What happened in portfolios
Patrick McLaughlin
Head of Responsible Investment Multi Asset Solutions
Performance update
Equity market returns were more muted during August (+0.4%) in comparison to recent months, Global Responsible Investing (RI) equity was up circa +0.1% for the same period. Within fixed income, Global Government Bonds (Euro Hedged) returned circa +0.2% and notably Global Inflation Linked Bonds (Euro Hedged) were strong performers, circa +0.7% for the month. The euro strengthened by over 2.0% versus the US dollar (this weakens global equity returns experienced by euro-based investors) as the expectation of Fed rate cuts grew.
Against this backdrop, Social Focus Core portfolio strategies experienced modest monthly returns, ranging from +0.2% in Social Focus Cautious Core portfolios to +0.2% in the Social Focus Long Term Growth portfolio. Returns in the Social Focus GPS range were broadly similar, Social Focus Cautious GPS +0.4%, Social Focus Moderate GPS +0.2% and Social Focus Long Term Growth GPS +0.2%.
Year to date, Social Focus Cautious Core portfolios have returned +1.8%, while the Social Focus Moderate Growth and Long Term Growth Core portfolios have returned +1.1% and +0.4%, respectively. Across the Social Focus GPS range, year-to-date returns are as follows, Social Focus Cautious GPS +1.6%, Social Focus Moderate GPS +0.7% and Social Focus Long Term Growth GPS 0.0%.
The ARC quartile analysis became available in the last number of weeks. As outlined previously, ARC offers risk-profiled peer indices that enable private client investors and entities to assess the performance of their portfolios in relation to comparable wealth managers across the UK and Europe. Davy contributes to the ARC indices and has also been awarded the ARC 3D Award for commitment to transparency, which is an independent endorsement of Davy’s Investment Process.
The Euro Indices do not distinguish between responsible investment mandates and mandates without a responsible investment mandate. As a result, our range of responsible investment solutions are compared to a broad index of investment mandates taking a similar level of risk.
In Table 1 below you can see all Social Focus Core Models reside in the top quartile of their respective indices on a rolling 10 year basis. Concentrating on our Social Focus Moderate Growth Core Model, it is in the top quartile on a rolling 5 year basis and in the second quartile on a rolling 3 year basis (2022 was a challenging year for RI mandates as they were underweight the strong performing energy sector). On a rolling 1 year basis the same model is in the third quartile, (owing largely to a magnificent 7 underweight.)
Table 1: ARC Quartiles – June 30th 2025
Source: Davy, ARC Indices
Portfolio update
Tactical calls
We frequently implement short to medium term (typically 6-18months) tactical deviations from our longer-term Strategic Asset Allocation (SAA) to take advantage of opportunities, or to reduce the risks, that market dislocations present. The purpose of these tactical deviations includes enhancing returns, managing risks and insulating versus potential near term market shocks, without drifting too far from long term strategic asset allocations. We typically implement these tactical positions as tilts (underweight/overweight) vs our SAA.
At present we have a number of these tactical positions open in our portfolios, detail and year-to-date performance is provided in figure 1 below:
Figure 1: Tactical Calls Performance 2025 YTD
Source: Davy Portfolio Management.
Year to date the cross asset tactical call in the euro/yen structured product is -3.5%, the call to overweight global equity in the first half of 2025 returned +11.7%. The tactical equity call to overweight Europe vs Global Equity is positive, calls to reduce US Dollar exposure within the equity bucket are also positive, up +3.3% and +5.3% respectively. The equal weight equity call in the United States, -0.6% has suffered as the mega cap stocks have recovered as the position tilts away from their dominance of US equity allocations. Finally, the call to overweight the belly of the US Treasury curve vs Global Government bonds is +3.2% year to date.
Ongoing Market concentration
Market concentration and the continued dominance of the Magnificent 71 names continues to be an area of focus as Donough has outlined. The level of concentration associated with these names presents a challenge when constructing robust portfolios, as a lack of diversification and breadth can adversely impact portfolio stability. Any reversal in fortune for these mega-caps will have a sizeable negative impact on markets. At the end of August, the Magnificent 7 weight in global equity indices was approximately 21.2% (which is larger than the allocation to European Equity circa 14.7%).
A key pillar of our philosophy and process is diversification and its role in achieving long-term objectives. We have taken tactical positions to reduce the impact of current levels of concentration with positions in euro Hedged equity, Equal Weight S&P500. Our overweight Europe also alleviates some the of issues associated with ongoing market concentration.
Portfolio changes
JPY Structured Note
One of the defensive tactical calls we have implemented in portfolios is a 1% position in a euro/yen structured note2, funded from Global Government bonds. This position, when implemented in September 2023, was viewed as defensive allocation. The position’s defensive characteristic, offering low to negative correlation with Global Equity, derives from the yen’s traditional “flight to safety” status during periods of market turmoil.
However, we also believed it could also outperform an equivalent Global Government Bond allocation over the period as the economic outlook for Japan was supportive, Gross Domestic Product (GDP)3 growth forecasts for 2023 and 2024 were +1.8% and +1.0% respectively. In addition, at this time yen looked cheap versus the euro and Bank of Japan (BOJ) policy was supportive of interest rate increases.
As the current structured product nears its maturity, we have decided to initiate a new euro/yen structured product as we believe majority of the original thesis remains in place. The yen remains cheap versus the euro (nearing historic levels of weakness), growth prospects remain positive (albeit slightly lower), Japanese inflation is above target and central bank policy path for European Central Bank (ECB) and BOJ remains divergent – leading to a narrowing of the euro/yen interest rate differential.
Our solutions will invest in a new note with the same two-year term and a similar structure, but importantly with a lower capital protection, maximum loss of 10% and a maximum payout of 22.5%. In this instrument, the lower capital protection allows for increased participation, meaning the instrument return is amplified by over three times for every move higher in the yen vs euro. The payoff profile is quite favourable and would only require a modest strengthening in the yen to generate material gains, with built-in protection on the downside.
If you have any questions about this allocation in your portfolio, please do not hesitate to contact your adviser.
1The Magnificent 7 refers to the group of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
2 Structured notes are investment products combining debt securities with derivatives, offering tailored exposure to market assets with varying levels of risk and return.
3GDP is gross domestic product, the standard measure of economic activity.
Warning: Past performance is not a reliable guide to future performance.
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Warning: The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own adviser.
