Second Quarter 2026 Review.
April to June 2026
The second quarter of 2026 witnessed a rebound in equity markets after the first quarter of 2026’s gains were largely erased by March’s outbreak of war in the Middle East between the US, Israel and Iran. The table below shows similar returns for the second quarter and year to date for the Plus and Prosper portfolios. The Purpose portfolios performed less well year to date as they were unable to invest in natural resources like oil and gas companies that performed well in March.
| 01/01/2026 | 01/04/2026 | |
| 30/06/2026 | 30/06/2026 | |
| YTD | Last Quarter | |
| Plus Four | 13.87% | 13.86% |
| Prosper Four | 12.37% | 11.97% |
| Purpose Four | 8.17% | 12.81% |
| Plus Three | 11.52% | 11.57% |
| Prosper Three | 10.18% | 10.06% |
| Purpose Three | 6.90% | 10.83% |
| Plus Two | 8.70% | 8.97% |
| Prosper Two | 7.82% | 7.93% |
| Purpose Two | 5.39% | 8.32% |
| Pier Income | 8.05% | 7.49% |
| Plus One | 5.85% | 6.29% |
| Prosper One | 5.29% | 5.00% |
| Purpose One | 3.97% | 5.98% |
However, the second quarter’s positive outcomes for equities were heavily influenced by the clamour for the artificial intelligence (AI) theme. That theme proved to be the major catalyst for performance for all of Pier’s portfolios. As the following chart from Bianco Research, sourced from Bloomberg illustrates, 41 AI-related companies represented 45% of the US
S&P 500 Equity Index by the middle of 2026.
In April:
- Iran played its Trump card (pun intended) and closed the Strait of Hormuz. The US countered by blockading the exit to the Strait for all shipping. Financial markets oscillated accordingly.
- The outcome of all sides’ apparent desire to seek peace reassured equity markets for most of April, but with understandable volatility.
- The International Monetary Fund (IMF) warned of a global recession as a consequence of the Middle East conflicts and the resulting disruption to supplies of oil, gas and fertiliser.
- Inflation began to absorb the rising impact from fuel and food price increases. Even when an agreed cessation of hostilities materialises in the Middle East, inflation data will take time to get back to levels where those setting interest rates will feel more comfortable.
In May:
- The surge in demand for semiconductors driven by artificial AI resulted in a dramatic increase in the value of a few businesses. In May two of those companies joined the trillion dollar club taking the total to 14.
- The rise in fuel prices and mortgage rates in the US had a meaningful impact on consumer sentiment. The preeminent consumer sentiment indicator, The University of Michigan Consumer Sentiment Index, fell to a record low of 44.8 in May, its lowest level since the index began in 1952.
- UK inflation for April as measured by the Consumer Prices Index fell by more than expected to 2.8%.
- UK unemployment rose to 5.0%, which, coupled with the inflation improvement, ultimately kept the Bank of England’s Monetary Policy Committee on hold and refrained from increasing official interest rates.
- The South Korean equity market index, also referred to as ‘Kospi’, leapt 24% in May buoyed by the stellar performance of Samsung and SK Hynix. Technically South Korea is an emerging market and they are emerging market companies, but in reality, they are global businesses benefiting from the surge in demand for their AI related products.
In June:
- A US-Iran memorandum of understanding was signed on June 17th, earmarking US$300 billion for reconstruction and reopening the Strait of Hormuz toll-free for sixty days. So, the question is, will it hold? Nevertheless, oil prices plummeted from recent highs.
- UK Prime Minister, Sir Keir Starmer resigned. His likely successor, Andy Burnham, committed to fiscal discipline which gave stability to UK Government (gilt) bond yields and Sterling. UK Consumer Prices Index for May showed a rate of inflation of 2.8% unchanged from April. The Bank of England maintained its Base/Bank Rate at 3.75% when the Bank’s Monetary Policy Committee (MPC) met on Thursday, June 18th.
- The European Central Bank (ECB) raised its deposit rate to 2.25%, its first hike in nearly three years although with inflation yet to rise meaningfully in response to higher oil prices and economic growth hard to come by, it is hard to understand why rates were raised. The Bank of Japan lifted rates to 1.0%, a level not reached for thirty years but part of the normalisation of Japanese monetary policy. New US Federal Reserve (Fed) Chair and Trump appointee Kevin Warsh held his first Federal Open Market Committee meeting which held rates at 3.5% to 3.75%, but with a bias to raise rates later this year.
- Gold continued its fall after Fed Chair, Kevin Warsh, demonstrated a greater resolve to defeat inflation than perceived before his appointment.
Portfolio Activity
In general, Pier portfolios remain broadly diversified across bonds and equities. Bond exposure is focused on short to medium maturities to provide better price stability, rather than longer maturities where budget deficit funding delivers a risk of price depreciation. Portfolios with bond allocations moved to lower interest rate risk further in April both to mitigate UK budget deficit plus political risk and to recognise that the outbreak of war in the Middle East made UK short term interest rates more attractive. In our view, interest rates had risen expecting higher short term interest rates to curb inflation. We believed that a significant uplift in inflation was unlikely to materialise.
Equity exposure continues to focus on global, not regional, equities of all sizes where valuations are not stretched and profitable companies proliferate. Given the meteoric rise in AI-related equities and their valuations, the risk of a sell-off in that theme was heightened so a decision was taken to lighten US equity exposure in favour of global quality income equities with a proven record of maintaining or increasing their dividends over ten year periods.
The second quarter activity for Pier portfolios centred around continuing to mitigate risk and specifically risk from:
- Equity concentration in a few very large mainly US companies
- Duration/interest rate risk from longer-dated bonds.
Currency risk is centred on having a low non-GBP exposure with particular reference to US Dollars. Non-GBP exposure is effectively balanced between US Dollars offset by Japanese Yen and Euros – currencies that historically move in the opposite direction to the US currency. Pier manages foreign currency risk as part of the investment process to deliver inflation* plus returns. There was a marginal increase in non-GBP exposure over the quarter.
* Inflation as measured by the UK Consumer Prices Index, aka CPI.
Pier Performance – Key Portfolio Influences
Plus
What Worked
First Trust Nasdaq Cybersecurity ETF: +47.01%
Having been the worst performer in the Plus portfolios in Q1, this ETF rebounded strongly as investors realised that not all software companies can be replaced by AI and that cybersecurity software is very much an in-demand service.
Polar Capital Artificial Intelligence: +45.16%
A global equity themed portfolio focusing on both the enablers and beneficiaries of artificial intelligence and its productivity gains. Having been the leading holding in performance terms in Q1, this fund was a key beneficiary of the momentum behind AI in Q2 but its breadth of exposures across enablers and beneficiaries was an added positive.
What Didn’t
WS Havelock Global Select: -0.60%
An index-agnostic concentrated portfolio of attractively-priced global businesses that was little exposure to AI was the only negative equity holding in Q2 across Pier’s portfolios ranges – and one of only two holdings overall in negative territory. It was one of the top two last quarter so is up over 7.8% in 2026 to end June.
Gold: -13.13%
Only held in Plus One in the Plus range, gold was purchased at the end of Q1 to hold as a defensive asset and alternative currency. A 2.5% holding, gold has weakened on a lack of demand and a lack of inflationary pressure or US Dollar debasement.
Prosper
What Worked
Fidelity Index Emerging Markets: +24.00%
This tracker’s excellent performance is mainly due to the AI nature of its three largest holdings, TSMC, Samsung and SK Hynix. All three are manufacturers of key components of chip production.
Xtrackers S&P500 ETF GBP Hedged: +16.23%
The US equity market recovered after a poor first quarter where this ETF was one of the worst performers. The recovery was largely due to a better US equity market for this market capitalisation-based tracker.
What Didn’t
Dimensional Short Duration Real Return: +0.09%
This fund is constructed to provide returns above UK inflation by investing in short-term maturities in the UK bond market. The oscillations in UK short-term interest rates resulting from inflation concerns related to the US-Iran conflict made for a difficult backdrop for this fund although it still posted a positive outcome for the quarter.
Gold: -13.13%
Only held in Prosper One in the Prosper range, gold is held as a defensive asset and alternative currency. A 5.0% holding, gold has weakened on a lack of demand and a lack of inflationary pressure or US Dollar debasement.
Income
What Worked
Schroder Asian Total Return: +32.36%
Like many Asian equity funds, this fund benefited greatly from its 27% exposure to three companies linked to the building blocs of AI and chip manufacturing – TSMC, Samsung and SK Hynix.
Schroder Asian Income: +21.87%
Very much in the same frame as the Schroder fund above but more diversified to attain greater income from the region.
What Didn’t
Dimensional Short Duration Real Return: +0.09%
This fund is constructed to provide returns above UK inflation by investing in short-term maturities in the UK bond market. The oscillations in UK short-term interest rates resulting from inflation concerns related to the US-Iran conflict made for a difficult backdrop for this fund although it still posted a positive outcome for the quarter.
Purpose
What Worked
UBS MSCI USA Socially Resp ETF GBP: +25.09%
The investment objective is to replicate the price and return performance of the MSCI USA SRI Low Carbon Select 5% Issuer Capped 100% (hedged to GBP) Total Return Index net of fees. This ETF performed well as with other Pier investments, a number of the top holdings are directly exposed to the AI theme. In this case, five of the top ten holdings representing over 20% of the ETF.
iShares MSCI World SRI ETF GBP H: +18.51%
Similarly, this ETF was a beneficiary of the boom in AI-related companies’ share prices.
What Didn’t
iShares UK Gilts 0-5yr ETF GBP: +1.49%
The oscillations in UK short-term interest rates resulting from inflation concerns related to the US-Iran conflict made for a difficult backdrop for this fund although it still posted a positive outcome for the quarter.
Please remember that past performance does not predict future performance and it should not be the main reason for making an investment decision. The value of investments and income from them can fall as well as rise.
Looking Forward
After a strong quarter for portfolio performance, it seems sensible to recognise the risks remaining for financial markets. The peace in the Middle East that came with June’s memorandum of understanding may not last or be challenged from time to time. Leverage in the marketplace is uncomfortably high and becoming more expensive to finance.
A new UK Prime Minister is something of an unknown regarding policy. So, reasons to be careful. With that in mind, Pier portfolios have sought to reduce the risk of being exposed to highly valued businesses and themes where earnings might not deliver the expectations of financial market analysts investment analysts.
