SMF - Q3 2025 update

13 Oct 2025

Top 3 investment themes – Q3 2025

Q3 2025 was broadly positive for global markets, marked by lower volatility as investors began pricing in the potential effects of evolving US tariff policy against a backdrop of resilient, though pressured, economic data. Despite persistent risks, including muted growth, rising inflation and widening fiscal deficits, most asset classes delivered positive returns, with key equity markets returning to all-time highs. As markets adjusted to the new tariff regime, the quarter was also shaped by the first Federal Reserve rate cut in 2025 and renewed fiscal concerns in Europe. Following their weakest performance since 2022 in the second quarter, US equities returned to all-time highs, supported by robust growth data and signs of policy stability, while US Treasuries also began to recover. Meanwhile, gold surged to record highs, and long-end European sovereign bonds came under pressure amid political instability and credit downgrades.

Markets steady as tariff tensions ease

Tariffs remained a central theme in Q3, though investors grew increasingly comfortable with the new regime, leading to less reactive markets. The extension of the 90-day tariff pause to August 1st gave time for new trade deals, and by late July, the US had reached agreements with the UK, EU and Japan, and was in continued negotiations with China. Roughly six months on from the initial announcement, early indicators suggested that President Trump had secured early wins against his objectives, raising the global tariff rate five-fold to an average of 15%, reducing trade deficits markedly and generating over $100bn in revenue. Investors responded especially well to the latter, given growing concerns about US deficits. Although US policy has had a notable impact on growth forecasts, exceptional US earnings data allayed concerns of an immediate earnings shock and any potential recession.

Dovish tilt as inflation lingers

Inflation pressures persisted in Q3, but the Fed’s first rate cut of 2025 in September marked a key shift in monetary policy. With the US having one of the highest central bank rates amongst developed markets, and as the servicing of US debt has become increasingly costly, pressure had been mounting on the Fed to act. Following signs of labour market weakness, the Fed cut rates by 25bps to 4.00–4.25%, with two further rate cuts currently forecast by year end. In a split decision in August, the Bank of England also cut rates by 0.25% to 4%, while the European Central Bank kept rates steady at 2% against the backdrop of more controlled inflation. Ongoing concerns about growing inflation and pressure on longer-dated government bonds have contributed to a surge in gold prices. Gold continued to rise in Q3, hitting an all-time high of $3,800 in late September, having increased over 45% in 2025. Central bank buying, growing ETF subscriptions and increasing demand for alternative safe-haven assets have supported the rally.

Fiscal fragility in Europe

While US Treasuries rallied on the back of rate cuts, European sovereign bonds faced renewed pressure amid fiscal concerns and growing deficits, in tandem with increased government spending. France was at the epicentre, with Prime Minister Bayrou losing a confidence vote and Fitch downgrading the country’s credit rating from AA– to A+. The French 30-year yield rose 29bps to 4.35%, peaking at 4.50% in early September, its highest level since 2009. Germany and the UK also saw long-end yields rise, with the 30-year Gilt yield reaching its highest point since 1998. In the UK, growing scrutiny of public finances has increased anticipation around the upcoming Budget, scheduled for November, which is expected to outline the government’s fiscal strategy. Investors are watching closely, as decisions on spending and taxation could have broad implications for interest rates, currency markets and investor risk appetite. Despite these pressures, global bonds posted modest gains in Q3.

Q3 2025 Market performance (GBP Terms)

Past performance is not a reliable indicator for future performance.

_{Source: Source: Morningstar as at 30 September 2025. All returns are in GBP and fixed income is GBP hedged.}

How did SMF perform?

Growth assets

Global equity markets delivered strong returns in Q3 2025 as investors grew more comfortable with the new tariff regime. Emerging Market equities led the way, rising 12.47%, supported by dollar weakness and a continued appetite for global diversification. Asia Pacific ex Japan equities followed closely, gaining 11.63%, driven by enthusiasm around artificial intelligence and the tailwind of US rate cuts. North American equities also had a strong quarter, advancing nearly 10% and reaching fresh all-time highs, buoyed by robust corporate earnings, resilient consumer demand, and better-than-expected economic growth. For sterling-based investors, a strengthening dollar served as an additional tailwind. Japanese equities rose nearly 10%, supported by a weaker yen and ongoing corporate reform. UK and European equities continued their 2025 rally, though to a lesser extent. From an active positioning perspective, our tactical overweight to Emerging Markets, US equities, and European equities was additive to performance.

Defensive assets

Fixed income markets were more subdued but still delivered positive returns in most areas. Emerging Market debt was the strongest performer, returning 4.65% in local currency and 4.32% in hard currency terms, as investors sought yield in a falling rate environment. Global High Yield and investment-grade corporate bonds also posted gains of 2.64% and 2.14%, respectively. More defensive bonds - including inflation-linked bonds, global treasuries, and UK Gilts - were the weakest performers for the quarter, weighed down by growing fiscal concerns across developed markets.

Alternative assets

Performance for the SMF alternatives allocation was mixed in Q3 2025, with the UK Property exposure delivering a negative return. Conversely, the AIMS target return fund delivered a modest positive return.

Key active management themes in Q3 2025

1. Remain overweight equities, distributed across multiple regions.

We remain overweight EM, European and US equities, with a preference for US equities.

2. Exited UK mid-cap position

In Q3 2025, we exited our UK mid-cap position due to heightened uncertainty around the upcoming Autumn Budget.

Neutral duration
We are neutral duration, with a preference for shorter-dated US government bonds. We also have an overweight in Australian government bonds.
Maintained dollar underweight
We have maintained our underweight to the US dollar

Q3 2025 Performance

Past performance is not a reliable indicator of future performance

_{Source: Morningstar as at 30 September 2025.}

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.

2020 and 2021 prior to SMF II inception date.

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.}

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in Q3 2025.

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

We continue to see fundamental support for equities and maintain an overweight position. US equities remain our preferred regional allocation, underpinned by strong quarterly earnings and renewed confidence in tech spending, a key uncertainty that has now been resolved. While the earnings outlook for European and Emerging Market equities is more mixed heading into 2025, they offer greater valuation support, which is particularly relevant in an environment where regional diversification is deemed increasingly importantly. In Q3 2025, we exited our UK mid-cap position due to heightened uncertainty around the upcoming Autumn Budget.

Within fixed income, the case for long-duration exposure remains weak across our opportunity set. During Q3, we actively traded yield curve positions in both Europe and the US, capturing upside while maintaining a neutral stance on duration. Our only remaining long-duration exposure is in Australian 10-year bonds, held primarily to offset duration risk elsewhere in the portfolio. We currently hold no material active credit positions.

In currency markets, we expect US policy dynamics to continue weighing on the dollar over the longer term, driven by shifts in international asset allocation and domestic economic risks that may influence Federal Reserve expectations.

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.