Navigating Elevated Valuations: Q3 MPS Rebalance Update

The third quarter of 2025 delivered strong results across our portfolio ranges, with returns ranging from 3.5% to 10.3% depending on risk profile. While these numbers are certainly welcome, they’ve also brought us to a point where we need to talk about what happens next.

A Strong Quarter, But Questions Ahead

Global equity markets have been on a remarkable run since April, climbing to fresh all-time highs throughout the summer and autumn. The rally has been broad-based, with emerging markets particularly impressive and the AI theme continuing to drive substantial gains in technology stocks. Our portfolios benefited significantly from this momentum, with tactical positions in gold, emerging markets, and thematic plays like uranium delivering exceptional returns.

However, strong performance creates its own challenges. Global equity valuations now sit at 22 times earnings, well above the historical average of 16 times. The US market is even more stretched at over 25 times earnings compared to its typical 17 times multiple. History suggests that starting from these elevated levels, future returns tend to be more modest—or in some cases, negative.

Why We’re Taking a Defensive Stance

This brings us to the rebalancing decisions we’ve made this quarter. Some clients have asked why we’re not simply riding the momentum, given how well markets have performed. The answer lies in what we believe is an increasingly asymmetric risk-reward profile.

The current rally is heavily concentrated in a small number of very large technology companies, particularly those benefiting from AI investment. This concentration means there’s less margin for error. If sentiment shifts or if the enormous capital expenditure on AI infrastructure fails to deliver expected returns, the potential for a sharp correction is real. Even the Bank of England has flagged concerns about a potential AI-related stock bubble.

Our rebalancing approach reflects this outlook:

For Fusion Active portfolios, we’ve maintained our defensive tilt by keeping absolute return and gold exposure at current levels. We’ve also made a tactical shift away from European equities toward global stocks, while increasing our allocation to emerging-market debt, which offers attractive yields and useful diversification.

In Fusion Optima portfolios, we’ve increased our protective VIX component back to 1% across all risk levels. This came partly from profit-taking in our Defence sector holding, which has risen 67% this year. It’s worth noting that this protective component will generate small losses during strong market periods—that’s exactly what it’s designed to do—but it’s there to cushion potential downturns.

The Fusion Passive range has seen a modest shift in strategic asset allocation, with a slight increase in equity exposure (around 3%) at the expense of bonds. As part of this adjustment, we’ve tilted toward UK, European, and Japanese markets and away from US equities.

For Fusion ProActive Planet, we’ve introduced emerging market debt as a new component and swapped our renewable energy fund for one we believe is better positioned to capture gains in decarbonisation and electrification themes. Like Active, we’ve reduced European equity exposure in favour of broader global holdings.

What This Means in Practice

It’s important to understand that our defensive positioning doesn’t mean we’re expecting an imminent crash or that we’re moving to cash. Rather, we’re making measured adjustments to reduce potential losses if markets do correct, while keeping the majority of each portfolio positioned to participate in continued growth.

Think of it as wearing a seatbelt. You don’t put one on because you’re expecting to crash—you wear it because it makes sense given the risks involved in driving. Our absolute return funds, gold holdings, and volatility protection work the same way. They typically generate modest returns or small losses during bull markets, but they’re there to protect capital when conditions deteriorate.

Fixed Income and Regional Views

In bonds, we continue to favour short and mid-maturity issues over longer-dated debt. While interest rates have started to decline, persistent inflation concerns and questions about fiscal sustainability—particularly evident in the recent pressure on UK gilts—make longer bonds less attractive in our view.

Regionally, we maintain a mild preference for US equities over Europe, though this is more about relative positioning than strong conviction. The US offers greater upside if AI momentum continues, but European markets would likely suffer similarly if a broader downturn materialises.

Our most constructive view remains on emerging markets, where valuations are more reasonable, and the asset class now offers genuine diversification benefits rather than simply adding risk. The strong performance from China, Korea, Taiwan, and Latin America this quarter validates this positioning, and we see further potential, particularly in emerging market debt.

Looking at the Full Picture

The detailed performance attribution, complete market commentary, and specific fund selections across all our portfolio ranges are available in our full quarterly report. There you’ll find the breakdown of how individual components performed, our complete outlook, and the specific changes made to each portfolio during this rebalance.

Markets have delivered impressive returns over the past six months, but the journey ahead is likely to be more challenging. Our rebalancing decisions aim to acknowledge this reality while staying invested in the opportunities that remain.

For more information about Fusion’s Managed Portfolio Service or to access the complete quarterly report, please contact your financial adviser or reach out to our Investment Team.

Past performance is not a reliable indicator of future returns. The value of investments can fall as well as rise, and you may not recover the amount originally invested.