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Our market summary
In the third quarter of 2026, geopolitical tensions in the Middle East pushed oil and gas prices higher, adding to inflation pressures and prompting many central banks to raise interest rates. Despite this backdrop, economic growth remained stronger than expected, while company earnings generally continued to improve.
Performance review
The WealthSelect Responsible Passive Portfolios delivered mixed returns during the third quarter, with the lower-risk portfolios recording modest declines while mid- and higher-risk portfolios generated small positive returns. The differing outcomes were largely driven by asset allocation, with portfolios holding higher allocations to equities benefiting from the relative resilience of equity markets, while those with greater fixed interest exposure were more affected by rising bond yields. Fixed interest was a notable detractor as higher bond yields and renewed inflation concerns weighed on returns.
The performance figures shown refer to past performance. Past performance is not a reliable indicator of future performance.
Developed markets (ex UK) equity
How our developed market holdings performed
Japan sets the pace
Japan was the standout region during the quarter, and this was reflected in the performance of the L&G Future World ESG Tilted and Optimised Japan Index Fund which gained 5.6%. The market continues to benefit from a more supportive economic backdrop, improving corporate profitability, and ongoing corporate governance reforms aimed at enhancing shareholder value.
UK equity
How our equity holdings performed
Energy lifts the UK market
UK equities delivered positive returns during the quarter, supported by resilient economic data, attractive valuations, and a strong contribution from the energy and commodity sectors as oil prices moved higher.
Emerging markets equity
How our emerging market holdings performed
Mixed fortunes across emerging markets
Our emerging market equities holdings delivered negative returns during the quarter, with the L&G Future World ESG Tilted and Optimised Emerging Markets Index Fund down 2.8%. Performance across the asset class was uneven, with improving sentiment towards Chinese equities offsetting weakness in parts of the Asian technology and semiconductor supply chain, particularly in Korea and Taiwan.
Fixed interest
How our fixed-interest holdings performed
Rising yields weigh on bonds
Fixed interest faced a challenging quarter as rising bond yields weighed on returns across government and corporate bond markets. Stronger US economic data, higher energy prices, and renewed inflation concerns led investors to reassess the outlook for interest rates, resulting in a broad sell-off in bond markets. Against this backdrop, all of our fixed interest holdings delivered negative returns.
Responsible investment update
During the quarter, our engagement activity focused on our ongoing oversight of the passive funds used within the portfolios. As these investments track indices rather than relying on individual security selection, our emphasis is on understanding how managers incorporate ESG considerations into index construction and maintenance, and how their stewardship teams engage with companies on material environmental and social issues. We continued our review of flagged exposures and sought evidence that material environmental and social risks are appropriately reflected within index methodologies and stewardship activities. This helps us ensure that passive strategies continue to align with the responsible investment objectives of the portfolios.
A significant area of focus this quarter was our Climate Action Plan engagement programme. We met with BlackRock's stewardship team to discuss several utility companies identified through our climate risk analysis, including NextEra Energy, SSE, and RWE. The discussion explored how stewardship activities can support long-term progress on issues such as emissions reduction, renewable energy investment, and transition planning. While each company faces different challenges and political context, discussions highlighted the importance of ongoing stewardship engagement and monitoring of transition progress, particularly where outcomes depend on evolving policy, regulation, and energy market conditions. These discussions also provided valuable insight into how large stewardship teams seek to influence climate-related outcomes within passive portfolios through engagement, voting activity, and wider industry dialogue.
Investment outlook
Throughout the third quarter, markets increasingly shifted their attention back to inflation and central bank policy. The key question now is not how long rates remain restrictive, but whether further increases will be required to bring inflation back under control.
Energy adds to inflation concerns
Higher energy prices resulting from tensions in the Middle East are an obvious source of concern, but they are not the only risk. Resilient economic activity, particularly in the US, ongoing supply-side pressures, and the potential for wage inflation to remain elevated could all contribute to inflation proving more persistent than expected.
Higher rates test market valuations
With several developed market central banks already raising rates during the quarter, investors will be watching closely for signs of whether further policy tightening is required, and what impact this may have on both economic growth and financial markets. Higher interest rates can also act as a headwind to asset valuations, particularly in areas where expectations are already elevated.
Navigating political uncertainty
Alongside inflation and central bank policy, investors must also navigate an increasingly busy political calendar. The upcoming UK Budget and US midterm elections could have important implications for fiscal policy, taxation, and government borrowing. As recent quarters have shown, market narratives can shift quickly, so we remain focused on maintaining diversified portfolios and a pragmatic, flexible approach as risks and opportunities evolve.
Stuart Clark
Portfolio Manager
Helen Bradshaw
Portfolio Manager
Bethan Dixon
Portfolio ManagerApprover: Quilter October 2026
QIP 24020 /25/19226
