February Performance Update

Diversification is a key cornerstone of portfolio management, as it aims to reduce risk and provide a platform for sustainable growth across a range of investment environments. We are multi-asset investors, with the objective to deliver robust returns over the medium to longer term, without over exposing clients to one particular risk.

One of the big challenges about allocating portfolios today is that for the last 10 years there has been one standout investment market, the US. In particular US ‘growth’ stocks have led the way, in the main driven via the technology sector. This has progressively led investors to become more and more US centric in their allocations, with less and less diversification to other geographies. Looking at the US in particular, over the last 10 years there has been 76 positive months and 44 negative, with the maximum upside being +28% with a maximum downside of -14.8%. Good yes, but hardly smooth, and therefore not a basket that’s suitable for all your eggs, especially those you may need in the short term.

Over this period, we have been active investors in US markets, though haven’t fully followed the trend. To this end it is pleasing that when reviewing our own past performance, we have consistently delivered returns above benchmarks and at the top of our peer group whilst only having a relatively modest US equity allocation (c. 40% compared to most which are now 60%+). More recently, we reduced our US exposure at the start of the year due to the recent increases in valuations due to Trump enthusiasm. We felt too much good news was priced in here.

Where am I going with this pre-amble then… well, it is interesting because one of the characteristics of the investment environment so far in 2025 has been that a number of investment markets have outperformed US equities. Notable mentions here are UK and European equities. In February, US markets were down 3% and European markets up 2%, which is quite a swing in one month. Bonds have also performed better, adding circa. 1.5% so far this year and again performing well over the last month.

Our sense of the drivers of such trends are twofold. Firstly, there remains a lot of open questions about the future of the US tech sector given recent AI developments, which have challenged the idea that the huge wave of spending will be productive investment. Secondly, Trump’s policy decisions have caused a lot of uncertainty, not only on tariffs but also with commentary that he wants to cut deficit spending (but at the same time start a national Crypto Reserve). The latter would certainly be a drag on growth, and therefore could lead to lower company earnings.

At the same time, European markets have been benefiting from an increased likelihood of a peace deal in Ukraine. Our early conversations with economists suggest that should such a thing occur, then overall inflation could fall by around 0.5% over the following 12 months as energy prices deflate. This would be a significant boost to both European consumers and businesses, with lower inflation also allowing for the possibility of interest rates coming down slightly faster or further.

Now at this point it is of course all speculation, and in many ways, markets are now a bit complacent about the prospects for a deal, which means that if one doesn’t materialise, they could be disappointed. For now, we can only comment that it has been a positive contributor for our portfolios, as we are overweight in our allocations.

So, diversification has worked really well so far this year. All in all, the portfolios produced between +0.90% (Low Risk) and -1.8% (High Risk) in February, with the higher risk portfolios suffering from their naturally larger allocation to US equities, and little exposure to bonds. Year to date all portfolios have settled at around the same place, up around 2% though, as you would expect, the journey to 2% for low risk portfolios has been far less volatile than the same journey for portfolios taking on more risk. Despite the nature of our journey so far this year, all our portfolios sit nicely above their benchmarks and towards the top of our peer group.

From an activity point of view, we reduced our allocation to bonds slightly on the month, having increased in the January bond sell off. Bonds have been our biggest active position for some time, and so as the allocation bounced back in February, we took some profits. This doesn’t mean we are any less positive on the outlook for bonds, or our lower risk portfolios overall. Indeed, we still feel bonds offer significant benefits given their circa. 6% income stream and ability to increase in value in periods where equities struggle (such as February), so the decision was a tactical one based on a short period of strong performance. Additionally, we do see inflation ticking up slightly in the UK over the next few months before dropping down again towards the back end of the year. In this regard we expect some market volatility over the next few months, from which we expect to see benefits as the year unflods.

As we said in January, to say it has been an interesting start to the year was probably an understatement. Some of the investment trends we have seen are certainly providing opportunities, and if nothing else, are supporting the benefits of diversification and active portfolio management, both of which are central pillars to our proposition.