MARKET REVIEW
Geopolitical developments in the Middle East were the dominant driver of market dynamics during the second quarter, shaping both the macroeconomic outlook and investor positioning. The conflict initially renewed concerns over energy supply, inflationary pressures and global growth, complicating the task for central banks.
Despite this uncertain backdrop, equity markets proved resilient. After recovering most of their previous decline, markets moved progressively into a more constructive risk-on environment, supported by hopes for a negotiated settlement and, later, by the peace agreement between Iran and the United States. The reopening of the Strait of Hormuz helped normalise energy flows and pushed oil prices lower, with crude retreating toward USD 72 per barrel. This sharp moderation in oil prices reduced the inflationary risk and provided additional support to equity markets.
The quarter was marked by significant sector rotations. The easing of geopolitical tensions and the decline in oil prices weighed heavily on energy stocks, making the sector one of the weakest performers of the period. By contrast, industrials led markets higher across regions, benefiting from improving risk appetite. Financials also recovered after a weak first quarter, supported by an improved outlook for capital markets.
At the same time, corporate earnings remained an important source of support for markets. The artificial intelligence theme continued to dominate investor attention, as it had in the first quarter. Semiconductor companies were once again the main beneficiaries, driving the strong outperformance of the information technology sector across regions.
Overall, Q2 was characterised by a shift from geopolitical stress and inflation concerns toward normalisation. The combination of easing energy prices, resilient earnings, continued artificial intelligence (AI) momentum and improving risk sentiment allowed equity markets to advance to new highs, even as macroeconomic uncertainty remained elevated.
The US-Iran memorandum has helped reduce the immediate geopolitical risk premium, but the compromises it contains leave many questions unanswered and the challenges are far from over. Macro and market conditions should progressively normalise, supported by lower oil prices and improving visibility, although uncertainty remains elevated. In this environment, equity fundamentals across both developed and emerging markets remain constructive, with resilient earnings, high-quality growth and persistent AI-related leadership continuing to support risky assets.
PERFORMANCE GLOBAL – FUND SPECIFIC
Supported by a more constructive environment for risk assets, the Fund delivered a return of 15.03% over the quarter and outperformed its benchmark.
Sustainability tilts supported Q2 performance
The portfolio allocates the majority of its active risk to alignment with the net-zero target, and this component contributed positively during the quarter. The portfolio’s tilt toward lower carbon emissions, while representing a smaller share of active risk, also had a meaningful positive impact on relative performance. ESG-related restrictions and exclusions further supported returns.
Within the strategy’s performance-efficiency pillar, the combined contribution from dividend optimisation and the systematic alpha component was slightly negative in Q2, detracting 9 bps from performance.
Positive impact from the Energy underweight combined with strong stock selection
Our sector allocation is the result of a bottom-up stock-selection approach, guided by the portfolio’s net-zero transition objective while seeking to minimise active risk. As a result, sector exposures remain broadly aligned with the benchmark, with a structural but controlled underweight to the Energy sector.
The normalisation of oil prices during the quarter weighed on Energy stocks, which benefited the portfolio and generated a positive sector-allocation effect. The portfolio was largely insulated from the main style, regional and sector rotations observed over the period. Overall, sector allocation contributed approximately 0.6% to excess return.
Stock selection provided an additional source of outperformance. In particular, the portfolio delivered strong positive selection effects in Information Technology and Financials, further supporting relative returns.
PERFORMANCE GLOBAL EX CH – FUND SPECIFIC
Supported by a more constructive environment for risk assets, the Fund delivered a return of 15.52% over the quarter and outperformed its benchmark.
Sustainability tilts supported Q2 performance
The portfolio allocates the majority of its active risk to alignment with the net-zero target, and this component contributed positively during the quarter. The portfolio’s tilt toward lower carbon emissions, while representing a smaller share of active risk, also had a meaningful positive impact on relative performance. ESG-related restrictions and exclusions further supported returns.
Within the strategy’s performance-efficiency pillar, the combined contribution from dividend optimisation and the systematic alpha component was slightly negative in Q2, detracting 3 bps from performance.Positive impact from the Energy underweight combined with strong stock selection
Our sector allocation is the result of a bottom-up stock-selection approach, guided by the portfolio’s net-zero transition objective while seeking to minimise active risk. As a result, sector exposures remain broadly aligned with the benchmark, with a structural but controlled underweight to the Energy sector.
The normalisation of oil prices during the quarter weighed on Energy stocks, which benefited the portfolio and generated a positive sector-allocation effect. The portfolio was largely insulated from the main style, regional and sector rotations observed over the period. Overall, sector allocation contributed approximately 0.6% to excess return.
Stock selection provided an additional source of outperformance. In particular, the portfolio delivered strong positive selection effects in Information Technology and Financials, further supporting relative returns.
PERFORMANCE EUROPE – FUND SPECIFIC
Supported by a more constructive environment for risk assets, the Fund delivered a return of 11.94% over the quarter and outperformed its benchmark.
Sustainability tilts supported Q2 performance
The portfolio allocates the majority of its active risk to alignment with the net-zero target, which contributed modestly positively over the quarter. The portfolio’s tilt toward lower carbon emissions, while representing a smaller share of active risk, also had a meaningful positive impact on relative performance. This was partially offset by the negative impact of ESG-related restrictions and exclusions.
Within the strategy’s performance-efficiency pillar, our systematic alpha component, introduced at the end of February, was slightly negative in Q2, detracting 3 bps from performance.
Positive impact from the Energy underweight, gradual recovery from stock selection
Our sector allocation is the result of a bottom-up stock-selection approach, guided by the portfolio’s net-zero transition objective while seeking to minimise active risk. As a result, sector exposures remain broadly aligned with the benchmark, with a structural but controlled underweight to the Energy sector.
The normalisation of oil prices during the quarter weighed on Energy stocks, which benefited the portfolio and generated a positive sector-allocation effect. The portfolio was largely insulated from the main style, regional and sector rotations observed over the period. Overall, sector allocation contributed approximately 0.5% to excess return.
Stock selection was also challenging, in particular within Industrials and IT. Within Industrials, we were impacted by rotations among industries where we hold overweight positions, such as building-products and professional-services. These positions reflect either ambitious decarbonisation trajectories or lower carbon-emission profiles. This has been largely offset by a strong stock selection within Financials.
After a mixed start to the year, we recovered around 30 bps during the month of June. Our systematic alpha strategy, implemented in March, has started to generate performance, mainly in the financial sector.
PERFORMANCE EMERGING – FUND SPECIFIC
The Fund ended the quarter outperforming the benchmark.
Performance lift from net zero and systematic alpha
The portfolio allocates the majority of its active risk to alignment with the net-zero target, and this component contributed positively during the quarter. The portfolio’s tilt toward lower carbon emissions, while representing a smaller share of active risk, also had a meaningful positive impact on relative performance. ESG-related restrictions and exclusions had a modest positive impact on excess returns.
As part of the strategy’s performance efficiency pillar, the systematic alpha component was a strong contributor in Q2, providing an additional boost to our outperformance relative to the benchmark.
Alpha and Net-Zero: Key Drivers of Stock Selection
Our sector allocation is the result of a bottom-up stock-selection approach, guided by the portfolio’s net-zero transition objective while seeking to minimise active risk. As a result, sector exposures remain broadly aligned with the benchmark, with a structural but controlled underweight to the Energy sector.
The normalisation of oil prices during the quarter weighed on Energy stocks, which benefited the portfolio and generated a positive sector-allocation effect. The portfolio was largely insulated from the main style, regional and sector rotations observed over the period. Overall, sector allocation contributed approximately 0.6% to excess return.
Stock selection provided an additional source of outperformance. In particular, the portfolio delivered strong positive selection effects in Information Technology and Materials, further supporting relative returns.
PERFORMANCE JAPAN – FUND SPECIFIC
The Fund, launched on 22 April, ended the quarter outperforming the benchmark.
Sustainability tilts supported Q2 performance
The portfolio allocates the majority of its active risk to alignment with the net-zero target, and this component contributed positively during the quarter. The portfolio’s tilt toward lower carbon emissions, while representing a smaller share of active risk, also had a meaningful positive impact on relative performance. ESG-related restrictions and exclusions also had a positive impact on excess returns.
Positive impact from the Energy underweight combined with strong stock selection
Our sector allocation is the result of a bottom-up stock-selection approach, guided by the portfolio’s net-zero transition objective while seeking to minimise active risk. As a result, sector exposures remain broadly aligned with the benchmark, with a structural but controlled underweight to the Energy sector.
The normalisation of oil prices during the quarter weighed on Energy stocks, which benefited the portfolio and generated a positive sector-allocation effect. The portfolio was largely insulated from the main style, regional and sector rotations observed over the period. Overall, sector allocation contributed approximately 0.17% to excess return.
Stock selection provided an additional source of outperformance. In particular, the portfolio delivered strong positive selection effects in Information Technology and Materials, further supporting relative returns.
PORTFOLIO STRATEGY
Positioning for an environment of persistent inflation and acceleration of growth
While navigating sharp waves of sector and style rotations, we have remained resilient, including through the recent Middle East tensions. We close the first half of the year with positive excess returns across almost all of our TargetNetZero Equity strategies.
The US–Iran memorandum has helped to reduce the immediate geopolitical risk, but the compromises it entails leave many questions unanswered, and the challenges are far from over. The decline in oil prices has clearly alleviated inflation concerns and supported sectors sensitive to energy costs; however, this alone is not sufficient to fully eliminate Federal Reserve-related risks.
Equity fundamentals across both developed and emerging markets have remained solid since the start of the year. If this trend continues, it should provide support for further market upside. A closer look at performance drivers, particularly AI, suggests that earnings growth in these companies can sustain market leadership, albeit by pushing already elevated valuations even higher. At these levels, sensitivity to negative earnings surprises could lead to meaningful repricing. Recent macroeconomic data confirm a gradual improvement in the growth environment since the beginning of the year. This trend is reflected in the simultaneous acceleration of growth and inflation, a combination that is characteristic of the expansion phase of the economic cycle, which is typically supportive of equity markets.
With a beta close to 1, the TargetNetZero strategy is designed to be neither structurally defensive nor structurally cyclical. This balanced positioning helps mitigate downside risk in adverse market environments while preserving participation in rising markets.
As always, our focus remains on delivering consistent and efficient returns on a risk-adjusted basis. We continue to closely monitor evolving market conditions and remain committed to our disciplined investment approach.
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