Video transcript

Speakers

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

Transcript

Introduction and market backdrop

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, who will talk through markets, performance and positioning, and Kate Elliot, who will bring a responsible investment perspective to some of the longer-term themes shaping portfolios.

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 simply 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.

Artificial intelligence and diversification

Olivia: AI continues to be one of the 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. Technology continued to perform strongly, but financials recovered well, infrastructure assets delivered another solid set of returns and bonds continued to provide both income and diversification.

For charity investors with long-term objectives, trying to predict very short-term market movements is extremely difficult. We believe 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, inflation, interest rates, government borrowing and geopolitics all remain important factors to monitor.

Olivia: So despite the volatility, the underlying message for charities remains clear: stay focused on your long-term objectives, remain diversified and avoid being distracted by short-term themes.

Fund performance and portfolio positioning

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

James: The fund performed well during the quarter, benefiting from the recovery in global equity markets and improving investor sentiment.

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 infrastructure supporting artificial intelligence and advanced computing.

We also saw strong performance from businesses exposed to the wider build-out of digital infrastructure. Companies such as Amphenol and Siemens were strong contributors, reflecting demand for network equipment, sensors, industrial automation and the physical infrastructure required to support growing data and power needs.

Financials also performed well. Barclays, HSBC, DBS Group and ING all benefited from resilient economic conditions and the prospect of interest rates remaining higher than many investors had anticipated at the start of the year.

Olivia: This fund is designed to balance growth opportunities with income and resilience. 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. Infrastructure assets also performed strongly. Holdings such as 3i Infrastructure, HICL and Sequoia Economic Infrastructure benefited from their defensive characteristics and attractive income streams.

There were some weaker areas. Oil majors such as Shell and TotalEnergies gave back some of their exceptional gains from the first quarter, while Deutsche Telekom 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 beneath the surface. We added semiconductor exposure through the iShares MSCI Global Semiconductor ETF and initiated a new position in Morgan Stanley, while continuing to manage bond duration carefully.

The key takeaway for charity investors is that diversified sources of income and return remain extremely valuable in a market environment where economic and geopolitical conditions can change very quickly.

Responsible investment and structural trends

Olivia: Kate, I'd like to bring you in on responsible investment. One of the themes running through the quarter was the tension between short-term market pressures and long-term structural change. How should investors think about the opportunities and risks through a responsible investment lens?

Kate: That tension really was the story of the quarter. Markets were absorbed by day-to-day developments such as geopolitics, oil prices and interest rate expectations. But beneath that noise, capital continued flowing towards long-term structural themes shaping the next decade – the energy transition, digital infrastructure, artificial intelligence 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, with roughly two-thirds allocated to clean energy and electricity grids as electrification gathers pace.

At the same time, spending on AI, semiconductors and the digital and physical infrastructure that supports them continued to accelerate.

These themes carry both opportunities and risks. Examples include grid bottlenecks, the water and energy intensity of AI, human rights in supply chains and governance challenges facing rapidly scaling businesses.

That's why a disciplined ESG approach matters. It helps us identify companies that are genuinely well positioned for long-term success.

Stewardship and engagement are equally important. Through ongoing dialogue with management teams on a range of ESG issues, we can encourage stronger disclosure and better management of emerging risks. Even in a noisy quarter, this helps keep portfolios anchored to the long term.

Responsible investment for charities

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

Kate: The message is simple: don't let short-term noise pull you away from your long-term plan.

It's important to anchor discussions in your mission and your investment policy statement. That framework helps trustees focus on what genuinely matters rather than reacting to every headline.

Responsible investment is most valuable when markets and headlines are moving quickly because it helps keep portfolios aligned with the long-term themes shaping the economy.

Viewed in that way, responsible investment can become a source of resilience for investment portfolios, even in a fast-moving world.

Why diversification matters

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 many investors became accustomed to over the previous decade.

For much of that period, falling interest rates, low inflation and strong performance from a relatively narrow group of companies led to returns becoming concentrated in a small part of the market.

Today we're seeing a broader range of factors influencing outcomes, from government policy and geopolitics to infrastructure investment, energy security and fiscal pressures.

We think the opportunity set may actually be broadening, but investors may need to rely less on any single source of return and more on a balanced combination of growth assets, income-generating assets and diversifiers capable of performing across different market environments.

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

James: 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.

During the second quarter, equities performed strongly as sentiment improved. Bonds continued to provide income and diversification, while infrastructure and other real assets also contributed positively.

That combination helped portfolios remain resilient amid ongoing uncertainty surrounding 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, while fiscal pressures are becoming increasingly influential.

Active management and diversification therefore become powerful tools for reducing reliance on any single market or investment theme.

Closing remarks

Olivia: As we've discussed, the fund benefited from improving market sentiment during the quarter. 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.