What happened in portfolios
Ben Banerji
Director, UK Investment Team
Performance update
May was another strong month for portfolio returns, ranging from 1.6% in Cautious Growth to 5.1% in Equity Growth. Returns were driven by strong equity market returns (+5.4% in GBP), particularly across emerging markets (+10.3%), and the technology sector (+16%). Global Government Bonds, hedged to pounds, returned 0.5% for the month.
For the year to date, global bonds have returned 0.8% (hedged to pounds), while global equities have risen by 10.3%. After costs, portfolio returns have ranged between 2.0% for Cautious Growth and 9.4% for Equity Growth.
Portfolio commentary
Across both developed and emerging market stock indices, there were muted gains outside of the technology sector. The technology sector is now a large part of the passive index exposure that we own in portfolios and so these positions have benefitted strongly. Our active managers are deliberately underweight US technology and the Magnificent 71 and as a result underperformed for the month.
Across all portfolios, we own tactical tilts away from the US mega-caps and towards; Europe equities, China A equities, S&P 500 equal weight index, and Latin America (‘Latam’) equities. Although these positions are ahead for the year to date, each of them lagged during the strong technology-led rally in the month.
The biggest position in the portfolio, relative to the benchmark, is in emerging markets, which continues to outperform. The region is up 25% in 2026, 15% ahead of the benchmark. Emerging markets provide portfolios with differentiated exposure to the AI theme as the index has many the hardware manufacturing companies required for the data centre build out.
More broadly, economic risks are still elevated across inflation, the situation in Iran, the uneven resilience of the US consumer, and the ability of AI-related companies to monetise their huge spend. The rapid shifts in market leadership during March and April, along with the recent concentration of gains, have reinforced the importance of maintaining diversification both within and across asset classes. Active equity managers are a key part of that diversification. Generally, they maintain a valuation discipline, and how we chose to blend managers in the portfolio ensures a broad-based exposure across sectors and investment styles. This reduces reliance on any single driver or dominant market theme.
Portfolio changes
As Donough noted above, the tactical call to overweight Asia high yield bonds was closed in May.
The position was incepted in December 2021 using the PIMCO Asia High Yield Bond fund. The spike in inflation and interest rate reset in 2022 was a difficult environment for fixed income, but returns in the Asian market were hit doubly hard due to stress in the China real estate sector.
Once market uncertainty settled down, we increased our position in the fund which now yielded over 10% per year. In some cases, bonds in the Chinese Real Estate sector had been written down to 20 to 30 cents on the dollar. The strong recovery from these lows was supported by solid economic performance and weaker inflation across Asia allowing major Central Banks to cut interest rates.
Following our second allocation to the fund, we saw a rally almost 20%, significantly outperforming government bonds, which funded the call. During this rally, in October 2024, we reduced the position.
Since inception, both tranches of the call were ahead of government bonds, with tranche two performing strongly.
Toward month-end, we amended our target emerging markets (‘EM’) equity exposure to reflect its new larger share of global markets, increasing from 10% to 12%. This is a separate decision to our shorter term view on the attractiveness of the region. This drift will have happened naturally for many portfolios and trades were only executed where necessary.
If you have any questions on the portfolio changes, please contact your Davy UK Wealth Manager.
1The Magnificent 7 refers to the group of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Warning: Past performance is not a reliable guide to future returns and future returns are not guaranteed. The value of investments and of any income derived from them may go down as well as up. You may not get back all of your original investment. Returns on investments may increase or decrease as a result of currency fluctuations.
Warning: Forecasts are not a reliable indicator of future performance.
“SPDR” is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. STANDARD & POOR’S, S&P, S&P 500 and S&P MIDCAP 400 are registered trademarks of Standard& Poor’s Financial Services LLC .No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its Affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors’ rights are described in the prospectus for the applicable product
