Olivia Marlow: Hello and welcome to our latest quarterly market update for charities.
It's been a more volatile start to the year than many expected, with geopolitics – particularly developments involving Iran – bringing renewed focus on energy markets, inflation, and global stability.
In this session, we'll talk through what's been driving markets, how our portfolios have been positioned in response, and what it all means for our charity investors.
I'm joined by James Ayre, Fund Manager for Rathbones Charity Pooled Funds, and Kate Elliot, Head of Responsible Investing.
So James, could you elaborate a little more on what has been driving markets this quarter?
James Ayre: I would say that this quarter has really been much more about geopolitics rather than macroeconomics.
After a long period where markets have been very focused on inflation and the path for interest rates, the conflict that we have seen in Iran and the Middle East has very much driven markets, particularly having a big impact in terms of energy prices.
That's really rippled through the global economy as the market has sought to adjust to the new normal.
Olivia Marlow: And how different does this environment feel than any time in the last 12 to 18 months?
James Ayre: The last year or so was largely about the macro trends, particularly normalisation of inflation off highs and the path of interest rates, which were coming down in most developed economies.
This quarter has really refocused market concentration on inflation, which was coming down and now more likely than not will be driven higher, certainly in the short term, by energy prices – both natural gas and oil – and commodity prices generally.
We've seen that impact investments.
We've seen energy producer stocks being very strong and we've seen quite a lot of disruption in the rest of the market.
Olivia Marlow: You mentioned energy, which is clearly a key theme again. What have recent events told us about the role of energy in portfolios today?
James Ayre: I would say that the current events have really shown that energy still matters enormously, both within portfolios and the broader economy.
We've seen big impacts on energy‑importing economies, particularly in Europe, which is quite dependent on energy imports.
The UK has obviously seen that too, and also parts of the Far East, particularly Japan and China, which are also economies that are quite dependent on energy imports.
The key takeaway from my perspective is that while we've seen very strong oil and gas prices, it reinforces the need for more investment in renewable infrastructure and alternative energy sources, as higher energy prices from carbon‑based sources naturally impact the break‑evens for alternative energy sources.
I think it's quite an interesting time to revisit some of those drivers.
Olivia Marlow: Building on that point, coming to you Kate, are we seeing a shift in how investors think about energy security versus decarbonisation?
Kate Elliot: I often think about it as a bit of a false dichotomy between those two issues, because energy security and decarbonisation are inextricably linked.
Further investment or further build‑out of renewables capacity is investment into energy resilience and into energy security.
If we look at the cost of solar capacity, for instance, that has come down by over 90 per cent since the turn of the millennium and is expected to halve again by 2050.
As James mentioned, the cost parity of renewables and low‑carbon energy versus fossil fuels continues to close and in many cases is going in the other direction.
Olivia Marlow: Looking at the portfolio again, traditionally investors look to bonds as defensive assets for protection, but that hasn't necessarily worked this quarter. What do you think has changed, James?
James Ayre: Certainly this quarter we've seen some challenges to long‑held assumptions, particularly in the government bond markets.
Bonds sold off slightly more than equity markets in some instances.
In the UK gilt market, gilt prices fell around 2 to 2.5 per cent, which is quite a significant sell‑off.
Typically, when building multi‑asset portfolios, we look to bonds to be more defensive.
But markets were frightened by the risk of more inflation coming through the system.
Longer‑duration bonds were particularly affected.
Olivia Marlow: Where did we see resilience within portfolios?
James Ayre: We touched on energy, which was one of the best‑performing sectors within the World Index.
It was up about 35 per cent over the course of the quarter, which is quite a dramatic repricing.
We've also seen quite strong returns from other parts of the market.
In particular, utilities, some infrastructure, some real estate linked to data centres, and some industrial businesses that benefit from energy pricing.
Olivia Marlow: And how have you positioned the fund in response to this environment?
James Ayre: We've taken a few clear steps.
The first and probably the most important was to reduce the duration of the bond portfolio.
Longer‑duration bonds tend to be more impacted by changes in inflation and interest‑rate assumptions, so we shortened duration and we think that was sensible.
Within equities, we used the volatility to pick up good‑quality businesses where we saw fundamentals likely to remain strong but share prices had weakened.
We added to names like Siemens Energy, which provides gas turbines to industry and benefits from data‑centre build‑outs.
We also added Parker Hannifin, a large‑cap industrial business specialising in high‑end components for airframes and other high‑intensity applications.
Both names sold off on the back of the Iran news and we thought they offered good entry points for the fund.
Olivia Marlow: We've also seen a sharp rotation in technology and AI‑related stocks. What's been happening there?
James Ayre: The narrative has evolved quite dramatically within markets.
Early on in the quarter, we saw some wobbles across parts of the AI complex, with investors questioning the large capital‑expenditure budgets being reported by hyperscalers.
But the more remarkable move was in the software complex.
Software accounts for about 6.5 per cent of the World Index.
We saw a significant sell‑off as investors worried those business models could be disrupted by AI.
Olivia Marlow: Do you think that's a short‑term correction or something more structural?
James Ayre: Some of those stocks were quite expensive, so we've seen a reappraisal of what investors are willing to pay for their future cash flows.
What we've seen is a reasonably healthy shake‑out.
There are genuine concerns that some of the AI technology coming from newer players could disrupt incumbents.
That doesn't mean the end of those businesses, but it does suggest their growth and margin profiles may change in the medium term.
Olivia Marlow: Kate, from a responsible investment perspective, how do you interpret these trends around energy infrastructure and AI?
Kate Elliot: AI is a really fascinating area from an ESG perspective.
From an environmental standpoint, energy use and water use are the principal risks.
Energy can be mitigated through renewables or power‑purchase agreements, but water is much harder to manage.
That’s a core area of our engagement activity, both individually and collaboratively.
We focus on ensuring organisations have appropriate controls around emerging water risks.
From a social perspective, there are risks around content moderation and the design and build‑out of AI tools.
We are engaging to understand the human‑rights implications of these emerging technologies.
Olivia Marlow: Coming back to you James, given the level of uncertainty – from geopolitics to AI – how should charities be thinking about their investments right now?
James Ayre: The most important point is to remain disciplined and long‑term in focus.
Uncertainty in investing is unavoidable.
Portfolios are built to cope with different outcomes.
This quarter has reinforced how important diversification is.
That includes income generation and exposure to a broad range of assets.
Exposure to commodities such as gold and copper has been important, as well as real assets like real estate and infrastructure with inflation‑linked cash flows.
Olivia Marlow: And what gives you confidence as we look ahead?
James Ayre: What gives me confidence is remaining focused on portfolio fundamentals, which remain pretty sound.
Valuations have come down quite meaningfully over the quarter.
Assets are now more reasonably priced than they were three months ago, without a major deterioration in revenues or earnings.
If energy price spikes prove temporary and commodity prices normalise, the global economy and the companies in the portfolio can fare reasonably well this year.
Olivia Marlow: Thank you both for your insights.
As we've discussed, while the backdrop remains uncertain – from geopolitics to rapid developments in AI – these periods really highlight the importance of diversification and maintaining a disciplined long‑term approach.
For charities in particular, focusing on resilient income and the ability to navigate different market environments remains key.
If you'd like to find out more about how we're positioning portfolios or to discuss your own investment strategy, please get in touch with your usual Rathbones contact.
Thank you for watching.
