What does the chart show?
The chart shows three asset types: Gold, property (REITs) and two measures of UK index-linked Gilts; that, individually, offer a means to protect against inflation over the long term. As can be seen their respective performances diverge significantly. The most dramatic performance has been gold which went through something of a euphoria bubble from September to February and then succumbed to an inevitable reckoning as it was used as a source of capital in the Iran/US/Israel war.
The fifth line represents our Real Assets Growth and Income Fund (RAGI) since its inception in April 2024. Over the period shown the Fund owns, or has owned, all three of the assets illustrated as well as others such as Infrastructure trusts. It demonstrates an outperformance of return alongside lower volatility with the exception of Gold. As it happens, the Fund actually exited Gold in February of this year when we felt it had become dislocated from its traditional ‘risk off’ defensive qualities and would be vulnerable to a sharp correction and therefore was no longer a defensive asset.
Even drilling into the world of ‘Linkers’; sub 10 year index linked gilts have outperformed the UK index-linked Gilts All Stocks index as the effect of implied increased short term inflation expectations associated with the war had a greater positive impact for shorter dated linkers.
Why this is important
Firstly, it is another demonstration that diversification is important; secondly, active asset allocation can be useful when assets become dislocated from what might be considered ‘normal’ valuations.
RAGI has benefitted from a number of take-overs that have either been completed or just announced but yet to be accepted. The latest is the approach to Segro plc by Prologis of the US. They are offering ‘Net Asset Value’ which on face value may sound attractive given the shares were trading at a 30% discount earlier this year. However, such an offer does not reflect the substantial gains to be expected from the development and growing data centre arm of the business. We, and I suspect most other shareholders, would therefore not be prepared to accept such terms, whereas other REITs have been successfully taken out at material discounts to reported NAV; again demonstrating that in terms of quality, prospects and valuation not all real assets are born, live or die equally.
The week was dominated by macroeconomic fundamentals, with markets focusing on the Federal Reserve's June meeting minutes, which reinforced expectations of higher US interest rates for longer. Investors grew more confident that global growth was slowing gradually rather than weakening sharply, supporting equity markets despite higher bond yields.
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FOMC minutes reinforced a cautious Fed stance: Minutes from the June meeting indicated policymakers remained concerned about inflation risks, with markets scaling back expectations for rapid interest-rate cuts despite moderating economic growth.
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Rising tensions: The continued tensions between the US and Iran pushed oil prices higher and briefly lifted Treasury yields on renewed inflation concerns.
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Trade and tariff policy returned to focus: The administration continued discussions around trade measures targeting strategic industries, with investors monitoring potential impacts on manufacturing and technology supply chains.
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Corporate earnings season optimism built: Investors positioned ahead of the Q2 earnings season, expecting AI investment, technology spending and financial sector resilience to underpin S&P 500 earnings growth.
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Political attention: Nigel Farage’s resignation as an MP, triggered a by-election that he intends to contest amid ongoing scrutiny over donor-related disclosures.
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Gilt markets remained stable: UK government bond yields traded within a relatively narrow range as investors assessed fiscal policy alongside Bank of England expectations.
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Housing and construction received attention: Measures to accelerate housing development and planning reform were viewed positively by property and construction sectors.
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Sterling remained resilient: The pound was supported by relatively stable macroeconomic data and expectations that UK fiscal policy would remain broadly disciplined.
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ECB rate expectations dominated markets: Officials continued signalling a data-dependent approach, with inflation remaining above target but continuing its gradual moderation.
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German industrial weakness remained a concern: Manufacturing output and export performance continued to weigh on Europe's largest economy despite signs of stabilisation elsewhere in the Eurozone.
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Defence spending accelerated: Several EU members announced additional defence procurement and investment commitments, reflecting continued geopolitical uncertainty.
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Trade competitiveness discussions intensified: European policymakers continued examining measures to strengthen industrial competitiveness against the US and China.
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Exports showed resilience: External demand continued providing an important offset to softer domestic consumption, particularly in advanced manufacturing sectors.
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Technology and industrial policy remained priorities: Investment in semiconductors, AI and advanced manufacturing continued under China's industrial strategy.
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Yen volatility continued: Currency movements reflected shifting US Treasury yields and changing expectations for Federal Reserve policy.
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Global commodity markets remained stable: Industrial metals and energy prices traded within relatively narrow ranges as investors balanced geopolitical risks against moderate global growth.
