SMF monthly update

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

How did SMF perform?

Growth assets

Despite the initial market volatility at the start of the month, which saw a sell-off across global equity markets, most equity markets closed in positive territory for August. European equities led the recovery this month, which was reflected in the portfolios as our European equity fund was one of the top performers. Emerging Market equity and Japanese equity were the exception to the general recovery, with the latter being hit particularly hard by a surprise rate hike by the Bank of Japan at the end of last month. In terms of our tactical positions, our overweight positions in North American and European equities contributed positively to returns. Our active trading during the volatility meant that our overweight position in Japanese equities, now a closed position, was also a positive contributor to returns. 

Defensive assets

August was another positive month for fixed income markets as market expectations for further rate cuts were reaffirmed. This was initially sparked by fears of a growth slowdown in the US, which have since eased, and further supported by dovish Fed commentary which has set expectations for a September rate cut. In the UK, the BoE voted to cut interest rates by 0.25% for the first time in four years on August 1^st. Our allocation to the Aviva Investors Global Investment Grade Corporate Bond fund was the top performer this month within the portfolio's Defensive sleeve. Regarding active positions, our overweight in Gilts was a positive contributor this month as global yields moved lower on rate cut expectations, although this trend meant that our short position in Japanese government bonds detracted from returns. 

Alternative assets

Alternative assets continued to perform well in August, delivering positive performance. This was driven by our property holding.

Key active management themes in August 2024

• Reduced our overall overweight equity position to take profit 
  • We used the market drawdown at the beginning of August as an opportunity to increase our European, North American and Japanese equity overweight positions. We then trimmed our overall equity overweight within the month to take profit on these active trades, in anticipation of potential volatility around upcoming US macro data.
  • Our tactical overweight position in Japanese equities is a now closed position.
• Reduced our short position in Japanese government bonds 
  • As global yields have trended lower on the expectation of rate cuts, we have trimmed our underweight position in Japanese government bonds. 

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.

Top 10 Equity holdings

Source: Aladdin, as at 27 August 2024.The reference fund is SMF.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in August 2024.

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

From an active asset allocation perspective, we continue to prefer equities as they have the potential to perform well in a disinflationary macro environment wherein interest rate cuts by developed market central banks are expected this year (with the exception of Japan). We remain overweight US and European equities, whilst having an underweight in Emerging Market equities. Despite recent volatility, US equities have maintained their strong valuations as companies have continued to deliver robust earnings, albeit slightly below market expectations. We also expect US equities to continue outperforming EM equities, given the economic slowdown in China. In Europe, company valuations remain at attractive levels.

Regarding our fixed-income allocation, we have two key tactical asset allocation positions: short Japanese government bonds and overweight UK Gilts. Essentially, we believe that Japan is at the start of its hiking cycle given increasing inflationary pressures, with another rate hike delivered by the Bank of Japan at the end of July. 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 would benefit from the greater likelihood of potentially more rate cuts from the BoE, compared to the Fed.

Top 3 investment trends – August 2024

1. Volatility (briefly) returns to the market

August was a turbulent month for risk assets, with the VIX index (a barometer for market volatility) briefly reaching levels last seen in March 2020. The initial catalyst for this was a weak US jobs report, which showed an increase in the unemployment rate to 4.3% among other softer-than-expected data. This raised fears that the US may be heading for a recession, and helped spark volatility in global markets. One of the most impacted markets was Japan. The “yen-carry” trade, a popular position in markets that relies on Japanese rates being low, began to unwind as the Bank of Japan increased rates and expectations for US interest rates fell. The Japanese TOPIX index fell by -12.2% in JPY terms on August 5th, with other less pronounced sell-offs occurring across global markets. However, after better economic data and dovish central bank messaging, calm quickly returned and markets rebounded. Despite the heightened volatility, most equity and bond markets finished positive for the month.  

2. Central banks position for rate cuts

A number of key central banks either cut rates or signalled their readiness to do so. At the start of the month, the Bank of England (BoE) lowered its base rate from 5.25% to 5.00%, marking its first interest rate cut in over four years. This was after headline CPI figures fell to the bank’s 2% target in May and remained at that level in June, despite sticky services inflation. Core inflation fell to 3.2% in the US, and dovish remarks in Fed Chair Jerome Powell’s Jackson Hole speech and the latest Federal Open Market Committee (FOMC) minutes solidified investors’ conviction that rate cuts in the US are now imminent. Eurozone inflation fell to a three-year low of 2.2% in August, with European Central Bank (ECB) economists and board members stating they were open to another rate cut in September. This helped sovereign bonds post another relatively strong month.  

3. Gold continues to glitter while Nvidia’s lustre fades

Gold continued to perform strongly, reaching all-time highs in August. The precious metal rallied, initially driven by safe-haven flows in the middle of the month ahead of US inflation data. Growing market expectations of interest rate cuts from the Federal Reserve and further weakening of the US dollar pushed the gold spot price up, finishing August with a 2.3% gain. This brought year-to-date returns to 21.3%, placing gold among the top-performing major asset classes. In contrast, Nvidia’s stock fell by 8% after hours following its earnings call, despite reporting record-breaking revenue of $30 billion for the second quarter. This figure represented a 15% increase from the previous quarter and 122% year-over-year growth. Investors were still underwhelmed, as the company’s forecasts for the third quarter were only slightly above consensus expectations, rather than the significant beats the market has become accustomed to.

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.