SMF - Q2 2025 update

Top 3 investment themes – Q2 2025         

Q2 2025 was a turbulent period for markets, marked by a shock tariff announcement, a controversial US budget and a significant escalation of geopolitical tensions in the Middle East. Despite this, the S&P 500 posted its best quarter since 2023 following a historic bout of volatility, reaching record highs in late June. Markets have been buoyed by strong earnings, resilient macroeconomic data and an increasingly dovish outlook from key central banks.

1. Tariff Wars – Markets resilient amid volatility and uncertainty

President Donald Trump shocked markets on 2nd April by announcing trade tariffs nearly double the scale of those pledged during his political campaign. The announcement, dubbed ‘Liberation Day’, was widely condemned by businesses, investors and economists and led to fears of a global recession, prompting one of the worst two-day returns in the S&P 500 since World War Two. The tech giants, which are global businesses with international supply chains, were amongst the worst hit. Following market turmoil and an escalating trade war between the US and China, President Trump backtracked in early April, calling for a pause on tariffs which is scheduled to end on 9th July. 

Following the volatility, early deals with the UK and China, in combination with strong US company earnings and resilient macro data, combined to reassure investors. As it stands, a 10% baseline rate has been imposed on most trading partners, which was broadly in line with markets’ initial expectations on Trump’s election.  A sharp recovery in global assets was led by the US, which saw the strongest May performance of the S&P 500 since 1990, leading the index to reach a new all-time high and close the quarter up 10.9%. Despite the recovery, significant uncertainty remains on tariff policy as we enter Q3 and threats remain against key trading partners of the US.

2. Budget deficits and the ‘Big Beautiful Bill’

Investor concern has been mounting about growing government deficits, which are increasingly costly in the higher interest rate environment post-2022. In May, Moody’s, a global leader in credit ratings, downgraded the US from Aaa (the highest attainable rating), to Aa1, due to rising deficits and the growing cost of servicing the debt. Fears over the US public finances were compounded by the announcement of President Trump’s ‘Big Beautiful Bill’ at the end of the month, which included sweeping tax cuts and spending increases forecast to add over $3 trillion to US debt over the next decade. The US debt-to-GDP ratio is also forecast to rise from 98% to 125% by 2035.

This has led to growing concerns over the long-term fiscal and monetary credibility of the US, resulting in a 7% fall in the dollar (the world’s reserve currency), which posted its worst H1 performance since 1973. US Treasuries, which are seen as the core defensive asset for global investors, also performed poorly, with the 30-year Treasury yield peaking above 5% in May. President Trump has downplayed this, suggesting increased tariff revenue will close the gap. Government deficits are also seen as a concern in Europe, where key economies (most notably Germany) have loosened fiscal constraints while pledging increases in defence spending. A key beneficiary of these fiscal concerns has been gold, which has proved one of the best performing asset classes in 2025. 

In terms of monetary policy, and despite the new tariffs, US inflation surprised to the downside, with futures markets continuing to price in over 0.50% of Federal Reserve interest rate cuts in the second half of the year, which has buoyed risk assets despite key central banks holding rates steady in Q2.

3. The ‘12-Day War’

There was a dramatic escalation in geopolitical tension during the quarter, which led to direct conflict between Israel and Iran. Despite this escalation, which included a US attack on Iran’s nuclear infrastructure, a fragile ceasefire was reached. Though geopolitical events can have a significant impact on markets, global equities and bonds held firm, as investors priced in a limited risk of a broader escalation.

The key impact was on oil prices, with Brent crude oil spiking by 7% in a day – marking the largest jump since 2022 – before retreating after the ceasefire. Investor fears that Iran may restrict access to the Strait of Hormuz, a strategically vital shipping lane for the global oil supply, were quelled by the ceasefire. 

Q2 2025 Market performance (GBP terms¹)

Past performance is not a reliable indicator for future performance.

_{Source: Morningstar as at 30 June 2025. ¹Equity returns are in GBP, commodity in USD and fixed income is GBP hedged.}

How did SMF perform?

Growth assets

Investor focus was centred on President Trump’s upcoming ‘Liberation Day’ at the start of Q2, with the wide-sweeping tariff announcements triggering a global equity sell-off. This was led by US equities as sentiment soured on the region, resulting in a correction of over 10% in the S&P 500 (in local terms). This reversed over the latter half of the quarter following President Trump’s 90-day pause on tariffs, although the positive returns were reduced for Sterling investors due to US Dollar weakness. Over the quarter, Asia Pacific and European equities (both core Europe and UK) were consistently the top performing regions, which was reflected in the portfolio. These markets have benefitted from investor caution towards US assets as well as region-specific drivers, such as progress on trade deals with the US and more fiscal spending within the EU. In terms of active positioning, our dynamic trading across equity markets (US, European, UK & Emerging Markets) to navigate the market uncertainty has been additive for Q2, as has our underweight US dollar position.

Defensive assets

Q2 also saw volatility within bond markets, most notably US Treasuries, although fixed income markets broadly ended in positive territory. Whilst historically considered as ‘safe haven’ assets by investors during periods of uncertainty, overriding fiscal, and inflation, concerns saw investors shift away from US government bonds. Notably, in May yields trended higher beyond the key 5% milestone (which translates to lower bond prices). In contrast, European bonds have outperformed, particularly within the Euro Area as the European Central Bank continued to ease monetary policy in Q2, sending bond yields lower. Falling inflation across major developed markets, including Europe and the UK was also positively received, and supported the likelihood of interest rate cuts in the second half of the year. Overall, our tactical positions within fixed income have broadly been flat over the quarter.

Alternative assets

The Alternatives sleeve continued to deliver positive performance over Q2. AIMS – Aviva Investors’ target return fund - has been the top performer within the sleeve over the last quarter, delivering on its benefits as a portfolio diversifier amidst the market volatility. The fund has benefitted from its overweight tactical positions within European equities (including exposure to defence) and short-term UK fixed income.

Key active management themes in Q2 2025

1. Opened overweight equity position, following a defensive positioning prior to ‘Liberation Day’

• In light of the downside risks posed by President Trump’s ‘Liberation Day’ (which materialised), we were initially underweight equities
• Over the quarter, as sentiment has improved, we have opened overweight equity positions across global markets (European, US & Emerging Markets), diversifying our exposure to US equities
• Within the UK, we have a relative preference for exposure to mid-cap UK companies (Russell 150) vs the broader market (FTSE 100)

2. Re-allocated our global fixed income exposure

• Given fiscal concerns in the US, which tends to impact long-term bonds, we have opened an overweight 5Y US Treasury position vs an underweight to 30y USTs
• Within Europe, we have also opened an overweight German Bunds position vs an underweight to French OATs, given scope for relatively larger fiscal risks in France
• We closed our UK Gilts position at the end of the quarter, given the potential for rising yields as the next Budget announcement draws closer

3. Diversified our underweight US Dollar exposure

• We have increased our underweight to the US Dollar, as investors remain cautious on the region given growing government debt and President Trump’s tariff policy
• This relative value trade is against underweights to JPY, EUR & EMD LC, with the latter exposure offering more attractive interest rate differentials

Past performance is not a reliable indicator of future performance

_{Source: Morningstar as at 30 June 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 30 June 2024.}

Top 10 Equity holdings

_{Source: Aladdin, as at 9 June 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 Q2 2025.

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

From an active asset allocation perspective, we maintain a modestly constructive stance on equities as uncertainty in the medium-term remains. Whilst investor sentiment has improved, and corporate earnings continue to show resilience, we remain cautious with a modest overweight to equities. In terms of fixed income, we remain long duration, allocated across several regions to diversify risk.  We also retain our underweight US Dollar position as dollar weakness persists, which is relative to underweights in JPY, EUR & EMD Local Currency.

In terms of equity regions, we have diversified our overweight exposure across US, European and Emerging Market equities. We maintain a small overweight to US equities, against the backdrop of strong corporate earnings 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 improved due to signs of easing trade relations with the US more recently. 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. 

Regarding our fixed income allocation, we remain overweight duration due to the potential for downside growth risks, with positions within European and US markets. In Europe, we have a relative value trade 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.

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 and Wales No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178.