Market outlooks

Good afternoon everyone and welcome to our latest quarterly Multi-Asset webinar. My name is Tom Cole, I'm a National Account Manager at Royal London Asset Management. I'm delighted to say I've been joined by Trevor Greetham, Head of Multi-Asset. And today we'll be giving you a review of the last quarter. We're also looking at key considerations as we move forward into the second-half of the year. So we're keen to make this as interactive as possible. So please pop any questions into the chat as we go through and we will get to as many as we can at the end.

So it's certainly been a busy quarter. You know, we've seen a lot of panic and some huge swings in markets, obviously set off by Trump's Liberation Day speech in April. But now we're also seeing sort of signs of potential longer term damage and uncertainty, particularly in the US. So where does this all leave us?

So Trevor, I'll pass over to you to take us through. Thanks, Tom. Thanks, everyone, for sparing the time with us today. So we're going to be talking about navigating Trump 2.0. And there is a sort of saying that when Trump was first in the White House, he was a reality TV star, didn't know anything about governing, hired a sort of cabinet, if you like, of experts. He'd all kind of done stuff before. And sometimes you come up with crazy ideas and people would say the adults in the room would finally speak up and something more sensible was done.

Trump 2.0, there are no adults in the room. He's hired this sort of cabinet of ex-Fox News hosts and who knows what. And he's being fed pretty crazy ideas. He hasn't got many people restraining him. And I'm not even sure there is a room, if you like, that decisions are being made in, because most of it seems to be happening in Trump's social at any hour of the day. So it's a much more kind of chaotic policy backdrop that we have to navigate. But the whole idea of multi-asset is you can diversify risk and you can manage risk in a variety of different outcomes.

And so in that sense, it's not something that we should be unprepared for. We like to say there's no such thing as passive in multi-asset in the sense that your strategic mix is up to you. don't just have to invest in stocks and bonds. You can have a broader range of asset classes to hedge you against unexpected events. We think you should keep that mix under review all the time. We think you should have day-to-day tactical asset management and ideally not just blindly investing in big stocks because they're big, having some kind of active security selection going on as well. In this call, I'm going to talk about the strategic asset allocation changes we've made across the governed range portfolios and GMAP funds, which we do about once a year. And that's in response to shifts in valuation or emerging risks. So adding to bond duration, partly because real yields are the highest they've been in 20 years. We'll see that later.

Prior to 2022, we had very low bond exposure in these funds because you were kind of being asked to sort of basically pay to invest in bonds, they had a negative real yield. Now we think it's another opportunity to add a bit more to bonds. We think high yield spreads, credit spreads in America in particular in what used to be called junk bond sector, are extremely tight. So we're diversifying the credit exposure in the funds into other credit strategies like asset-backed securities or different parts of the high yield universe. We've reduced also our strategic exposure to US equities. That might be the more headline-grabbing thing we're doing. We're stepping away a bit more from the US market. Valuation is reason enough, but there's also emerging risks around Trump policy, which we think could challenge those valuations.

Tactically, though, we're actually still positive on US equities versus Europe in particular. Some of that's coming through because the recent round of dollar weakness is helping US companies. With strategic and tactical asset allocation, you're kind of looking at different time horizons. Strategic is looking ahead sort of 5 to 10 years, thinking about risks you maybe can't see yet. Tactical is what you can see. And you have to be able to walk and chew gum at the same time. So if you like, the fact that markets have bounced back from the sell-off that Tom referred to around Liberation Day, it's a great time, actually, to have taken some of that US money off the table. But tactically, we're saying actually this isn't the time to move out wholesale.

If you're trying to finesse that timing, the tactical asset allocation means actually we haven't sold very much of our US exposure yet. So let me move on and we'll fill in some of the detail on this. So here's the range of funds. We're looking here at the governed portfolios. which launched in 2009, and the GMAPs, the global multi-asset portfolios, the on-platform consistent proposition range, which launched in 2016. And you can see this is the new expression of the government portfolios as a risk spectrum, starting in GP defensive at the left-hand side and going up through progressively positioned multi-asset funds, conservative moderate growth enhanced dynamic, and then finally GP total equity, the highest risk fund in the range, The red names above each of those doughnuts are the equivalent GMAP fund. And you can see that most of that government portfolio range is now available in GMAP form. And there were active discussions about plugging that final hole there in GP dynamic.

You can see in the picture on the right-hand side that you could easily draw yourself using TrustNet. And if you look at the equivalent GPs and GMAP funds, they track very closely in terms of performance. So you are really talking about very consistent propositions. all of them trying to maximize return after inflation for a given level of risk. Look at the performance of the GMAP funds, and we'll look at the govern range in just a moment. I'm showing performance of four of the multi-asset GMAPs versus the IA sectors. You'll see over one, two, and actually three years, we're below the median, but over four and five years, we're above. And what I would say is that our broader diversification has helped us in this sort of long run period. where you've had lots of different shocks and you had that very inflationary post-COVID recovery.

So if you're looking across the valley, if you like, of the COVID shock and the inflation that followed it, the GMAPs have outperformed the peer group. If you're measuring from the trough of the valley, the balanced funds, which predominantly make up that peer group, with a lot of US equity exposure, will have done better. And we're here to tell you that over the long run, we believe in the broader diversification. Similar story for the government portfolios here, we're looking at lots of different time periods, annual periods. You can see you're going all the way back here, 15 years now, almost 15 years. You can see that there's been a consistent outperformance of their composite benchmarks. We say there's no such thing as passive and multi-asset. I mentioned this at the top of the call. There are three different levels of active management, and we'll talk about those in a bit more detail. So the strategic asset allocation is beyond just stocks and bonds. So in a kind of passive balance solution, you'll have equities and bonds, but you won't have the more difficult to manage asset classes like physical property. You typically won't have any commodity exposure. You won't have a lot of active credit management. So we think that active diversification is there to build in resilience and to hedge against inflation. because both stocks and bonds tend to suffer in years like 2022 when inflation strikes.

The tactical asset allocation is really kind of saying you don't have to keep rebalancing passively to 60-40 or whatever the mix might be. You should adapt as the business cycle evolves. And then, you know, beyond trackers, you can take advantage of an award-winning active fund line-up and think quite carefully about which securities you're invested in as well. So starting with strategic asset allocation, and again, just as a reminder, what we're doing here is trying to build a portfolio at the right level of risk to suit the risk buckets that people are using when they're choosing funds, but also taking relative valuations into account and being cognizant of what we see as emerging threats to try and improve resilience.

You can see the benefits of diversification if you look at how varied asset class returns have been over the calendar years. since 2018, shown on the picture here, these are all sterling returns for different asset classes. And again, if you look at 2020, being less diversified paid off. So most funds in the peer groups we're managing against are predominantly stocks and bonds. Global stocks are up 14%, gilts are up 8. So it didn't really matter where you were in the risk spectrum. You made good money in 2020. And our more diversified mix there in purple, which had the commodities and UK stocks and property, which were lagging that year, was only up 5%. So underperformance in 2020, but again, over this four and five year periods, we're outperforming those balanced funds, partly because of the strength of commodities in the inflation shock. And that's what they were there for. But partly also in 2022, not being so exposed to just those two asset classes. In 2022, you had gilts down 24% and global stocks down 7.8%. And as a result, the balanced funds had a very bad year. And in particular, gilts did really badly, which when your lower risk funds, supposedly lower risk funds lost you more money.

So broad diversification helps you across these different environments. When we look at strategic asset allocation, it isn't sort of like a black box where you kind of press a button and out spots, the weightings. If you've only got two asset classes, stocks and bonds, it is almost a sort of automatic process because what you do is you increase the equity weight in the fund. And you've only got one other asset class, which is bonds. So if you increase equities by 10% and you're reducing bonds by 10%, and you keep doing that until you hit the 5% volatility target or the 10% volatility target or whatever it is that the risk rating agency says is your target. And there's really no discretion involved. And many of those passive balance funds, it's a kind of fire and forget process. They decide what the weighting is, 50-50 or 70-30. It's usually very round numbers and they don't revisit it. In our case, we revisit it all the time. There are new asset classes we may think we want to invest in. We've got a few to explain to you today. But also the valuation of asset classes changes. And valuation is something that doesn't tend to play out over a three or six month period. It tends to play out over a period of years. And so it's a good opportunity to take that valuation into account. And with six or seven very distinctive different asset classes, I would say that there are many different portfolios you could build with a 10% volatility. There's much more active investment discretion involved in that.

So some of the changes we're making in the detailed weightings of the different governed range portfolios and the GMAPs are to realign us with the risk buckets. Some of them are propositional. So for example, towards the top end of the risk spectrum, we've reduced some property weightings. That's because the very top fund is pure equity with zero property. We wanted to have a bit more gradation in property weightings as you go up. The risk spectrum, we still very much believe in that asset class. I haven't shown all the numbers for all of the portfolios because flashing them up on the screen doesn't do you a lot of good in a webinar like this, but they're obviously available if you're interested in the detail. I'm going to just focus really on the themes.

So inflation is still very much a consideration. And we've been talking about spikeflation and the fact that recent COVID, we've got more inflation risk. And this does influence the asset classes we include. So since we last caught up, we've had US missiles in Iran and a spike in the oil price. It's now subsided again. But you've got lots of stuff going on in terms of geopolitics, in terms of the trade wars, which are likely to be inflationary, at least in America, high levels of debt. We're seeing the problems around that in the UK. And also sort of net zero resulting in a drop in commodity investment. All of these things say to us that we should take seriously the fact that we're trying to maximize returns after inflation in the asset classes that we include.

And that's really just as a kind of preamble to the fact, yes, we include commodities and we include commercial property. There's two asset classes that we think can help you in the case of commodities with short-term inflation shocks like geopolitical shocks. And that bar chart shows you that in periods when inflation is at its highest, you're getting the best returns from commodities to real time, unexpected. commodity-based inflation shocks. On the right-hand side, you've got a comparison of commercial property with UK and global equities. Back to the late 1980s, and the green line on there, the lower line on that graph, is the price level, the retail price index. And you can see that commercial property, which is there in the orange colour, has more or less kept pace with equities over most of that period. and is giving you a different kind of real return, inflation beating return over the long run. And some real diversification on some instances, for example, the.com crash.

If you're worried about AI valuations and worried about a repeat of the early 2000s when equity markets dropped, commercial property just sailed on through. So that broader diversification, the fact we can have less liquid private assets like physical property We're the UK's largest commodity investor. This is important to us. It's trying to give you a broader, more diversified mix. And there will be years when stocks do better than property and commodities and will lag. But we're thinking about the longer term. The three changes we've made can really be categorised under these three points. Adding to bond duration, I highlighted this at the beginning. So increasing government bond duration, both in terms of conventional bonds and inflation linked bonds. And again, a different type of inflation protection there, more about inflation expectations, diversifying the credit exposure, and then reducing the US. So I'm going to have a few slides just on those three points. The first one being bonds. These slides have got red dotted lines, which I put in yesterday, my PowerPoint skills coming to the fore. But they're all trying to make valuation points. What we're looking at on this page, it's not a graph you see very often, it's just the real yield. available in UK gilts. So the real yield. It’s the index linked gilt yield.

So you get this yield and on top of this, you get whatever inflation is. In 2020, 2021, in the immediate post-pandemic periods, the real yield available was minus 2%. So you were paying in real terms 2% a year for the privilege for investing in gilts. And then you lost a ton of money in 2022 when yields moved. And in some of these long-dated index-linked gilts, you lost half of your money. You lost half of your money. Where we are now, it's the mirror image. So the real yield is plus 2.

So you're actually being properly paid now by the government to invest in government bonds. And that red dotted line shows you the last time you saw a plus 2 real yield. And it was right about the time of the dot-com bust back to 2000, almost 25 years ago. So you've got a decent level of yields. We had very low fixed income exposure, duration exposure in the governed range and GMAPs ahead of 2022.

We were saying at the time it wasn't risk-free return, it was return-free risk. But now it's back to being risk-free return. We made one move to add to bond duration in 2023. We're making another move this time. High yield spreads are tight. Now, there has been a change in composition of the high yield market, partly because of the growth of private lending. So some of the riskier lending is actually happening in private markets now. But notwithstanding that, this graph looks at the spread of US high yield bonds compared to US treasuries. And again, another red dotted line. Where we are now, we're looking at spreads that have really never been exceeded on the downside. So we're looking at the tightest credit spreads in this history, which goes back to the late 1980s. So you're not really being compensated for possible default risk. We don't see a recession in the near term, but my goodness, we see some economic instability, especially around US policy. And historically, we've had a lot of exposure in global high yield debt, and a lot of that's been US-based. So we've been diversifying that into asset-backed securities, which are much for a very short duration type of more investment grade style of credit the way that Royal London does it. And also in the GMAP funds, we've also included a bit of exposure to emerging market corporates. Many of those issues were already in the high yield exposure, but it's a way of again reducing that US exposure a bit.

Turning to equities, we've always had more in the UK than the market cap weight. So the market capitalisation weight of the UK within global equities is something like 3 or 4%. It's tiny. Historically, we've had a lot more than that. More recently, we've had about 20% in the UK. And we've taken the opportunity here to top that up a tiny bit to 22 and a half, taking the global predominantly US weighting down a bit. Now, why are we doing that? Another red dotted line. On the left hand side of your page, you've got valuation metrics, cycle adjusted price earnings ratios. The orange line is the US, the purple line is Europe. The turquoise line is the UK. The UK is reassuringly cheap. It's about half the multiple of the US market. Now we know the US has got this really fantastic return on equity and it's got the AI boom going on, but you're really priced for perfection. You can see the only times you've seen higher valuations in recent years in America were the dot-com bubble, or the back end of 2021 before you had that bad year for tech in 2022. This would be enough, in my mind, to tweak the US weighting down a little bit. When we've had cheaper valuations, as we saw in 2023, actually, we moved the other way. We increased the US.

So there's a kind of, you know, an element here of when the market swings to expensive again, you can lighten it. Maybe later on, we'll add back. I don't know. But the chart on the right-hand side, I think, is really interesting. What it does, it looks at the future subsequent 10-year average return by investing in US equities. And that's the vertical axis, depending on what the orange line was priced at when you put the money in. And again, another red dotted line. It's vertical this time. It's at 36 times cycle adjusted earnings. That's the current valuation rating. And you can see what that scatter plot says about future returns. It doesn't tell you that the US is about to fall out of bed. Maybe there are great returns for the next year or two. It just says you kind of stack the odds against you by putting a lot of money into the US when it's already this expensive. It's got to deliver on what are high expectations. And this is where Trump 2.0 does come in, because on the one hand, you've got the uncertainties around AI, and nobody really knows if it's a bubble like it was in 2000, and whether there's too much investment going on, whether deep seek and other things happening are going to undermine some of the stories, quite possibly. be a bit ambivalent on that.

But also you've got Trump making policy, which is not what you would expect in a developed economy like America. I mean, Trump has come in to the world's most respected economy, the world's most expensive stock market, and he's behaving like an emerging market autocrat. And you've got a lot of people, I mean, Bridgewater is saying that, for example, that they're going a bit further than I'm going there. But he's behaving in this sort of unrestrained, you know, off the seat of the pants kind of way. If you look on the left hand side, you can see a measure of equity market volatility there in purple, which spiked in April. This chart's been doing the rounds as a measure of policy uncertainty in turquoise. And Trump, with his Rose Garden speech on tariffs, managed to create the same level of uncertainty as the pandemic. This is a once in a century deadly pandemic that killed 10s of millions of people. And one man with a Sharpie in the Rose Garden in the White House created the same level of panic. We'll see on our sentiment indicator later on, it was really, really panicky. kind of doesn't really fit with the 36 times cycle adjusted price earnings ratio. People say emerging markets are cheaper, partly because policy is uncertain. On the right-hand side, you see another cost of that uncertainty and it's dollars. The dollars are kind of over owned by global investors everywhere. And while relative bond yields, which the 10-year yield there is there in turquoise, so bond yields have stayed pretty stable over this period. the dollar has just kept weakening.

And you see that correlation between US yields and the dollar has broken. So while things have bounced back, and as we speak, I think the US is pretty much back at its previous highs in local terms, the dollar hasn't bounced back. And I think you're going to see a lot of overseas investors really questioning why they've got 70% of their equity money in America when this kind of stuff is going on. And again, the valuation would be reason enough to step away, but we think there are emerging risks. It's hard to pinpoint them. but there were emerging risks to do with that policy uncertainty. Now, the UK allocation is sort of reassuringly cheap. It's generally quite defensive. It's particularly defensive in inflation shocks. The table on the right-hand side shows you the fact that the UK market tends to beat inflation even when inflation's rising. That's not true of the growthy global equities, particularly US equities.

We get a bit more of a diversification by sector by having the UK in the mix. And that's kind of what this is kind of really about. Again, it's not a huge increase, I think, compared to a lot of the peers that we compare ourselves to in the individual pensions market, but also in the funds market generally. I think we're kind of in the pack in our UK equities allocation, making more of a statement in workplace where a lot of people are market cap based. But again, I think we've got more inflation resilience than that. And then you see a picture paints 1000 words. Again, the straw man here on the left hand side is your passive balance fund, 60 global equities by market cap, 40 UK investment grade bonds by market cap. And what you'll see is that portfolio has got 42 pounds of 100 invested in North America and another 40 pounds in bonds, not very diversified. On the right hand side, we've got less in equity than aggregate because we've got property there. We've got a bit more of a balance. You can see the UK element there coming in for this portfolio at 13%, not 2.2%. So a bit more home bias, but for good reason, for value reasons. A bit less in bond exposure.

Then you've got the commodities and high yield there as well. The commodities in particular giving you the real-time inflation resilience. So tactically, what do we think? Now, this is going to be a quicker part of the call. Quite often, this is most of these calls, but actually at the moment, the cross-asset level, We're not really sure. And our models like the investment clock are a little bit sort of mixed. We've got some positions on. I mentioned we were still long.

We've recently gone long again, actually, US equities. We were underweight earlier in the year. Let me explain. So we have this process starting with research and tactical models. We have our daily team meeting. We manage in total about 105 billion sterling of multi-asset funds of one kind or another for our insurance parent or third parties. And on a daily basis, we can implement tactical changes across those portfolios using derivatives. So it's a very sort of research-driven, systematic process for doing tactical asset allocation. We can simulate the tactical asset allocation added value going back a long time. So this is the current suite of models we're using in a multi-asset portfolio. The different colours on the right-hand side of the different strategies, cross-asset, currency, equity regions and sectors, credit, active commodity. And then the very top one, a new one we've added in the last couple of years is gold. And you can see that on average, these strategies add value over time. This is looking back over 32 years.

You'll also see times when it's sideways or down over one or two or three years at a time. And actually, if you've got very good eyesight, you'll see it's down a bit over the last year. So tactical asset allocation, our framework, has struggled a bit with some of the big reversals that we've seen in the last year. Obviously, we've underperformed around the Liberation Day reversal. Think about a momentum type factor. It's one of the sorts of factors we include. It got whipsawed a little bit. We tried to offset that a bit, but it was a hard thing to do. A lot of active managers struggled over that period. But also, the second-half of last year, there was the US election volatility. There was a crash and then a quick reversal in Japan when Japan started raising interest rates. And there was also a recession panic in the late summer.

So these things have all kind of contributed to different strategies struggling at different times, actually. And I said to the team, look, if we had strategies that had basically called everything right, particularly in Trump 2.0, they're unlikely to have got everything right over the last 32 years. so you've got to stick to your process. Be aware of the fact you can get some of these slightly crazy reversals, particularly coming out of US policy, but stick to the process. The investment clock is at the heart of this. This is looking at growth and inflation and asking the question, you know, which way is growth and inflation going? You can see 2022, which was stagflation, negative real return for both bonds and stocks, commodities doing well. So it helped us tactically at times like that. We know that the trade war tariffs make this very uncertain right now. The macro data is a bit hard to read.

So yes, Trump has back pedalled a little bit from what he was initially threatening, but every time you look, he's doing something more. I mean, just in the last few days, we've heard that he's got very high tariffs on Serbia for some reason. No one really knows why. Scott Bessant was saying some of these countries haven't even contacted us and someone on the team said that must have been Penguin Island because there were uninhabited islands they put tariffs on. There's A 50% tariff on copper that no one knew until yesterday, just blurted out during a cabinet meeting. So yes, Trump is on balance doing tariffs lower than expected, but this is one of Melanie Baker's charts going back to 1790, a long-term chart. And these are the highest levels of tariffs since World War II, even if Trump backpedals to what was expected in June. I've kind of likened this to Trump, only smashing one of your front windows when he threatened to smash both of them.

You know, it's still damaging to global trade and we don't really quite know how damaging it will be. We think it will be inflationary for Americans who'll pay these prices. but we think it will be deflationary for the rest of the world. And it's very hard to judge the macro data because the companies don't know where the tariffs are going to end. I don't think Trump has decided yet where the tariffs are going to end. When they finally entered a particular level, then you've got to watch what happens for the next three, six months to the data. There's front loading where people try and buy things before the tariff supply, which make the economy look stronger than it really is. It's chaos. Companies are seeing the same thing. I think there will be real economic consequences of this uncertainty with companies not investing in Cap Ex or hiring people, because like us, they just don't want to know, don't want to predict. They want to wait and see.

Where the investment clock is, that yellow blob at the moment, it's been moving around quite quickly. Last quarter, it was just heading into stagflation. Now it's showing growth being weak, but inflation, if anything, falling. And that's really reflecting the deflationary forces outside of America. Where we are at the moment on that clock, it's suggesting central banks outside of the US could cut interest rates. We're starting to see that. But I wouldn't put too much weight on this particular factor right now for those reasons I've just given around the policy uncertainty. And at the moment, the clock has been generally cautious on risk assets like stocks because of the weaker economic activity. We're still in the bottom half of the diagram. But some of the technical factors like price momentum and sentiment have been positive stocks.

So you've got some negatives, some positives, you end up more or less sitting on the fence. One of the positives was that there was a panic and sentiment got deep, deeply panicked in April. This graph goes back to 2006, but we've got the data going back to 1990. And apart from COVID, this was the most panicked reading we'd ever seen in financial markets, much more than anything during the financial crisis. Where we are now, our sentiment indicator updating it for this week is not shown on the chart. A -1 or lower is a buy signal because people are panicking. We got to -4. We're now at plus one. So if anything, markets are getting a little bit complacent. Has the recovery run its course? Maybe. US stocks could keep rising for a bit. We look at relative earnings. You can see that line there, which is where Liberation Day happened. If you focus on the purple line, that's the relative earnings revisions of the US market. Since Liberation Day, because the dollar went down and stayed down, that is giving exporters in the US a benefit and it's a translational positive for their overseas earnings when translated back into weaker dollars. So you are getting this sort of earnings support for US stocks, not just the MAG 7.

And so the US could keep doing well. But again, that dollar weakness means that even with this bounce back year to date, you can see on the right hand side there, the purple line, US equities are actually lagging. other parts of the world when you include the effect of the weak dollar. There's a bit of a lag here. What's going on? I missed a slide. Bear with me. Oh, it's jumped a couple of slides. We've got a gold position. I mentioned we've got a tactical model for gold that we researched in the last couple of years and the long gold position in the GMAP funds in particular. has been one of the best tactical positions we've had over this period. The red line on this graph is the performance of gold versus other broad asset classes, stocks, bonds, broad commodities, or cash. See, it's been sideways for a bit. I think gold is a good Trump hedge. If there are sort of confiscations of foreign assets or some of the things that have been talked about and backed away from, or further geopolitical risk, gold could move up further. But we are obviously looking at this closely. And if our tactical models want to take the position off, we'll take the position off. But for me, it's the kind of ultimate Trump hedge. In the end, though, whether we're in a bull market or a bear market will depend on the macro data. If you like, it will depend on the investment clock and where growth ends up going. This is my sort of touchstone to remind me how important the business cycle is. The purple line on this graph, which goes back to the late 80s,is the performance of global stocks versus global bonds. You can see these clear up and down cycles.

Those sort of shaded vertical areas are US recessions. So over periods where there's a US recession, you often get a bear market, stocks doing badly. You lost half your money in stocks in the GFC. You lost half your money in stocks in the.com crash. It was more of a flash crash for COVID. But you can sort of see here that recessions are a bad thing. the turquoise line is the US unemployment rate. It's shown upside down. So if it's rising on your screen, that's a falling unemployment rate. And that's because that's the same sort of direction as the stock market, if you like. At the moment, unemployment is starting to creep higher from 3 to 4%. If we end up seeing a global recession for one reason or another, and it could be that the Fed doesn't want to cut rates because of tariff inflation and that global growth gets impacted, by trade drying up. It could be all sorts of things. It could be deportations. Trump has given himself like $160 billion to fund effectively a private police force to round people up.

And that's not going to be great for the construction industry or the agriculture industry. Lots of uncertainty out there. Market's very expensive. But this is your touchstone. If America can somehow muddle through this and unemployment stay low, probably stocks will keep doing well driven by the Mag 7 and AI. If there's a recession, then I think stocks could do badly. And people may well then start saying, I'm not so sure about these expensive tech stocks in a recession. Are they really recession proof? And that's what we found in 2000, that the dot-coms certainly weren't. So you can rely on the fact that we are active managers at the tactical level.

This looks at all the position changes since 2016 across the cross-asset strategy, regions, sectors, currencies. We were quite long equities until early this year, actually, and we neutralised most of that. The underperformance we've had has been primarily around being underweight US equities, which then reversed. But you can rely on the fact we'll keep on top of everything. Current positions, not much going on at that cross asset level, slightly overweight stocks and high yield bonds, pretty neutral commercial property, pretty neutral commodities, but slightly underweight, but overweight gold. I mean, really quite dull. Most of our risk currently is in the regions and sectors where at the moment we do see the support for the US doing better and some of the growth sectors like the communication sector where Metalib's doing better.

Strategically, we're moving away tactically saying don't sell out yet if you like. So although we made the strategic reduction, Tactically, we're still in. So we haven't really reduced yet, but the strategic reduction will say that when we go neutral or underweight, the US will step down a level and try and protect a bit more value. On that note, let me stop and we'll see if Tom's got some questions.

Great. Thanks, Trevor.

Yeah, we've had some questions come in, so we can get to those now. So just firstly on the SAA change when it comes to the bond exposure, just sort of how the diversification there is going to help with sort of balance and resilience in the wider portfolios? Yeah, so again, valuation is really important. So when you've got negative real yields, you know, you've got to have a good reason to invest in the bonds. And then 2022 came around, a stagflation year, when both stocks and bonds did badly. So if you like, the diversification you expect to get from government bonds didn't help you in the equity bear market of 2022 because it was an inflation shock year. Where we are now with real yields positive, you're going to be a bit more predisposed to thinking you should have more bonds anyway for the return. And then on top of that, if you were to have a recession, which was a disinflationary shock, the bonds would give you that diversification benefit. They're starting at higher yields. There's more room for central banks to get interest rates.

So I think bonds are now more of a diversified than they used to be, and they're offering you a better entry point.

Great. OK. Thanks, Trevor.

And just sort of coming back to the geopolitical scene, so how do we see that driving returns going forward, maybe over the longer term as well? And what do we need to factor in into sort of asset allocation positioning when we think about this? Yeah, so I always like to say that strategic asset allocation and diversification is kind of about the risks you can't see yet. And again, the valuation is important. To give you some kind of sense, you're in this asset class at a sensible time. Having commodities in the mix does mean you get a bit more resilience. So we did have this period with the Israeli-Iranian conflict starting up and the run up in the oil price just before and just after Trump's involvement and stock markets were down and oil was up. And that meant the commodities gave you more resilience in these kind of portfolios. But then it sort of blew over and then oil went down and stocks went up.

So across the whole period, it hasn't made much difference having the commodities in there. But if you like, it's a dress rehearsal. If you were to get a worse geopolitical shock, a more lasting disruption to oil, and these things do feel like they could happen, it feels much more in a 1970s kind of geopolitics, then I think the commodities will really help with that kind of resilience. Yeah, great. Thanks, Trevor. And I suppose just going back to the US and Trump and the impact of his presidency, like do we see the US being a main driver of global returns going forward now? Tactically, yes, strategically, probably not. So again, that's a walking and chewing gum thing. The strategic asset allocation says the valuations are stacked against you and one of a range of different things might go wrong. But what we see at the moment is just really superior earnings growth, very strong demand around anything to do with artificial intelligence. And tactically, that is something you can't ignore. So we wouldn't sort of want to step away too much from US equities, but neither do we think it's sensible to be invested passively in a global index that's got 70 or 80% in the US, of which, you know, maybe 20, 30% is like 7 stocks. Yeah.

And then talking about currencies, so what part do they play in the portfolios? How are we exposed there? Yeah, I mean, we've probably got more sterling than most people, because if you think about the equity growth engine in a balanced fund, that's typically got a bit of a UK element, but it's got a lot of global equities. We've also got the commercial property, which is a sterling asset class. So we've probably got a bit more sterling exposure. than the most. And this strategic asset allocation change, US into UK, I've kind of framed it around the valuation of the equity markets, but it's also a move of dollars into sterling. So again, it's reducing a bit of dollar exposure to reflect the policy uncertainty. And if Trump wants to get rid of the trade deficit in America and make America great again in terms of exports, he supports a weaker dollar.

You know, he blows hot and cold than what he actually says about it. but his policies, the implications of them are a weaker dollar. So it makes sense to move away a little bit from that dollar exposure. Yeah, that makes sense. I think finally we've just got time for one more. So is there anything that's not being talked about at the moment that we need to be aware of sort of going into the final part of the year? I think, what do I think? they're always the unknown unknowns. There will be things that happen that none of us are expecting. And that's why if you don't put all your eggs in one basket, that's why you diversify.

Over the medium term, I'm kind of interested in what goes on with Europe. This is a longer term thought, but Europe has basically removed the German debt break. There's German rearmament going on. An investment bank, commodity specialist, is now on the buy side. said the reason there's a tech industry in America is there's a big defence industry in America, Silicon Valley and the sort of the sort of the sort of US defence industry overlap quite a lot. And if you think about what's going on in Ukraine, a lot of new warfare is quite techy. Inside the hybrid warfare, it's drones. And you could find actually that defence spending increasing in Europe does actually start to create more productivity around tech. in Europe. And I think you'll also see potentially a tighter relationship between the UK and Europe on a trading basis. I'd like to see that improve. Of course, this all gets blown out of the water if in a couple of years' time, we have Prime Minister Nigel Farage. So, you know, again, keep diversified. And if you think Trump is, you know, something, well, maybe he's another one cut from the same cloth. Indeed. Great.

Well, I think we're going to have to leave it there. Thanks for everyone dialling in.

We really appreciate your support. If you do have any further questions, please reach out to your relationship manager at Royal London. And we look forward to seeing you at the next quarterly update and have a good rest of the day. Thanks everyone.

We like to say there’s no such thing as passive in multi asset. The assets you invest in are a choice, you don’t have to just invest in stocks and bonds. We like to include commodities to give you an inflation hedge, commercial property to give you a different kind of growth generator, and quite a broad selection of international equity and fixed income exposures. On a daily basis we think you should be adjusting positions actively as the business cycle evolves.

I’m going to talk to you today about some changes we’ve made to our strategic asset allocation mix, really reflecting valuation [shifts] which we think can help stack the odds in our favour over the medium term, and also our current tactical positioning. We’re quite neutral at the cross asset level but still favouring US equities over European equities.

Starting with strategic asset allocation, the governed range and the GMAP funds, they invest in global stocks and bonds, commercial property, commodities, cash-like instruments, a lot of different types of fixed income.

We’ve made three changes to the mix this year. First of all, we’re reflecting the fact that real bond yields are now positive. We’ve added more to bond duration across all of the portfolios. Prior to 2022, real interest rates on UK index-linked gilts were -2%. You were effectively paying 2% in real terms to lend the government money when you bought gilts. And the other bonds were all priced off the gilts.

Now we’re seeing real yields of +2%, much more attractive. So prior to 2022 we used to joke that the government bond markets were giving you return-free risk. Well now they’re back to giving you what you want, which is risk-free return. We’ve added more to bonds.

The second change we’ve made is also valuation based. US high yield spreads, credit spreads, over government bonds are the tightest we’ve seen really in the last 20 or 30 years. We think that doesn’t compensate you enough for potential risk, so we diversified credit away from global high yield towards things like asset-backed securities, and some more emerging market corporate exposure.

The third change we’ve made is within equities, and maybe it’s a bit more headline grabbing. We’ve stepped away a bit further from US equities. In the last few years, we’ve gradually added more to global equities and US equities out of the UK because we saw better growth potential. Where we sit at the moment, we think that’s gone a little bit too far, valuations are very expensive. If you look at the chart, if you look at long-term valuations, the US is trading at 36 times cycle-adjusted earnings. It’s only been more expensive at the back end of 2021 before the 2022 sell-off or the dotcom bubble.

And we think that’s actually priced for perfection. Things can go wrong, maybe they won’t in the short run, but on a medium term view, it makes sense to step away a little bit. And we’d add to that we see policy risks around the way that Donald Trump is behaving with things like tariffs and deportations and some of the other risks out there, which don’t really fit with a very expensive developed market equity rating. We’ve moved the money back towards the UK a touch, the UK is reassuringly cheap, about half the long-term valuation of the US, and it gives you more inflation resilience.

So those three changes, otherwise still very broadly diversified. Where are we now in terms of the business cycle? Well we don’t even know what the tariffs are going to end up. Almost every day there’s a new off the cuff announcement. Companies don’t know if they’re coming or going in terms of the taxes they’ll be paying on trade. They don’t know where to invest, where to hire people. We’re also looking at economic data that we’re not sure gives you a clear picture.

So if you look at the investment clock, it’s moved around. At the moment it’s looking like weak growth, falling inflation, the bottom left hand corner of the picture you can see. That’s where central banks generally cut interest rates, but there’s a different picture in the US where the tariffs are inflationary and outside of the US where they’re disinflationary and rate cuts are more likely.

So hard to really read all of this and at the moment we’re broadly neutral tactically in terms of stocks and bonds and commodities. Where we do have position still is to do with relative earnings trends. We’re still seeing in the short term very strong earnings growth in America, actually helped by the fact that the dollar has weakened substantially this year and that’s helping the US exporters.

So we’re overweight US equities versus European equities. We’re also overweight the communications and healthcare sectors, a bit of a growthy mix there, and then we’re underweight the US dollar.

So kind of summing up, diversification very broadly, it’s an active process, the strategic asset allocation and reflects shifting valuations, emerging risks tactically on a day-to-day basis, looking at the data, and it should become clear over the next few months whether it’s business as usual, in which case probably we’re adding more to equities, backing that strong tech-driven earnings trend in America, or whether actually we’re going to see some kind of problem, maybe even a recession, in which case we would have to get more defensive.