Speakers

• Olivia Marlow – Senior Investment Director, Rathbones
• James Ayre – Head of Investments, Charities, Rathbones
• Katie Elliot – Head of Responsible Investment Centre of Excellence, Rathbones

Transcript

Olivia: Hello and welcome to our latest quarterly market update for charities. The second quarter was a reminder of how quickly market sentiment can change. After a turbulent start to the year, markets recovered strongly as geopolitical tensions eased, energy concerns moderated, and investors refocused on economic fundamentals. I’m joined by James Ayre, Head of Investments, Charities at Rathbones, who will talk through markets, performance and positioning, and Katie Elliot, Head of Responsible Investment Centre of Excellence at Rathbones, who will bring a responsible investment perspective to some of the longer-term themes shaping portfolios. So, James, let’s start with the market backdrop. After a difficult start to the year, markets recovered quite strongly during the second quarter. What’s changed?

James: The main shift was that investors became more comfortable looking through some of the geopolitical concerns that had dominated headlines earlier in the year. Energy prices fell back from their peak levels, concerns about disruption to global supply routes eased somewhat, and confidence gradually returned to markets. Importantly, investors also began to focus once again on the underlying fundamentals. Corporate earnings generally remained resilient, economic activity held up reasonably well, and many companies continued to demonstrate an ability to grow despite the uncertain backdrop.

What was particularly striking was that this wasn’t just a relief rally driven by sentiment. Many businesses continued to deliver solid results, especially those exposed to long-term structural trends. Artificial intelligence remained a significant driver of investment, with companies across semiconductors, digital infrastructure and automation benefiting from continued demand. So, while geopolitics certainly influenced markets, the quarter ultimately reminded investors that earnings, innovation and long-term growth trends still matter most.

Olivia: And AI, as you say, continues to be one of those major themes shaping markets. Did we see that theme broaden out at all over the quarter?

James: Very much so. Earlier in the AI story, much of the attention focused on a relatively small number of technology companies. What we’re increasingly seeing is the impact spreading across a much wider part of the economy. Building AI capability requires semiconductor manufacturing, testing equipment, network technology, sensors, power infrastructure and industrial automation. Many of the companies we invest in are involved in enabling that ecosystem.

At the same time, the quarter reinforced why diversification remains so important. While technology continued to perform strongly, financials recovered very well, infrastructure assets delivered another solid set of returns, and bonds continued to provide both income and diversification. Markets can move quickly between different sectors, regions and styles of investing, often with little warning. For charity investors with long-term objectives, trying to predict the very short term is very difficult. We believe that maintaining exposure across multiple sources of return remains the most effective approach.

Looking ahead, we’re constructive but realistic. The global economy remains resilient and we continue to see attractive long-term growth opportunities. However, risks have not disappeared. Inflation, interest rate moves, government borrowing and geopolitics all remain factors that investors need to monitor closely. That’s why maintaining a disciplined investment process and diversified portfolio remains so important.

Despite the volatility, the underlying message to charities remains: stay focused on your long-term objectives, remain diversified, and avoid being distracted by short-term themes.

Olivia: Let’s turn to the Rathbone Active Income and Growth Fund. How did that portfolio navigate what was another eventful quarter for markets?

James: The fund performed quite well during the quarter. It benefited from the recovery in global equity markets and overall improving investor sentiment. As with many portfolios, technology and AI-related holdings were among the strongest contributors. Companies such as ASML, Taiwan Semiconductor, Nvidia, Advantest and Cisco all benefited from continued demand for the infrastructure supporting artificial intelligence and advanced compute.

We also saw strong performance from businesses exposed to the wider buildout of digital infrastructure. Companies such as Amphenol and Siemens were strong contributors, reflecting demand for network equipment and sensors, industrial automation, and the physical infrastructure needed to support growing data and power requirements. Financials also did well. Barclays, HSBC, DBS Group in Asia and ING all benefited from resilient economic conditions and the prospect of interest rates remaining higher than many investors had expected at the start of the year.

Olivia: This fund is designed to balance growth opportunities with income and resilience as well. How did that diversification help during the quarter?

James: That balance was particularly important. While equities drove much of the upside, other parts of the portfolio also played a valuable role. Bonds delivered a modest but positive return and continued to provide attractive income and diversification against overall equity market volatility. The infrastructure assets all performed strongly. Holdings such as 3i Infrastructure, HICL Infrastructure and Sequoia Economic Infrastructure benefited from their defensive characteristics and attractive income streams.

There were inevitably some weaker areas. Oil majors, such as Shell and TotalEnergies, gave back some of their exceptional gains from the first quarter. Deutsche Telekom also lagged somewhat as bond yields moved higher. However, these holdings continue to serve important portfolio roles and we remain comfortable with their long-term investment case.

During the quarter, we maintained our overall allocation across equities, bonds and alternatives while making selective adjustments underneath the surface. We added semiconductor exposure through the iShares MSCI Global Semiconductors ETF. We also initiated a new position in Morgan Stanley, and continued to manage the duration of the bond portfolio carefully. We think that for charity investors, the key takeaway is that diversified sources of income and return remain incredibly valuable in a market environment where economic and geopolitical conditions can change very quickly.

Olivia: Thank you, James. So, the message is that while growth opportunities remain important, maintaining diversified sources of income and resilience continues to be central to the fund’s approach.

Olivia: Katie, I’d like to bring you in on the responsible investment approach. One of the themes running through the quarter was the tension between short-term market pressures and long-term structural change. How do we think about the opportunities and risks in this type of market environment through the responsible investment lens?

Katie: That tension was really the story of the quarter. Markets were absorbed by day-to-day geopolitics, oil prices and interest rate expectations. But underneath that noise, capital kept flowing into the long-term structural themes that are shaping the next decade: the energy transition, digital infrastructure, AI, and a wave of industrial investment across major economies.

To give a sense of scale, global energy investment is expected to reach around $3.4 trillion this year. Roughly two-thirds of that is going into clean energy and electricity grids as the electrification of energy systems gathers pace. At the same time, spending on AI, semiconductors, and the digital and physical infrastructure around them continued to accelerate.

These long-term structural themes carry real risks and opportunities side by side – for example, grid bottlenecks, the water and power intensity of AI, human rights and supply chains, and the governance challenges of businesses scaling very quickly. That is exactly why a disciplined approach to ESG analysis is key. It helps us identify which companies are genuinely well positioned.

Stewardship and engagement – where we are in dialogue with company management on a range of ESG issues – allow us to push for better disclosure and stronger management of those risks. In a noisy quarter, that combination is what keeps portfolios anchored to the long term.

Olivia: Thank you. Bringing that closer to home for charity investors specifically, how should charities think about responsible investment when markets are moving as quickly as they are and geopolitical risks are elevated?

Katie: The message to me is simple: don’t let short-term noise pull you off your long-term plan. It’s important to anchor discussions in your mission and in your investment policy statement. That framework will help trustees prioritise what genuinely matters rather than reacting to every headline.

Responsible investment is most valuable precisely when markets and headlines are moving quickly, because it keeps portfolios anchored to the long-term themes that are shaping the economy. Viewed in that way, responsible investment can really become a source of resilience in investment portfolios, even in a fast-moving world.

Olivia: James, why do you think diversification is becoming more important again for investors?

James: We’re moving into a very different investment environment from the one that many investors became accustomed to over the prior decade. For much of that period, falling interest rates, low inflation and strong performance from a relatively narrow group of companies meant that returns were often concentrated in a small part of the market.

More recently, we’re seeing a broader range of factors influence outcomes, from government policy and geopolitics to infrastructure investment, energy security and fiscal pressures. That doesn’t mean the opportunities are disappearing. In fact, we think the opportunity set may actually be broadening. But it does mean investors may need to rely less on a single source of return and more on a balanced combination of growth assets, income-generating assets and diversifiers capable of performing in different market environments.

Olivia: So, when we talk about diversification today, what does that actually mean in practice for charity portfolios?

James: For us, diversification is about much more than simply holding a large number of securities. It’s about ensuring portfolios have exposure to different sectors, geographies and asset classes that can respond differently as conditions evolve. For example, during the second quarter, equities performed strongly as market sentiment improved. But bonds continued to provide income and diversification, while infrastructure and other real assets also contributed positively. That combination helped portfolios remain resilient during ongoing uncertainty around inflation, interest rates and geopolitics.

We also think diversification is becoming increasingly important because the world appears more fragmented and more capital-intensive than in the past. Governments are investing more in infrastructure, energy systems and strategic industries. Fiscal pressures are becoming more important. Different countries and sectors are likely to experience very different outcomes in that environment. Active management and diversification become powerful tools for reducing reliance on any single market or theme.

Olivia: Thank you, James. As we’ve discussed, the fund benefited from improving market sentiment during the quarter. But perhaps more importantly, it demonstrated the value of a diversified portfolio. While technology and AI-related investments were significant contributors, returns were supported by a range of sectors and asset classes, helping the portfolio participate in market gains while maintaining resilience. Thank you for joining us and we look forward to updating you again next quarter.