment of uncertainty, actively managed bond funds will be able to navigate and take advantage of the volatility in duration, rates, and exchange rates.

Across all portfolios, we maintain an overweight to active funds to benefit from dispersion in earnings, business models, and sector outcomes under tariff pressures. Our approach blends strategic active funds that offer tilts toward quality, value, or income, with cost-efficient passive holdings that provide broad market exposure. This combination continues to serve clients well in a world where policy, inflation, and sector divergence demand thoughtful, evidence-based positioning.