SMF - February 2026 Update

Top 3 investment themes – February 2026                

1. US and Israel launch an attack on Iran

Geopolitical risks intensified at the end of February following U.S. and Israeli strikes on Iranian military targets, marking a clear escalation in tensions. Market attention quickly turned to the Strait of Hormuz, a critical oil route connecting the Gulf with regions responsible for 20% of global seaborne oil, although Iran has stated it intends to keep traffic flowing. The immediate market reaction reflected a classic supply‑driven risk‑off move, with oil rising toward $80/bbl, gold gaining 2.2% on safe‑haven demand, and the U.S. dollar strengthening 0.7% against major peers amid rising inflation concerns.

2. Growth continues to extend beyond the Magnificent Seven 

Equity leadership continued to broaden, as technology and software stocks came under growing pressure. The S&P 500 software component fell 8.9% on the month, while the Magnificent Seven fell 7.3% amid growing concerns around AI disruption, stretched valuations, and a widely circulated Citrini Research memo warning of double-digit US unemployment by 2028 due to AI. Weakness accelerated late in the month after Nvidia’s earnings beat expectations but failed to deliver the outsized surprises seen in recent years. This has reflected a broader trend of performance broadening out past US and tech, to Europe and other sectors. 

3. Trump's tariffs ruled unconstitutional

President Trump's tariffs continued to dominate headlines, as the U.S. Supreme Court deemed the broad‑based tariffs unconstitutional, reversing approximately half of the measures introduced last year. President Trump responded by announcing a temporary 10% global tariff for 150 days, while signalling a possible increase to 15%. The ruling prompted the EU to pause ratification of last year’s U.S. trade deal, and President Trump warned that countries which “play games” would “be met with a much higher Tariff, and worse, than that which they just recently agreed to."

February 2026 market performance (GBP Terms¹)                                                                                                         

Past performance is not a reliable indicator for future performance.

_{Source: Morningstar as at 28 February 2026. ¹Equity and oil returns are in GBP, commodity is GBP hedged, and fixed income is GBP hedged.}

How did SMF perform?

Growth assets

February continued to see equity markets supported by resilient macro data, and looked past volatility from geopolitical and policy headlines. Japanese equities led gains, with the Nikkei up 10.4% to a new record following PM Takaichi’s snap‑election victory, while European equities extended their rally for an eighth consecutive month (+3.9%) as investors diversified away from US mega‑cap tech. Emerging markets also posted solid gains of 5.5%, benefiting from a risk‑on tone outside the US. In the US, weakness in software and technology stocks offset otherwise supportive labour‑market and manufacturing data, leaving broader US equities only modestly higher by month‑end. Our overweight positions in EM, European ex UK, European basic resources and newly added overweight to Japanese equities added to performance whilst our now closed overweight positions to US equities slightly detracted. 

Defensive assets

Fixed income continued to provide a stabilising anchor for portfolios in February, with bond markets delivering strong returns as investors looked through headline volatility. In the US, 10‑year Treasury yields fell to around 3.3% - their largest monthly decline in a year - supporting an uplift in bond prices despite resilient economic data and slightly firmer inflation. The move reflected ongoing demand for bonds, given AI-related fears and geopolitical concerns that emerged later in the month. In Japan, government bond yields declined for the first time in eight months, as expectations for further rate hikes eased. Our underweight position in long-term German government bonds slightly detracted following the bond rally, whilst our underweight positions to USD and GBP added to performance. 

Alternative assets

Our allocation to Aviva Investors Multi Strategy Target Return fund (AIMS) added to performance, as it continued to provide a diversified source of returns and downside protection amidst the volatility. This was driven by overweight positions to Gold and UK Gilt exposure. The UK Property fund also performed well given the falling interest rate environment, which improved investor sentiment. 

Key active management themes in February 2026

1. Added new equity positions

• We initiated an overweight position in Japanese equities following Prime Minister Takaichi’s decisive election victory, with a $135bn near‑term stimulus package creating a supportive backdrop for equity markets.
• We also increased our overweight to emerging market equities relative to the US, reflecting strong EM corporate earnings and continued weakness in the US software sector.

2. Reduced US equity exposure

•   We closed our outright overweight to US equities, including the NASDAQ, amid heightened global market volatility and as we sought more attractive opportunities outside the US.

3. Repositioned European equities exposure

• We took profit on our overweight position to European basic resources following strong rally in January.
• We closed our outright position to European equities due to broader market volatility.
• We increased the size of our overweight position to European financials given an attractive entry point

4. Adjusted currency positioning

• We increased our overweight position in Emerging Market Debt relative to USD due to an improved longer-term outlook supporting exposure to EM currencies.
  
  
• We opened an overweight position in the Australian Dollar relative to USD, due to stickier inflation in Australia increasing the likelihood of interest rate hikes. More broadly, Australia are also benefitting from higher gold prices, which is on track to become Australia's second largest export.
  
  
• We increased our overweight to the euro relative to sterling, underpinned by stronger growth prospects linked to EU fiscal stimulus, while maintaining an underweight to sterling given the UK’s subdued growth outlook.

5. Rotated fixed income exposure

• We reduced our overweight to Australian government bonds relative to US Treasuries, as persistent US inflation pressures supported higher yields.
  
  
• Conversely, we increased our underweight position to long-term German government bonds following the EU and German fiscal stimulus.  
  
  
• Against this backdrop, we opened an underweight position in Sterling relative to the Euro, reflecting the potential for renewed political uncertainty to weigh on the currency.

February 2026 Performance

Past performance is not a reliable indicator of future performance

_{Source: Morningstar as at 28 February 2026. Performance is shown net of fees.} 

The launch date of SMF (pension) was 11/12/2017, SMF (bond) 18/02/2019, SMF II (pension) 30/06/2021 and SMF II (bond) 30/06/2021.

SMF Strategic Asset Allocation

^{Source: Aviva Investors. This diagram is for illustrative purposes only, asset allocations are subject to change. The reference fund is SMF, based on its strategic asset allocation as at 31st August 2025.}

Market outlook and positioning: what do we believe happens next?

We expect the global economy to strengthen through 2026 as the tariff-driven headwinds of 2025 begin to fade and a combination of easier monetary policy, modest fiscal support, rising real incomes, and a powerful AI driven capex boom lifts growth. After a period of weakening momentum, activity should accelerate as the year progresses. With underlying inflation converging toward central bank targets, we expect rate cutting cycles to conclude around mid-2026; given limited spare capacity and improving growth, some central banks may even begin raising rates again in the second half of the year. This is a supportive backdrop for risk assets. 

In terms of equity regions, we have diversified our overweight exposure across European and Emerging Market equities.  Our overweight positions in European equities, including European financials and defence, and Emerging Market equities, allow for diversification within our equity sleeve. The outlook for both regions has also strengthened due to signs of improving trade relations with the US. 

In fixed income, we remain overweight Australian 10-year government bonds relative to US 10-year Treasuries given the pressure on US yields. Given the changes to the German debt brake last year, which facilitates greater levels of spending, we hold an underweight position to long-term German government bonds. We retain our underweight US Dollar position, which is relative to overweight positions in Euro & EMD Local Currency. We also remain underweight the Pound given political risks surrounding the government with the upcoming local elections. 

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

Key risks

• Investment/Objective risk - The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.
• Currency risk - The fund is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of movements in currency exchange rates.
• Derivatives risk - Investments can be made in derivatives, which can be complex and highly volatile. Derivatives may not perform as expected, meaning significant losses may be incurred. Derivatives can have some degree of unpredictability (especially in unusual market conditions), and can create losses significantly greater than the cost of the derivative itself.
• Emerging market risk - Investments can be made in emerging markets. These markets may be volatile and carry higher risk than developed markets.
• Fixed Income risk - Investments in fixed interest securities are impacted by market and credit risk and are sensitive to changes in interest rates and market expectations of future inflation. Bonds that produce a higher level of income usually have a greater risk of default.
• Specialist Funds risk - Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors.
• Suspension of trading risk - Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period.
• This is a summary of the key risks. For further information on the full risks and risk profiles of the fund, please refer to the relevant Fund Factsheet.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

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