SMF October 2024 update

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

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

How did SMF perform?

Growth assets

Equity markets struggled in October, with the majority ending in negative territory for the month, although GBP weakness led to positive returns in Global Equity and US Equity for Sterling investors. Japanese equities were the exception to the general market sell-off, posting slightly positive returns with the market rallying on Yen weakness triggered by uncertainty around the formation of PM Ishiba’s parliamentary coalition. Our North American equity funds were the top performers over the last month. In terms of active positioning, this meant that our overweight position in North American equities was a positive contributor to performance, whilst our overweight in European equities detracted in October.

Defensive assets

Strong US macro data, and concerns about government spending led to negative performance for fixed income markets in October. Notably, global bonds posted their worst monthly performance since 2022. More resilient macro data has meant that investors have reduced their expectations for rate cuts for the remainder of this year; although both the BoE and Fed are expected to cut by 25bps in their next meetings. In terms of our active positions, our overweight position in UK Gilts detracted this month, although this was partially offset by our underweight position in Japanese government bonds.

Alternative assets

Alternative assets were down in October, as our absolute return fund detracted from performance. Our property holding helped to offset some of this weakness, delivering positive performance over the month. 

Key active management themes in Q3 2024

• Redistributed our regional equity exposure 
  • We maintain our overweight equity position but have trimmed our European exposure and increased our holding in US equities. Relief around US growth risks should be more supportive of the US equity market.  
• Increased our overweight position in Gilts, with some diversification into US Treasuries
  • Approaching the UK Budget, and assessing the upside risks to yields, we reduced our overweight position in Gilts to diversify our fixed income exposure. This was reallocated into US Treasuries which had sold-off more over the course of October.  
  • We were then able to tactically re-enter into Gilts following the Budget announcement, after a relatively pronounced sell-off. This is aligned with our view that market focus should shift back towards the rate cutting cycle by the BoE. 

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 30 June 2024.

Top 10 Equity holdings

Source: Aladdin, as at 29 October 2024.The reference fund is SMF.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in October 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 more focused exposure within certain regions. Equities have the potential to perform well in a disinflationary environment in which central banks are cutting interest rates, although we will continue to monitor for signs of broader weakness in economic activity. Regarding fixed income, central bank easing biases and the renewed focus on growth risks are likely to place a ceiling on bond yields. In this scenario, fixed income is well-positioned to offer diversification within the portfolios.

In terms of equity regions, we remain overweight US and European equities. Despite recent volatility, US equities have maintained their strong valuations as companies have continued to deliver robust earnings, albeit slightly below elevated market expectations. European equities look attractive from a valuation perspective, with promising signs these companies can deliver better growth. 

Regarding our fixed-income allocation, we are short Japanese government bonds with overweight positions in UK Gilts and US Treasuries. We believe that Japan is still in a hiking cycle given increasing inflationary pressures, with potential for another rate hike to be delivered in December. In the UK, inflation is falling and whilst UK growth has started to recover, it is still relatively weak compared 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. Our addition into US Treasuries last month provides more diversification within the portfolios’ fixed income allocation.  

Top 3 investment trends – October 2024

1. Bonds struggle on strong data and fiscal worries 

October was a weak month for fixed income markets, with global bonds posting their worst monthly performance since 2022. This was largely driven by resilient US macro data at the start of the month, which can impact the market’s expectations on interest rates and inflation, as well as fiscal concerns across developed economies. In terms of macro data releases, US unemployment dropped to 4.1%, Q3 growth remained strong at +2.8% and monthly US CPI saw its largest increase in 6 months. Consequently, bond yields trended higher as markets began to anticipate a slower pace of rate cuts for the rest of this year by key developed central banks (the Fed, BoE and ECB), driving bond prices down. Concerns about government spending were also a focal point in October. In addition to the strong macro data, US Treasury yields trended higher as investors positioned for a potential Republican sweep (Trump winning the Presidency, the Senate, and the House of Representatives). In the UK, Gilt yields also rose as the market braced for increased borrowing in the UK Budget.  

2. Equity market volatility returns 

Equity markets also struggled in October with the S&P 500 posting negative monthly performance for the first time in 6 months, in USD terms. This came in spite of a mid-month rally which saw US equities reach a new all-time high for the 47^th time in 2024 - a biproduct of strong initial earnings data and resilient macro data within the US. However, this swiftly reversed following mixed Q3 earning results from some of the Mag-7 companies, with the Mag-7 index down by -0.5% in October. Microsoft, Meta and Apple stocks all sold off after publishing their results as investors were disappointed by outlooks on their AI-related businesses, given their huge capital investment in AI infrastructure. The US election also fed into equity market volatility over the month as betting polls continued to spotlight a tight race between Harris and Trump. Investors have been buying protection on equities for the period following the election result, positioning themselves for more potential volatility.

To note, weakness in the Pound following the UK Budget has meant that Sterling investors have seen positive returns from the US equity market for the month.

3. UK Budget sends gilt yields higher 

The highly anticipated UK Budget was delivered on 30 October, Labour’s first budget in over 14 years. They presented a ‘tax and spend’ strategy to help address a reported £22bn fiscal black hole. Plans were announced to raise taxes by £40bn a year, with a specific focus on business taxes like National Insurance. Fiscal rules were also changed to fund increased spending towards public services. In contrast to the gradual rise in Gilt yields leading up to the announcement, the initial market reaction saw Gilt yields move lower as investors were reassured by the lack of major surprises within the policy announcements. Labour’s proposals had either been explicitly flagged by the Chancellor or speculated about in the press in advance of the official announcement. However, as investors digested the information, alongside the Office for Budget Responsibility’s longer-term growth forecasts, Gilt yields increased to their highest level since November 2023 leading to negative Gilt performance, down -2.7% in October. 

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.