SMF - August 2025 update

Top 3 investment themes – August 2025                

1. Earnings Season: US Outperforms, Europe Slows

Global equities remained resilient in August despite 2025’s challenges - tariffs, inflation, and fiscal strain - with the S&P 500 hitting all-time highs, up 27% since April, driven by strong Q2 earnings where 81% of reporting firms beat forecasts, the highest surprise rate since Q3 2023. Technology led, with over 25% year-on-year earnings growth, and standout performances from Alphabet, Meta, Microsoft, and NVIDIA, with Microsoft’s Azure’s cloud computing platform reinforcing AI-driven optimism. In contrast, European corporates lagged, with the Stoxx 600 showing only modest earnings growth despite increased fiscal and defence spending. Concerns are rising that the new 15% US-EU tariff deal may further pressure profitability, with forecasts pointing to continued earnings weakness.

2. Inflation Surprises and Fiscal Pressure

UK borrowing costs surged as 30-year Gilt yields neared 5.70%, levels last seen in the late 1990s, driven by concerns over debt sustainability, sluggish growth, and persistent inflation in essentials like food, transport, and alcohol. Yields have risen over one percentage point in a year. UK CPI surprised to the upside at 3.8%, while US inflation held steady at 2.7% in July (reported in August). Despite tensions between President Trump and the Federal Reserve (Fed), markets anticipate a September rate cut, supported by dovish signals from Chairman Jerome Powell. With pressure mounting on Gilts, US Treasuries and the US dollar, gold remains near record highs as a safe haven asset in this volatile market. In Europe, French 10-year yields rose above 3.50% amid political instability following Macron’s snap election loss last year, with PM Bayrou calling a confidence vote on a deficit-cutting budget, fuelling investor unease.

3. Global Trade Realignment Post-Tariff Truce

The global tariff regime took effect on 7 August after months of negotiation, ending the tariff pause and generating over $100 billion in revenue to the US. However, growth expectations have declined and the income is unlikely to offset the widening US deficit, which raises concerns for fixed income investors. Before implementation, the US secured 15% tariff deals with key partners including the EU, while Brazil and India now face 50% tariffs, with India’s rate split between a reciprocal tariff and a penalty for Russian oil purchases. China’s rate, once 145%, now stands at 30% under a temporary truce expiring in November 2025. Legal scrutiny of parts of the policy began in a US appeals court toward month-end. Despite uncertainty and muted growth, a global recession has been avoided, with strong corporate earnings supporting key asset classes.       

August 2025 Market performance (GBP terms¹)

Past performance is not a reliable indicator for future performance.

_{Source: Morningstar as at 31^st August 2025. ¹Equity returns are in GBP, commodity is GBP hedged and fixed income is GBP hedged.}

How did SMF perform?

Growth assets

It was a mixed month for equity markets (in GBP terms), with Japanese equities being the standout performer. This was driven by Japan reaching a trade agreement with the US, which addressed a long-standing dispute over reciprocal tariffs, with the US adopting a new calculation method that lowered tariffs on Japanese goods. This was particularly beneficial for heavy exporters, like auto manufacturers, which drove equity market returns. Although European equities ended the month in positive territory after a strong start to August, the escalating political situation in France weighed on the performance of the index. More broadly, growing expectations that the Fed would likely cut interest rates in September led equities, in US dollar terms, to have a strong month. However, the expectation of rate cuts led the US Dollar index to fall over the month, and so UK-based, Sterling investors did not fully benefit from the positive rally in equities. This led our overweight positions in North American equities (denominated in USD) - including the new NASDAQ overweight - European and Emerging Market equities to add to performance over the month, whilst our overweight to UK mid-caps relative to the FTSE 100 slightly detracted.

Defensive assets

In the UK, given long-term UK borrowing costs neared their highest level of the century, worries over the economic outlook of the country sent the yield on 30-year UK Gilts (government bonds) to near 5.7%. This has raised concerns ahead of the Autumn Budget, as persistently high yields could limit Chancellor Rachel Reeves’ fiscal flexibility. In France, Prime Minister Bayrou’s decision to call a September confidence vote reignited worries about the country’s debt trajectory, currently at 114% of GDP.  This led French OATs (government bonds) to fall by -0.9% over the month, with the yield spread on French and German 10-year bonds increasing by 0.13%, reflecting the additional compensation demanded by investors for holding French debt. In contrast, shorter-dated US Treasuries had a strong month as President Trump’s move to fire Fed Governor Lisa Cook led to investors questioning the central bank’s independence. The yield on 2-year US Treasuries fell by -0.34%, marking its biggest monthly decline since August 2024. Both our underweight position to French OATs relative to German government bonds, and our relative value position in US Treasuries added to performance. Our new overweight position in Australian government bonds slightly detracted.

Alternative assets

The Alternatives sleeve continued to deliver positive performance over August. Rate cut expectations also weighed on the US Dollar, with the Dollar Index falling -2.2% and the currency weakening against all other G10 currencies during the month. Our tactical underweight to the US Dollar added to performance, as did our overweight to Euro relative to GBP. Finally, our allocations to AIMS (Aviva Investors’ absolute return strategy) also added to performance.

Key active management themes in August 2025

1. Increased overweight equity positions across regions

• Building on strong US earnings, which highlighted the positive impact of capital expenditure by major tech companies, we increased exposure to US equities through positions in the S&P 500 and the NASDAQ – an index heavily weighted toward technology names.
• To enhance diversification within our equity overweight, we also added to Emerging Market equities.

2. Diversified currency exposure

• Ahead of US-Japan trade negotiations, we opened an overweight position in Japanese Yen vs US dollar position. Following the successful agreement, we took some profit on this position by reducing the size of the overweight.
• We rotated this overweight exposure against the US Dollar from Yen to Euro, to diversify against the weakening dollar.  
• Additionally, we increased the size of our overweight position to the Euro relative to Sterling, given fiscal concerns in the UK, particularly with the looming UK budget.

3. Added to fixed income positions

• We increased the size of our US steepener position (which favours short-dated over long-dated Treasuries), given the weaker data about new job creation in the US and ongoing questions about the sustainability of the long-term US fiscal deficit.
• To neutralise overall portfolio duration, we added exposure to Australian 10-year bonds, where we expect the Reserve Bank of Australia to deliver more rate cuts than are currently priced in by markets.

Past performance is not a reliable indicator of future performance

_{Source: Morningstar as at 31^st August 2025. Performance of the funds are net of fee.}

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.

^{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.}

Top 10 Equity holdings

_{Source: Aladdin, as at 31^st July 2025. The reference fund is SMF. The companies mentioned are for illustrative purposes only, not intended to be an investment recommendation.}

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in August 2025.

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

From an active asset allocation perspective, we maintain a constructive stance on equities as investor sentiment has improved, and corporate earnings continue to show resilience. In fixed income, we are neutral duration but do see value in selective parts of the yield curve such as the US 5-year treasury.  We also retain our underweight US Dollar position, which is relative to overweight positions in JPY, Euro & EMD Local Currency.

In terms of equity regions, we have diversified our overweight exposure across US, European and Emerging Market equities. We maintain a moderate overweight to US equities, against the backdrop of strong corporate earnings - especially within US tech - and resilient macro data. Our overweight positions in European and Emerging Market equities allow for diversification within our equity allocation; the outlook for both regions has also strengthened due to signs of improving trade relations with the US. Within the UK, we have a relative value position, favouring an overweight to UK mid-caps vs the broader market, as these companies stand to benefit more from central bank easing and USD weakness. 

In fixed income, we are neutral duration. We have a relative value trade in Europe with an overweight to German Bunds vs and underweight in French OATs. This allows us to isolate the potential for greater fiscal risks in France compared to the broader Euro Area, which would drive down French bond prices. Within the US, given salient fiscal concerns which impact longer-term bonds, we have structured our fixed income position to be overweight 5y US bonds vs an underweight to 30y US bonds. We also remain overweight Australian 10-year government bonds, as we believe the Reserve Bank of Australia will deliver more interest rate cuts than is currently priced in.

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

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. In the UK this is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178.