Performance update

Portfolio values continued to rise in May, delivering another strong month of returns. Gains ranged from 1.7% in Cautious mandates to 5.6% in Equity mandates. Equity markets were the main driver, with USA equities (+5%) and emerging market equities (+10%) the strongest regions over the period. Sector performance was heavily skewed to technology and businesses tied to the AI build-out, in particular semiconductor companies. The technology sector grew by +16% in the US and +29% in emerging markets (all figures in euro). An uneasy truce in Iran and decline in the price of crude oil helped to ease pressure on bond yields. As a result, the global bond index rose by 0.5%, rounding off a favourable month for multi-asset portfolios.

Year to date, global bond returns are broadly flat, while global equities have risen by almost 13%. Although investor sentiment has remained supported by optimism around the Middle East situation, gains have also been underpinned by strong fundamentals. US companies posted the strongest quarterly earnings growth since Q4 2021, albeit with much of this was concentrated in the Magnificent 7.1

Over the first 5 months of the year, the Cautious Growth core portfolio returned +2.1%, Moderate Growth +5.0%, Long Term Growth +7.9% and Equity Growth +10.7%. Returns for the GPS funds were slightly ahead. Hedge funds, held in core portfolios, had not yet reflected the strong May performance in month end pricing.

Portfolio commentary

Low market breadth and muted gains outside of the technology sector weighed on our active positions in May. Active managers held in portfolios were in aggregate underweight US technology and the Magnificent 7. Tactical decisions to tilt exposures away from the US mega-caps while favouring Europe equities, China A equities and the S&P 500 equal weight index, also detracted from performance. Latin America (‘Latam’) equities lagged primarily due to weaker oil prices during the month, although this position remains ahead on a year-to-date basis. The emerging market equities call continues to outperform, with the region up +26% so far in 2026, 15% ahead of the benchmark.

Liquid hedge funds delivered strong returns, supported by gains from JP Morgan Global Macro Opportunities (+2.5%) and Nordea Alpha 10 (+5.5%, held within GPS). All figures are in euro terms.

Year-to-date, some of the strong gains from active management in Q1 have moderated. Our preferred exposure to the AI theme is via emerging markets and exposure to hardware manufacturing companies in the index. This tactical position has performed well. However, other calls away from the concentrated US market, as noted above, have lagged since the onset of the Iran conflict. Our active managers maintain a valuation discipline, and the blending of managers in the portfolio ensures a broad-based exposure across sectors and to complementary investment styles. This reduces reliance on any single driver or dominant market theme.

Economic risks are still elevated across key variables on inflation, the situation in Iran, the uneven resilience of the US consumer and the ability of AI-related companies to monetise capex spend. The rapid shifts in market leadership during March and April, along with the recent concentration of gains, have reinforced the importance of maintaining diversification both within and across asset classes.

Strong recent market gains can lead investors to expect similar returns going forward, otherwise known as recency bias. However, history suggests a more cautious outlook is appropriate. Looking at longer-term data helps provide perspective.

Figure 1 shows the annualised 3 year rolling returns of global equity and global bond indices since the beginning of the century. While not at the levels of the early 2000s, bond returns have recovered recovered from the inflation shock of 2022 and are back in positive territory.

Equity returns have naturally been much more volatile, but generally positive. The current three-year annualised equity return of 19% (as of May 2026) is in line with previous peaks seen after major market recoveries, including the periods following the dot-com bust, the global financial crisis, the mid 2010s era of ZIRP2 and quantitative easing, and the post-covid bull market in technology and growth stocks. Viewed in this context, it would be prudent to expect returns to moderate rather than continuing at the recent pace.

In portfolio terms, the GPS funds have also delivered unusually strong three‑year annualised returns as of May 2026—6.9% for Cautious Growth, 9.5% for Moderate Growth and 12.5% for Long Term Growth. These outcomes are above typical long‑term levels and are likely to ease back toward more normalised return expectations over time.

Figure 1: Annualised 3 year returns of global equities and global bonds

Source: Bloomberg as at 31/05/2026, in euro, using monthly data.

Portfolio changes

As Donough noted above, the tactical call to overweight Asia high yield bonds was closed in May.

The call was originally opened in December 2021 and allocated in portfolios through an actively managed fund, the PIMCO Asia High Yield Bond fund. The call initially experienced a challenging period. 2022 was a difficult environment for fixed income more broadly, but returns in the Asian market were also driven by distress in the China real estate sector which caused a spike in default rates. However, the fund then recovered in value. Performance was supported by a favourable macro backdrop across Asian economies; stronger Gross Domestic Product (GDP) growth combined with contained inflation figures that did not reach the peaks experienced in the U.S. and Europe. This allowed major Asian Central Banks to cut interest rates and the fund enjoyed a rebound in returns.

In February 2024, we increased the size of the call in portfolios. At the time, the fund offered a significant yield premium over US and European high yield bonds, while maintaining limited exposure to China real estate (with a much-improved risk/reward profile with bonds trading at just 20/30 cents on the dollar). Following this decision, the fund rallied by almost 20%, significantly outperforming government bonds, which served as the funding source for the call. During this rally, in October 2024, we reduced the position.

Since inception, both tranches of the call were ahead of government bonds, with tranche two in particular performing strongly.

Figure 2: PIMCO Asia High Yield vs global government bonds

Source: Bloomberg as at 31/05/2026, in euro

Toward month-end, we rebalanced portfolio weightings to bring emerging markets (‘EM’) equity exposure back in line with benchmark levels.

After several years of being firmly out of favour, EM equities outperformed developed market (‘DM’) equities by 11% in 2025. This momentum has carried into 2026, with EM ahead by a further 15% year to date. Until recently, EM equities accounted 10% of the global equity benchmark. This shift in relative performance has increased the weight to 12%.

In response, we have updated the GPS funds and target portfolio allocations to reflect the higher EM benchmark weighting. Portfolio trades will only be executed where necessary, as in many cases EM exposure will have naturally drifted higher with market movements.

If you have any questions on the portfolio changes, please contact your Davy Private Client Adviser.

1 The Magnificent 7 refers to the group of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

2ZIRP is an acronym for ‘zero interest rate policy’, whereby a central bank sets its benchmark interest rate at or near to 0%

Figure 3: Tactical Asset Allocation Table - May 2026