SMF - 2025 Update

Top 3 investment themes – 2025                

1. AI momentum built but clouds appeared

Tech and AI continued to be the engine driving equity returns in 2025, with hyperscalers and AI‑exposed sectors capturing the bulk of performance as earnings continued to remain resilient. Global equities, as measured by the MSCI ACWI, finished the year up 14% in GBP terms. On the back of huge capital expenditure focused on AI, markets did begin to voice concerns as some of the large tech companies continued their borrowing spree as markets searched for answers on how this expenditure would be converted to revenue. Total AI Capex expenditure was reported to be around $484 billion in 2025, up a remarkable 44% on the previous year. Bubble talk intensified in the final months of the year as stretched valuations and massive capex continued to worry investors. Markets began to separate potential winners and losers in the AI arms race, with Alphabet up 29% in the last quarter while Meta fell 10% over the same period.

2. Trump's tariffs took a toll on global stability

“Liberation Day” triggered a burst of volatility, with the US administration’s unilateral tariff actions igniting sharp swings in global risk sentiment and tightening financial conditions. The US equity bellwether, the S&P 500, fell as much as 15% in April. There was a reprieve for trading partners of the US as the US administration announced the delay of tariffs allowing for ongoing negotiations. This was greeted favourably by markets, allowing regions like Europe, UK and China time to agree lower tariff rates, however in general, the effective tariff rate rose from c.2.5% at the beginning of 2025 to c.15% by the end of the year. With tariff-related revenue expected to be around $280 billion dollars in 2025, up from approximately $77billion in 2024, President Trump delivered on one of his election promises but the jury is still out on how this will impact the US economy.  

3. Governments lent into 'buy now, pay later' fiscal policy

The US government shutdown and fiscal brinkmanship reinforced the divide between short‑term political incentives and long‑term debt sustainability, driving volatility in Treasury markets and contributing to curve distortions as the 30-year yield rose in a year when US interest rates fell by 0.75%. Fiscal looseness wasn’t just a US issue in 2025, with France, the UK, and Germany all leaning on deficit spending to support investment, energy security and industrial policy - testing market patience. In direct response to this, investors sought alternative safe havens as persistent US fiscal concerns pushed global buyers toward gold which finished the year up 65% in USD terms, with its close relation Silver up a staggering 148% in 2025. Linked to this, the US dollar came under significant pressure in 2025 due to rising fiscal‑related risks, US Federal Reserve independence and the prospect of slower US growth. Consequently, the US dollar fell against a basket of global currencies by c.9% in 2025.

2025 market performance (GBP Terms¹)                                                                                                         

Past performance is not a reliable indicator for future performance.

_{Source: Morningstar as at 31 December 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 strong year across all major equity markets, with Global Equities finishing up +14% in GBP terms as markets proved resilient despite ongoing uncertainty from tariffs and inflation. One of the dominant stories of the year came with President Trump’s "Liberation Day" tariff announcements on 2nd April, which triggered the largest two‑day fall in US equities since WWII and pushed volatility to one of its highest levels in the 21st century. However, as investors increasingly priced in tariff‑related risks and the “TACO” (Trump Always Chickens Out) narrative gained traction, the perceived risks diminished over the course of the year. The new Trump administration also had a meaningful impact on European and UK equities, the best‑performing regions of 2025, following galvanised European defence spending in response to increasing pressure from the US. Markets experienced an early stumble following the release of DeepSeek’s new AI model, which saw Nvidia fall –17% in a single day, but the Magnificent Seven still closed the year up 25%. In the second half, however, concerns began to emerge around the possibility of an AI-driven market bubble. Our tactical positioning added to performance, particularly through dynamic allocations across US, European, and Emerging Market equities around Liberation Day. Our sector-based positions, such as overweight positions to US and European financials, US Healthcare, US Tech and European basic resources also contributed positively, whereas our overweight in UK Mid-Caps was a slight detractor.

Defensive assets

Fixed income markets also delivered their strongest performance since 2020, however there was some dispersion between major regions. Rate cuts in the second half of the year led US 10‑year Treasury yields to fall by 0.40%, which meant bond prices increased. There was some volatility throughout the year, largely in response to speculation that Trump might fire Federal Reserve Chair Jerome Powell, and Moody’s downgrade of the US credit rating. This led long‑term Treasury yields to briefly rise above 5%, amplified by Trump’s “One Big Beautiful Bill,” which is expected to add $3 trillion to the US’s already elevated $37 trillion debt burden. This reflected a broader global trend of widening gaps between short‑term fiscal spending and long‑term debt sustainability, with global debt reaching 100% of global GDP. In the UK, although debt levels climbed to their highest since the late 1990s, the main focus was the Budget, which had a limited impact on markets. The US dollar also fell by -9% over 2025 and it weakened against every other G10 currency, with the Euro strengthening +14%. In terms of our tactical positioning, our underweight to the US dollar, underweight to Japanese government bonds and relative value US Treasury trade added to performance whilst our overweight position to Australian government bonds detracted.  

Alternative assets

The Alternatives sleeve had a strong year. Our allocation to Aviva Investors Multi Strategy Target Return fund (AIMS) added to performance, as it continued to provide a diversified source of returns and downside protection amidst the volatility. The UK Property fund also performed well given the falling interest rate environment, which improved investor sentiment. 

Key active management themes in 2025

1. Dynamic equity allocations

• Prior to Liberation Day, in light of the downside risks posed by President Trump's tariffs, we moved our positioning to underweight equities. Following the initial market downturn and as sentiment continued to improve, we opened an overweight equity position across US, European and Emerging Markets. This dynamic positioning around Liberation Day contributed positively to performance. 
• We also continued to identify sector specific opportunities and capture profit. Now closed, our overweight positions in US healthcare and US financials boosted performance in the first half of the year. More recently, we increased exposure to European financials, supported by attractive earnings and compelling relative value versus US peers. We also added to European basic resources amid renewed defence commitments and easing trade tensions.
• We also recently closed our overweight in the NASDAQ - an index heavily weighted toward US technology names.  

2. Move to overweight fixed income

• Our key fixed income position this year has been our relative value US Treasury trade, where we are underweight 30-year Treasuries given long-term fiscal concerns and overweight 5-year Treasuries. 
• We continue to maintain our overweight position to Australian 10-year government bonds to help provide the portfolio with positive duration, given the expectation for interest rates to fall in the short-to-medium term. 
• We closed our underweight positions to short Japanese government bonds and overweight position to French government bonds, adding to performance. At the end of Q2, we also closed our overweight position to UK Gilts given rising concerns over the debt burden.  

3. Rotation away from the US dollar

• Following Liberation Day, we added an underweight position in the US dollar, reflecting our view that domestic policy dynamics and broader global risks could weigh on its longer-term performance. 

2025 Performance

Past performance is not a reliable indicator of future performance

_{Source: Morningstar as at 31 December 2025. 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

^{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.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.} 

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

We expect the global economy to strengthen through 2026 as the tariff-driven headwinds of 2025 begin to fade and a combination of easier monetary policy, modest fiscal support, rising real incomes, and a powerful AI-driven capex boom lifts growth. After a period of weakening momentum, activity should accelerate as the year progresses. With underlying inflation converging toward central bank targets, we expect rate cutting cycles to conclude around mid-2026; given limited spare capacity and improving growth, some central banks may even start raising rates again in the second half of the year. This is a supportive backdrop for risk assets. 

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 equities, including European banks and basic resources, and Emerging Market equities, allow for diversification within our equity sleeve. The outlook for both regions has also strengthened due to signs of improving trade relations with the US.

In fixed income, 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, to help maintain slight positive duration across the portfolio given the expectation of interest rates to fall in the short-medium term. 

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

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.

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