In 2025, falling interest rates, tighter credit spreads and high valuations are driving our decisions, and we have changed the Portfolio Funds’ strategic asset allocation (SAA) accordingly. Central banks began cutting interest rates in the latter half of 2024, with markets expecting limited further easing in 2025. We agree with this view, and in addition we believe credit spreads will remain tight. We also consider that equity valuations demand a selective approach.
For us, opportunities within short maturity bonds now offer a better risk-return profile than cash, although it remains an important store of liquidity in a downturn. As a result, we have reduced overall cash allocations across the range. Although interest rates are still relatively high, tight credit spreads mean the additional yield premium for taking on credit risk is less compelling at longer durations, as a widening of credit spreads is more painful for longer-duration bonds.
In our Portfolios III, IV and V, we have reduced cash and UK government bonds in favour of shorter maturities in both US treasuries and global investment grade bonds, seeking to capture a yield lift without significant duration risk. We also see value in short duration high yield bonds, where spreads remain somewhat wider, and have added or increased weights in Portfolios IV, V, VI and VII.
We have trimmed allocations in UK equities, reflecting uncertain earnings outlooks and ongoing macro challenges. Proceeds have partially been redirected to North American equities, where earnings growth is more resilient.
To diversify risk, we have increased allocations to commodities and listed infrastructure. Commodities offer a partial hedge against rising input costs, while listed infrastructure – spanning sectors such as energy, transportation, and utilities – provides more stable cash flows and some inflation protection.
Against the backdrop of these SAA changes, we will, as ever, continuously refine our tactical asset allocation in response to shifts in monetary policy, economic data, and market sentiment, aiming to preserve capital and achieve balanced, long-term growth for our investors.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The funds may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the fund. The value of the property is based on the opinion of a valuer and is therefore subjective.
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The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.