SMF Update

Views from the Aviva Investors' Multi Asset Team

Published: 09 Jul 2026

SMF Fund Price Adjustments

On the 7 May 2026, the price of the Life Smooth Managed Fund S4 was adjusted by +5.55% to be 149.68p. The upward price adjustment on the Smooth Managed Fund comes amid a complex but rewarding year for global assets, which saw many asset classes reach all-time highs in the second half of the year.

Top 3 investment themes - Q2 2026

Geopolitical tensions ease as oil prices retreat
The Iran conflict was the dominant driver of markets in Q2, with oil prices moving sharply throughout the quarter as sentiment swung between escalation and hopes of a deal. The key shift came in June, when a US-Iran Memorandum of Understanding helped ease tensions and restore confidence in oil flows through the Strait of Hormuz - a route that carries around 20% of global supply. On the day it fully reopened, roughly 12 million barrels passed through, signalling a move back towards normality. As that geopolitical risk premium unwound, oil prices fell sharply and are now around 40% below their March highs at $72/bbl. Lower energy prices provided a tailwind for both equity and bond markets. However, intermittent skirmishes were a reminder that tensions remain fragile and geopolitical risks have not disappeared entirely.
The AI story evolves from excitement to scrutiny
Tech was a clear standout in Q2, with semiconductors leading the charge as optimism around AI infrastructure kept demand for advanced chips extremely high, whilst supply remained tight. This even prompted Apple to increase prices on iPads and Macs. Against that backdrop, the Philadelphia Semiconductor Index surged a staggering 88.0% over Q2, while South Korea’s KOSPI rose 67.9%. That said, the tone shifted slightly in June as investors became more selective. Volatility picked up, with the Semiconductor Index moving more than 5% on ten separate days, and some of the largest tech names came under pressure with the “Magnificent Seven” falling close to 8% over the month. In contrast, the other 493 companies in the S&P 500 rose almost 3%, pointing to a gradual broadening of market leadership. Despite the wobble, global equities have remained resilient, up more than 12% year-to-date. The long-term AI story is still intact, but investors are starting to look more closely at where the real winners are likely to be.
Interest rate policy sets the tone for markets
Interest rates moved back to the centre of investor attention during Q2 as central banks reinforced a cautious stance. In the US, Federal Reserve Chair Kevin Warsh maintained a hawkish tone, leaving interest rates unchanged while removing much of the forward guidance that markets had become accustomed to under previous leadership. Investors interpreted this as a signal that US interest rates could remain elevated for longer, with future decisions becoming increasingly dependent on incoming economic data. In Europe, the European Central Bank delivered their first rate hike, albeit widely anticipated, since 2023 of 0.25%, while political developments in the UK brought renewed attention to fiscal stability. Against this backdrop, bond yields remained relatively elevated and government bond markets struggled to make progress, leaving both gilts and global government bonds broadly flat year to date.

Q2 2026 market performance (GBP Terms1)

How did SMF perform ?

Growth assets

Despite a quarter dominated by geopolitics, equity markets had an extremely strong quarter with global equities up 14.1%. This was driven by easing fears of stagflation, and investors being increasingly confident that the AI investment boom remained intact. US hyperscalers continued to lift their spending plans, with 2026 AI and data centre capex guidance now approaching an eye-watering $700 billion. That confidence fed through to earnings expectations, with forecasts for global equity earnings growth in 2026 rising sharply over the quarter, led by the technology sector. Asia Pacific equities had an outstanding quarter, up +23.9%, helped by their significant exposure to semiconductors and technology hardware companies at the heart of the AI buildout. Samsung Electronics was a notable standout, up a huge +77% over the quarter, as investors continued to favour the "picks and shovels" providers supplying the AI boom rather than just the end users. Our overweight positions to US and Emerging Markets added to performance, alongside sector specific overweight positions to European basic resources and banks. However, our overweight position to US Energy and European defence slightly detracted.

Defensive assets

Defensive assets also had a strong quarter, with easing inflation fears helping sovereign bonds recover. Gilts returned +2.1%, outperforming Global Treasuries as markets welcomed Prime Minister Starmer's resignation, removing an overhang that had weighed on sentiment. The "Burnham Premium" also continued to fade as he reiterated his commitment to fiscal discipline, supporting both gilts and sterling assets. Elsewhere, central banks remained firmly hawkish, with both the European Central Bank and the Bank of Japan delivering further rate hikes. In the US, the first Fed meeting under new Chair Kevin Warsh struck a more hawkish tone than anticipated, prompting a repricing of interest rate expectations. While markets began the quarter expecting no further rate increases this year, they ended it pricing in more than one hike by December. In this environment, our recently added overweight to UK gilts relative to US Treasuries added to performance, as did our overweight to the Australian Dollar, whilst underweight positions in the US Dollar and Sterling detracted.

Alternative assets

Oil was the dominant story of Q2, with Brent crude ending the quarter at pre-war levels of $72/bbl after falling -27.9% marking its biggest decline since the pandemic slump of Q1 2020. With Fed rate hikes being priced in and geopolitical risks easing, it was a tough quarter for Gold which fell -15.5%. Allocations to alternative strategies like AISS and AIMS added to performance over the quarter, in which AIMS' equity positions offered protection during volatility as well as capturing the upside as markets rallied.

Active management themes in Q2 2026

Captured profits following the equity rally

- We increased equity exposure early in the quarter across the US, Europe and Emerging Markets, supported by strong earnings momentum, continued AI-driven demand, and strong performance from technology and semiconductor companies. We also introduced tactical positions in European Basic Resources and US Energy to benefit from rising commodity prices amid heightened geopolitical tensions.

- Following the strong rally, we trimmed our regional overweight positions in June to lock in some gains while retaining exposure to the themes we continue to favour. We also exited our overweight position in Japanese equities as the pace of reform under the new Prime Minister proved slower than expected.
Added an overweight to UK gilts relative to US Treasuries

- UK yields have risen relative to other G10 markets on the back of political and fiscal uncertainty, but weakening macro data - particularly wages and the labour market - suggests rate hike expectations may need to be dialled back, which is supportive for gilt prices.

- By contrast, US rate expectations still look low given ongoing inflation risks, meaning Treasury yields may have further to rise.

- As a result, we have added an overweight to gilts relative to Treasuries.
Rotation in currency exposure

- In June, we closed our overweight position in the Euro relative to the Sterling to manage our Sterling exposure, whilst we increased our overweight exposure to the Australian Dollar ahead of their Central Bank decision.

Q2 2026 Performance

Q2 Performance — Past performance is not a reliable indicator of future performance. Source: Morningstar as at 31 May 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

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

An exceptional Q1 earnings season in the US has helped anchor market confidence, with earnings growth exceeding 29% year-on-year. More broadly, macro indicators continue to point to a resilient backdrop, with growth holding up better than expected despite mounting geopolitical and inflationary headwinds. The interim deal agreed between the US and Iran has brought down oil prices to pre-war levels, which has reduced inflation expectations. Whilst geopolitical risks remain, the ultimate impact will depend on whether traffic continues through the Strait of Hormuz, a critical global oil supply route.

In our central scenario, inflation risks for 2026 have moved higher while the growth outlook has softened, particularly in energy-importing regions such as the UK and Europe. That said, recent US earnings strength suggests large-cap companies remain well positioned to navigate the current environment.

On interest rates, central banks initially looked through the energy-driven inflation shock, but there has been growing hawkish stance from Central Banks across the globe, already reflected by an interest rate hike by the ECB. In a more adverse high oil price scenario, we cannot rule out further rate increases from the Bank of England or the Federal Reserve. We hold an overweight position to UK gilts relative to US Treasuries given differing rate outlooks.

Against this backdrop, the outlook for equities remains broadly positive, but with a wider range of outcomes. We retain overweight positions in the US, Japan and Emerging Markets, where growth dynamics remain relatively resilient. We also maintain selective exposure to European defence and banks, and US Energy, supported by longer-term structural themes.

We continue to hold an underweight position in the US dollar and sterling, alongside an overweight to the Australian Dollar.

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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