MPS on Platform Quarterly Review - July 2025

Q2 returns for W1M's Waverton Managed Portfolio Service ranged from 2.2% to 3.1%.

Fixed Income

It’s hard to recall a time in the past 40 years when the macroeconomic narrative has been so muddled. Yet, equity markets have pushed back to all-time highs, and rate markets are growing more optimistic about the potential for interest rate cuts. We are in the middle of a chaotic regime shift in the US, with significant knock-on effects globally. Remarkably, despite looming deadlines for tariff negotiations and a pivotal vote on substantial US tax cuts, risk premia across most asset classes have compressed in recent weeks.

We still have no clear understanding of how tariffs will affect inflation - and, by extension, the Fed’s monetary policy response. We don’t know how consumers will react to apparent labour market softness, or how corporations will make long-term investment decisions in an environment where policymaking seems to shift weekly. Overlaying this is a still-volatile geopolitical backdrop.

So how are professional investors managing portfolios amid such uncertainty? With some difficulty. There is, perhaps, a growing sense of fatigue among our peers. For many, this has led to a more passive approach and an emphasis on ‘career risk management’.

In the Sterling Bond Fund, however, the focus remains on limiting downside volatility for our multi-asset clients. That means staying active - allocating to opportunities where we see attractive risk-adjusted returns and potential upside convexity if the outlook deteriorates. Our positioning has become increasingly contrarian as peers rotate away from government bonds and into credit in pursuit of short-term income. But in June, our more cautious stance delivered outperformance, as yield curves retraced lower following the move higher in May.

There are, of course, some more positive scenarios within the range of possible outcomes - but the associated risk premia look thin and vulnerable to widening, which could result in negative returns. Until the outlook becomes clearer, we believe betting on those marginal probabilities is unwise. We remain cautious. That means credit exposure remains close to its lowest level since inception, while we retain meaningful government bond duration - albeit trimmed slightly following the recent yield decline.

Equities

The quarter began with a sharp sell-off following the Liberation Day tariff announcements, which intensified fears of a global recession. The U.S. administration then softened its trade policy-marking the first in a series of policy reversals now commonly referred to as “TACO” (Trump Always Chickens Out). This pattern has become familiar to the market, which rallied to all-time highs in response.

Since the U.S. softened its trade policies following the initial Liberation Day announcements, the market has shown more “risk-on” characteristics, favouring Growth and Cyclical areas over more Defensive sectors. On a relative basis, we were positioned more defensively than the MSCI ACWI, which contributed to our underperformance, alongside several bottom-up events.

Our biggest detractors on a regional basis during this period came from North America and the UK. In North America, our Healthcare exposure was a particular source of relative weakness-UnitedHealth and Thermo Fisher were key contributors. We also faced a further headwind from the strong rally in Nvidia, which rose 37% during the quarter and cost us 1.1% in relative performance versus the MSCI ACWI. We partially offset these headwinds through positive stock selection in our North American Industrials, where names such as GE Vernova outperformed.

In the UK, the most significant headwind to our relative performance came from the Financials sector, the largest sector in this market. Both the Banks and Insurance segments-where we held no positions-outperformed our core holding in LSEG, which declined 2.7%, resulting in a 35 basis point relative impact. LSEG posted in-line results but slightly slower-than-expected subscription growth, which may have disappointed some investors. Meanwhile, the more cyclical Banks and Insurance names benefitted from the “risk-on” rotation, as the global economy appeared more resilient in light of the softer tariff impacts from Trump.

Furthermore, our relatively defensive exposure to Rentokil lagged the broader UK industrials sector, where performance was dominated by defence-exposed names such as Rolls Royce and BAE, in which we hold no positions. Our analysis of future cash flow generation leads us to focus on areas of long-term structural growth, of which the rise in defence spending is one. However, a strong theme does not always translate into a good investment. Valuation matters, and apparent winners often gain substantial momentum before the underlying fundamentals are fully reflected-especially in today’s markets. It’s also important to consider that large defence orders can take three to five years to come through, and often even longer before they translate into stronger cash flows. As a result, while we continue to review potential investment opportunities in this area, we will look for attractive entry points in names that meet our fundamental criteria.

While U.S. stocks recovered during the quarter, the U.S. dollar continued to weaken, with the DXY dollar index ending the period down 7%. This decline created a headwind for UK and European markets, which had a strong first quarter but underperformed during the recovery.

Geopolitical tensions also added to market volatility. The war between Iran and Israel caused significant disruption, though its impact on markets was muted aside from a short-lived spike in oil prices.

Defence stocks, particularly in Europe, continued to perform well, supported by NATO’s pledge to increase defence spending to 5% of GDP. Yet, with valuations already high and actual spending likely to fall short of lofty market expectations, we remain more cautious on this area.

After the DeepSeek-induced hit to AI sentiment in the first quarter, the entire AI supply chain rallied strongly. Robust commentary on AI demand and capital expenditure expectations supported this recovery, leading to a narrowing of market breadth. Nvidia, the index’s largest stock, rallied back to all-time highs. It became evident from technology companies that the AI industry remains supply-constrained. The current bottleneck lies in capacity-cloud providers lack sufficient Nvidia GPU chips, and there is a waiting list at OpenAI for building applications.

One key takeaway from the quarter was the resilience of corporate earnings, at least for now. Strong growth persisted despite the volatility, driven in part by the ongoing strength of the U.S. consumer. While lower-income consumers are facing challenges, overall spending remains healthy. As one CEO noted, “income equals spending… everyone still has an income and the spending continues. Yes, a few big-ticket items are being postponed but as long as the consumer has an income they continue to spend so yes, the consumer is fine.”

However, the true test will come in the second half of the year, when the effects of the tariffs are more likely to be felt. Most companies we follow built up about a quarter’s worth of inventory ahead of the tariff increases, so any inflationary impact-if it materializes-is still to come.

Absolute Return

Over the quarter, aggregate exposure to specialist fixed income, absolute return strategies, and structured opportunities all contributed positively to returns, with specialist fixed income emerging as the top-performing exposure type.

While we continue to construct the overall portfolio to ensure both upside capture and downside protection, the fund continues to perform respectably in risk-adjusted terms, having delivered a 3.6% return over the last 12 months with 2% annualised volatility. The Fund’s low beta and differentiated return profile relative to a range of core market indices remains a key attribute in overall portfolio construction. This has materially improved outcomes for clients with lower risk profiles, where the fund often has a higher weighting.

Key additions over the quarter included Protected Equity and a HSBC Geometric Dispersion note. We exited our position in the UBS XRP note, as its volatility profile proved weaker than expected, though the note still performed respectably during our holding period, returning +6%.

Given our ongoing focus on enhancing the Fund’s risk-return characteristics, we are looking to gradually increase our equity exposure where built-in downside protection is in place. At the same time, we are working to remove the current 40% maximum weight restriction on structured opportunities within the Absolute Return Fund prospectus. This change would allow greater investment flexibility and is being pursued alongside ongoing negotiations around ISDA agreements with selected banking counterparties.

Real Assets

There are powerful macroeconomic tailwinds bolstering many real assets today, including government spending initiatives and the global need to update aging infrastructure. The opportunity set includes digital infrastructure, where increasing computing power from generative AI and related technologies is driving heightened demand for data centres, electricity and power.

Within real estate, we see valuation dispersions across property types and regions creating valuation opportunities, while clearly, any decline in base rates but importantly the rate curve, would be beneficial for sentiment towards the listed sector but importantly for any ongoing consolidation or takeover activity.

Gold and many natural resource sectors look well poised to hedge the return to more inflationary environment, which is not our base case, but certainly possible given the US economic resilience.