SMF 2024 full year update

Welcome to your 2024 full year update from the Aviva Investors' Multi Asset Team.

Top 3 investment trends – 2024

2024 was another exceptional year for equity markets, as economic growth exceeded expectations and central banks began cutting rates, albeit more gradually than initially anticipated. Continued optimism around Artificial Intelligence (AI) fuelled significant gains in the largest US technology stocks, resulting in the US market, which accounts for over 60 per cent of global equities, returning 25 per cent. This marked the first time since the late-1990s that US equities have delivered back-to-back annual returns above 20 per cent. The year saw a record number of elections and widespread political upheaval, including notable defeats for incumbents in both the UK and US. These regime changes precipitated new policy agendas that will likely impact economic growth and inflation in 2025.

1. Central banks begin cutting rates

In 2024, developed market central banks finally began to cut rates as inflation returned towards target levels. However, these cuts were more gradual and of a smaller magnitude than investors had expected at the start of the year. Starting in September, the US Federal Reserve cut its key rate three times, for a cumulative reduction of one percentage point to a range of 4.25 to 4.50 per cent. Although interest rates remain high relative to recent history, the US economy remained resilient, with GDP growth routinely surprising to the upside and unemployment only ticking up slightly over the course of the year. Rates were also cut in Europe and the UK by 1.0 and 0.5 percentage points respectively. Economic conditions in both regions were gloomier than in the US, which helps explain why, at the time of writing, markets expect the US to cut rates twice, the UK close to three times, and Europe close to five times in 2025.

2. AI boom continues to drive US mega-cap stocks

Optimism around Artificial Intelligence (AI) helped drive exceptional gains in US technology companies’ share prices in 2024. Shares in the Magnificent Seven (the seven largest companies in the US index) gained 67 per cent over the year, helping to drive the S&P 500 up by 25 per cent in USD terms. Nvidia registered a 171 per cent gain due to the continued surge in demand for AI processors. The optimism around AI encouraged further investment from the four biggest internet groups in the US (Microsoft, Meta, Amazon, and Alphabet), with capital spending estimated to have hit $290 billion in 2024 and expected to grow even further in 2025. A key question for next year is how effectively this investment will be translated into earnings. Regardless, tax cuts and continued robust economic growth are expected to provide a tailwind for US equities over the coming year.

3. The year of the election

Last year saw more elections than any other year on record, with over 70 countries, covering four billion people, going to the polls. This included major economic nations like the US, UK, France, and India. In the UK, the Labour Party was elected after 14 years in opposition. Labour presented its first budget in October, in which it materially increased tax, borrowing, and spending, leading to a sell-off in gilt yields. Crucially, the independent Office for Budget Responsibility (OBR) did not forecast much of a boost to growth following this, increasing UK borrowing forecast for future years.  The US elected former President Donald Trump for a second term. With the Republican Party also winning Congress, the incoming administration is in a strong position to implement its policy agenda. Trump’s key policy proposals include tax cuts, deregulation, border control, and tariffs on imported goods (with a particular focus on China). Although this could have a mixed impact on inflation and growth, Trump’s victory fuelled rallies in stocks and other risk assets, with Tesla gaining 60 per cent since the election and Bitcoin momentarily surging past $100,000.

2024 Market performance (GBP terms)

Past performance is not a reliable indicator for future performance.

Source: Morningstar as at 31 December 2024. All equity and commodity returns are in GBP and fixed income is GBP hedged.

How did SMF perform?

Growth assets

Global equities performed well in 2024, with all key equity markets posting a positive return for investors. This was in spite of several bouts of volatility, driven by uncertainty surrounding the potential for political upheaval, fears of US recession, and sticky inflation. Markets were supported by global growth, which generally proved resilient, alongside continued rate cutting by central banks. In particular, the S&P 500 was a stand-out performer, posting a return of over 25%. This was primarily driven by the Magnificent 7-stocks which delivered an exceptional 67% return over the year, with Trump’s election victory also providing an additional boost to the index in the fourth quarter. European equities posted a smaller gain over the year due to continued weakness in macro data and uncertainty caused by political shocks in France and Germany. Against this backdrop, our North American equity fund was the top performer in 2024, and in terms of active positions, our overweight positions in North American, Japanese and European equities were positive contributors (the latter two now closed positions).

Defensive assets

The majority of fixed income assets delivered positive performance in 2024, though this was less pronounced than growth assets. Rate cuts took longer than initially expected due to upside inflation surprises earlier in the year. In January, markets were pricing in approximately 6 rate cuts by the Fed, whilst only 3 were delivered. This saw global bond yields trend higher prior to a dovish pivot by developed central banks in H2 as inflation showed signs of easing. This resulted in strong performance by our Global Investment Grade Corporate Bond fund and our Global Sovereign Bond Fund. In terms of Gilts, despite rate cuts by the BoE, performance was hit by concerns around higher spending following the Budget announcement in October. This meant that our Gilts position detracted from returns in 2024, although our short position in Japanese government bonds helped to offset some of this.

Uncorrelated assets

Alternative assets also posted positive performance over 2024, delivering on their diversification benefits for the portfolios. Both our property holding and Absolute Return fund delivered strong performance over the year.  

Key active management themes in 2024

• Maintained our US equity overweight, with changes to other regions
  • Our overweight equity position has been additive in 2024, especially our exposure to US equities which we have increased over the year. US tech stocks benefitted from continued revenue growth driven by the AI boom, optimism surrounding the US ‘soft landing’ and in the final quarter the Republican Party’s clean sweep.
  • In the latter half of the year, we closed our overweight exposure to European and Japanese equities. The former was closed due to weak macro prospects, whilst we decided to take profit on the Japanese equities position following opportunistic trading during August’s market volatility.
  • We also closed our US / EM equity relative value trade after the PBOC (the Chinese Central Bank) announced a substantial stimulus package in September.

• Neutral fixed income, albeit with specific regional positions
  • We maintained an overall neutral position within fixed income, with tactical positions within certain regions. We continue to be overweight UK Gilts and traded proactively around the Autumn Budget. We expect the Bank of England to continue cutting rates in 2025, potentially by a greater extent relative to other developed central banks.
    • Over the year, we also had overweight positions in German Bunds and US Treasuries (now both closed positions), to provide diversification within our tactical fixed income positioning.
    • In terms of underweight positions, we continue to be short Japanese government bonds, although we reduced this position in H2. The BoJ is expected to continue hiking into 2025, albeit at a more gradual pace, which is supportive of our thesis.

SMF Strategic Asset Allocation

Top 10 Equity holdings

Source: Aladdin, as at 31 December 2024.The reference fund is SMF.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in 2024.

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

From an active asset allocation perspective, we maintain a long position in equities, with a preference for focused exposure within the US market. We continue to see the current macro environment of resilient growth as favourable for equities, supporting corporate profitability. Regarding global fixed income, the potentially inflationary effects of the proposed Trump 2.0 policies present a risk to central bank easing biases. We believe the UK is the exception, where the continued focus on growth risks are likely to place a ceiling on bond yields.

In terms of equity regions, we have a focused overweight position in US equities. Going forward, US companies are expected to benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. The resolution of election uncertainty has also improved investor sentiment. Earnings have also continued to be robust, as shown throughout 2024, helping to stabilise valuations.

Regarding our fixed-income allocation, we are underweight Japanese government bonds and overweight UK Gilts. We believe that Japan is still in a hiking cycle given their domestic inflationary pressures paired with concerns around currency depreciation, which is supportive of future rate cuts. In the UK, evidence of slowing activity continues to mount, painting a weaker macro picture relative to other developed economies. Given this, we believe our Gilt position could benefit from the growing potential for more rate cuts by the BoE relative to other developed central banks.

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

Key risks

• Investment not guaranteed: The value of an investment is not guaranteed and can go down as well as up. You could get back less than you’ve paid in.
• Specialist funds : 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.
• Suspend trading : 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.
• Derivatives: Derivatives are financial contracts whose value is based on the prices of other assets. Most funds can invest partly in derivatives so that the fund can be managed more efficiently or to reduce risk, but there’s a risk that the company that issues the derivative may default on its commitments, which could lead to losses. Some funds also use derivatives to increase potential returns – this is known as ‘speculation’ – and an additional risk warning applies to those funds.
• Foreign exchange risk: When a fund invests substantially in overseas assets, its value will go up and down in line with movements in exchange rates as well as the changes in value of the fund’s investments.
• Emerging Markets: Where a fund invests substantially in emerging markets, its value is more likely to move up and down by large amounts and more frequently than a fund that invests in developed markets. Emerging markets may not be as strictly regulated, and investments may be harder to buy and sell than in developed markets. Emerging markets may also be politically unstable which can make these funds riskier.
• Smaller Companies: Where a fund invests in substantially the shares of smaller companies, it’s more likely to move up and down by large amounts and more frequently than a fund that invests in the shares of larger companies. The shares can also be more difficult to buy and sell, so smaller-companies funds can be riskier.
• Fixed Interest: Where a fund invests substantially in fixed-interest assets, such as corporate or government bonds, changes in interest rates or inflation can contribute to the value of the fund going up or down. For example, if interest rates rise, the fund’s value is likely to fall.
• Derivatives: Some funds also invest in derivatives as part of their investment strategy, not just for managing the fund more efficiently. Under certain circumstances, derivatives can cause large movements up or down in the value of the fund, making it riskier compared with funds that only invest in, for example, company shares. There’s also a risk that the company that issues the derivative may default on its commitments, which could lead to losses.
• Cash/Money Market funds : These are different to cash deposit accounts, such as those held with high-street banks, and their value can fall. Also, when interest rates are low, the fund’s charges could be higher than the return from the investment, so you could get back less than you’ve paid in.
• Property Funds: When a fund invests substantially in property funds, property shares or directly in property, you should bear in mind that: · Property isn’t always easy to sell, so at times the fund may not be able to cash-in or switch part or all of its holdings. You may not be able to access your money during this time. Property valuations are made by independent valuers, but effectively they remain a matter of judgement and opinion. Property transaction costs are high due to legal costs, valuation costs and stamp duty, all of which affect the value of a fund.
• High Yield Bonds: These are issued by companies and governments that have a lower credit rating. When a fund invests substantially in high yield bonds, there’s a higher risk that the bond issuer might not be able to pay interest or return the capital that was invested. The value of these bonds is also more greatly affected by economic conditions and interest rate movements. There may be times when it’s not easy to buy or sell these bonds, so cashing-in or switching your investment in the fund may be delayed. You may not be able to access your money during this period.
• Reinsured Funds: Where a fund invests in a fund that’s operated by another insurance company, you could lose some or all of the value of your investment in the fund if the other insurance company became insolvent.
• Long-Term Asset Funds: The fund invests partly in one or more long-term asset funds (LTAFs), giving access to sectors such as infrastructure, venture capital, private equity and debt investments. LTAFs add diversity to the fund, but it takes longer to move money out of them than from many types of asset. This could mean that in exceptional circumstances cashing-in or switching your investment in the fund may need to be delayed. To reduce this risk, we set strict limits on how much of the fund can be invested in LTAFs and monitor this closely.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited ("Aviva Investors"). Unless stated otherwise any opinions expressed 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. 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.

Issued by Aviva Investors UK Fund Services Limited. Registered in England No 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: 80 Fenchurch Street, London, EC3M 4AE. An Aviva company.