How did the AJ Bell funds perform in the third quarter?

The big themes of the past three months included interest rate changes, turbulence in the summer and political events. Despite some volatility, particularly in Japan and the US, the AJ Bell funds performed well, with strong returns from bond markets and Asian emerging markets. We caught up with James Flintoft, Head of Investment Solutions at AJ Bell, to discuss the outlook, key events that affected markets and how the AJ Bell funds performed in the period.

What were the main things that happened in the past three months?

The July to September quarter was dominated by interest rate changes, politics and economic stimulus initiatives. We saw choppy market conditions at the start of the period but the recovery was quick and impressive.

A series of events put the market off course during the summer. Weak labour and manufacturing data from the US prompted fears of a recession. Investors got the jitters about technology stocks looking expensive and asked questions about when the big spending on AI would deliver positive returns.

The Bank of Japan putting up interest rates led to a partial unwinding of something called the Japan ‘carry trade’, where investors had borrowed in the cheap Japanese currency and invested that money in other higher yielding assets overseas. That prompted some selling among big-name stocks, including many of the Magnificent Seven group of mega cap tech companies, such as Nvidia.

There was also disappointment about a lack of action by the Chinese authorities to address an economic slowdown in that part of Asia, although Beijing pulled a rabbit out of the hat in late September with big stimulus measures

We saw interest rates cut in the US, UK and the Eurozone during the quarter in response to weaker jobs data and falling inflation. Markets responded favourably with many stocks rising, the price of UK and US government bonds going up (and yields falling), and gold hitting a new record high. And now people are starting to think about actually what's the real impact of higher interest rates on the economy.

Against this backdrop we also saw general elections in UK and France, and Joe Biden pulling out of the 2025-2029 US Presidential campaign. While the polls show a close race between Kamala Harris and Donald Trump for the White House and still leaves some uncertainty until the result in early November, the conclusion of two European elections provides more clarity for investors over the political landscape this side of the Atlantic.

Has it been a bit of a rocky period?

If you just looked at the quarter end results in terms of returns, you wouldn't notice the volatility. And that really ignores some of the steep declines that we saw in August, particularly in Japan, which had a double digit decline in a matter of days.

So a fair bit of volatility in Japan and and in the US too around some of those AI related names. Up until the last week, Asian emerging markets were actually performing pretty badly. But then in the final week of the quarter, the Chinese government came out with a variety of stimulus packages aimed at stimulating the economy and the market. And all of a sudden we saw a double digit rise in that market, in the space of a week, a very sharp rally. And actually, that proved to be the best performing market of the quarter.

What has been happening in bond markets then?

Well, the bond market has been quieter again. That's kind of a relief after the past couple of years. Markets started to price in some interest rate cuts from central banks over the coming year. The thinking now from markets is that interest rates might come down to about 3.75% or 3.5% in the UK. So, there's a lot been priced in. Yields have fallen, bond prices have gone up, and corporate bond markets have been a bit quiet.

Let's drill down into the AJ Bell funds. How did they perform in the third quarter and in the year so far?

It's been a good year so far, we’re ahead of expectations. And that's been the case over the past couple of years as well.

It's been a good couple of years for markets, we need to acknowledge that. Over the quarter, generally what you're seeing is good performance from bond markets filtering through into the funds at the lower end of the risk spectrum. The Cautious and Moderately Cautious funds have been protected from some of the volatility in equity markets and some of the underperformance in, say, the, the US and Japan.

Then when you go higher up the risk spectrum, so the Global Growth Fund, for example, that's performed particularly well because it has a lot more exposure to Asian and emerging markets. China's performed well, so that fund has done particularly well as well.

And have you made any changes to the funds in the past quarter?

We've got a couple of ideas going around the team at the minute. We think that potentially there might be a bit of complacency out there in terms of inflation and the horizon for that.

And obviously what we need to take into account is what the market is telling us at the minute. The market's telling us that interest rates are going to be cut quite a lot, that things are generally going to be okay. Do we need to change that narrative as it stands? Maybe. Maybe not.

We've got our annual strategic asset allocation project coming up towards the end of this year, and we will implement that in January. So, we've got a lot of thinking to do in the next couple of months in terms of how we reposition.

Find the latest quarterly reports for each of the AJ Bell funds

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