Overview

Investment specialist Kathleen Hunter gives an update on the UK Core Strategy covering Q2 2026.

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Your capital is at risk. Past performance is not a guide to future returns.    Kathleen Hunter: When markets lose confidence, they become increasingly short-term and more sensitive to events.  Volatility rises. Stocks are bucketed together. And simple labels start to take hold.  AI winners. AI losers. Safe havens. Domestic cyclicals.  This type of environment can create significant mispricing, which long-term fundamental growth investors can capitalise on.  And dramatic share price moves underpinned by short-term newsflow can become vulnerable to reversal when the narrative changes.   The clearest example this year has been oil. Prices spiked as investors worried about disruption linked to the conflict in Iran, before giving back most of those gains by quarter end. That created a turbulent period for the oil majors, which went from dominant drivers of index returns in the first quarter to notable underperformers in the second.  And there are echoes of this behaviour in software and technology stocks.  Earlier this year, concerns about AI led investors to group companies and mark them down sharply. Many are still caught up in the “AI loser” narrative. But in some cases, that pressure has started to ease and the market has looked again at the customer relationships, the data advantages and the economics of individual businesses.  The label came first. But, to some extent, the fundamentals have started to come back into focus.  This quarter, the UK Core Strategy delivered positive absolute and relative performance. We don’t want to overstate one quarter. A few months do not settle a long-term investment case.  But the quarter did show what can happen when the market starts to differentiate broad narratives from the fundamental characteristics of individual companies.  And Softcat is a good example of this. It was amongst the UK Core Strategy’s top performers this quarter.  And it’s an IT infrastructure and services provider that we bought for strategy earlier this year, when its share price was weighed down by concerns that AI would disrupt parts of its market.   We thought that interpretation was too blunt.  In our view, AI is not making IT easier for companies. If anything, it is making it more complicated. Businesses need to work out what technology to use, how it fits with their existing systems, how to manage the risks, and how to make sure it actually delivers value.  And this plays to Softcat’s strengths: it has long-standing customer relationships, strong vendor partnerships and a track record of helping companies make sensible technology decisions. And in its latest update showed that it is already benefiting from demand for AI-related infrastructure.  Elsewhere, having no exposure to Shell and BP also supported relative performance.   In terms of detractors this quarter, Babcock was amongst the laggards as UK defence companies derated, partly due to profit-taking after strong returns last year and partly as investors waited for greater clarity on the delayed Defence Investment Plan. With regards to Babcock specifically, the company also reported a £140mn charge on its Type 31 frigate contract which was disappointing and highlights the execution risk in complex defence programmes. However, we don’t believe this undermines the long-term investment case. Its underlying results were otherwise very reassuring, with progress in revenue, margins, cash generation and debt reduction. Management also reaffirmed guidance, increased the dividend and announced a further buyback. More broadly, Babcock remains a strategically important partner to the UK and allied governments, with entrenched positions in defence and nuclear, good revenue visibility and structural support from rising defence spending.  In terms of trading, we continued to work through a really strong pipeline of new ideas this quarter and purchased two new holdings: Scottish and Southern Energy and Helios Towers.  SSE is a UK energy infrastructure business which combines relatively stable, regulated earnings from electricity networks with a long runway for growth due to the need to modernise the UK grid and connect more renewable power to the rest of the country.   Helios Towers owns and operates telecom towers across Africa and the Middle East. We expect demand for mobile data in these markets to grow significantly, and for Helios Towers to benefit as customers rely more heavily on its infrastructure. To summarise - Performance this quarter was encouraging. But it is only a start.  There is still a long way to go before the portfolio’s long-term growth potential is properly reflected in share prices.  Artificial intelligence, geopolitics, interest rates and near-term economic data all matter. But they do not affect every company in the same way.  Our job is to look through the labels and ask how change affects the long-term economics of each business.  Is the market reacting to the facts, or simply reacting to the narrative?  For long-term fundamental growth investors, that is not just a challenge. It is an opportunity.  The recovery in performance this quarter is welcome, but we believe that the bigger opportunity is still to come.    <h3 class="TABLEHEADER1212pt">UK Core</h3> Annual past performance to 30 June each year (%) <table border="1" style="border-collapse: collapse; width: 100%; border-width: 0px; height: 75.1516px;"> <tbody> <tr style="height: 18.7879px;"> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.7879px; width: 43.4131%;"> </td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.7879px; width: 11.5071%;">2022</td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.7879px; width: 11.2456%;">2023</td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.7879px; width: 11.2456%;">2024</td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.7879px; width: 11.2456%;">2025</td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 18.7879px; width: 11.2456%;">2026</td> </tr> <tr style="height: 18.7879px;"> <td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.7879px; width: 43.4131%;">UK Core Composite (gross)</td> <td valign="bottom" style="border: 1pt solid rgb(204, 204, 204); padding: 7.5pt; height: 14.1pt; width: 11.5071%; text-align: center;"> -24.4 </td> <td valign="bottom" style="border-width: 1pt 1pt 1pt medium; border-style: solid solid solid none; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 15.4 </td> <td valign="bottom" style="border-width: 1pt 1pt 1pt medium; border-style: solid solid solid none; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt 7.5pt 7.5pt 0.75pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 8.9 </td> <td valign="bottom" style="border-width: 1pt 1pt 1pt medium; border-style: solid solid solid none; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 21.4 </td> <td valign="bottom" style="border-width: 1pt 1pt 1pt medium; border-style: solid solid solid none; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 5.5 </td> </tr> <tr style="height: 18.7879px;"> <td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.7879px; width: 43.4131%;">UK Core Composite (net)</td> <td valign="bottom" style="border-width: medium 1pt 1pt; border-style: none solid solid; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204); padding: 7.5pt; height: 14.1pt; width: 11.5071%; text-align: center;"> -24.8 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 14.8 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 8.4 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 20.8 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 4.9 </td> </tr> <tr style="height: 18.7879px;"> <td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.7879px; width: 43.4131%;">FTSE All Share index*</td> <td valign="bottom" style="border-width: medium 1pt 1pt; border-style: none solid solid; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204); padding: 7.5pt; height: 14.1pt; width: 11.5071%; text-align: center;"> -10.6 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 12.9 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 12.3 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 20.5 </td> <td valign="bottom" style="border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 14.1pt; width: 11.2456%; text-align: center;"> 18.1 </td> </tr> </tbody> </table>   Annualised returns to 30 June 2026 (%) <table border="1" style="border-collapse: collapse; width: 100%; border-width: 0px; height: 92.5px;"> <tbody> <tr style="height: 37px;"> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 61.3276%;"> </td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 13.0762%;">1 year</td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 12.684%;">5 years</td> <td style="border-width: 1px 1px 2px; border-style: solid; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(0, 0, 0); border-image: initial; padding: 10px; height: 37px; width: 12.8147%;">10 years</td> </tr> <tr style="height: 18.5px;"> <td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 61.3276%;">UK Core Composite (gross)</td> <td width="13%" style="width: 13.0762%; border: 1pt solid rgb(204, 204, 204); padding: 7.5pt; height: 13.9pt; text-align: center;">  5.5 </td> <td width="12%" style="width: 12.684%; border-width: 1pt 1pt 1pt medium; border-style: solid solid solid none; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 13.9pt; text-align: center;"> 4.0  </td> <td width="12%" style="width: 12.8147%; border-width: 1pt 1pt 1pt medium; border-style: solid solid solid none; border-color: rgb(204, 204, 204) rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 13.9pt; text-align: center;"> 7.3  </td> </tr> <tr style="height: 18.5px;"> <td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 61.3276%;">UK Core Composite (net)</td> <td width="13%" style="width: 13.0762%; border-width: medium 1pt 1pt; border-style: none solid solid; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204); padding: 7.5pt; height: 13.9pt; text-align: center;">  4.9 </td> <td width="12%" style="width: 12.684%; border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 13.9pt; text-align: center;"> 3.5  </td> <td width="12%" style="width: 12.8147%; border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 13.9pt; text-align: center;"> 6.7  </td> </tr> <tr style="height: 18.5px;"> <td style="border: 1px solid rgb(204, 204, 204); padding: 10px; height: 18.5px; width: 61.3276%;">FTSE All Share index*</td> <td width="13%" style="width: 13.0762%; border-width: medium 1pt 1pt; border-style: none solid solid; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204); padding: 7.5pt; height: 13.9pt; text-align: center;">  18.1 </td> <td width="12%" style="width: 12.684%; border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 13.9pt; text-align: center;"> 10.0  </td> <td width="12%" style="width: 12.8147%; border-width: medium 1pt 1pt medium; border-style: none solid solid none; border-color: currentcolor rgb(204, 204, 204) rgb(204, 204, 204) currentcolor; padding: 7.5pt; height: 13.9pt; text-align: center;"> 8.6  </td> </tr> </tbody> </table>   <div>Source: Revolution, FTSE. US dollars. Net returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.</div> <div></div> <div></div> <div>Past performance is not a guide to future returns.</div> <div></div> <div></div> <div>Legal notice: FTSE International Limited (“FTSE”) © FTSE 2025. “FTSE ®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data and no party may rely on any FTSE indices, ratings and/or data underlying data contained in this communication. No further distribution of FTSE Data is permitted without FTSE’s express written consent. FTSE does not promote, sponsor or endorse the content of this communication.</div> <div></div> Risk factors     This communication was produced and approved in June 2026 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking. The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned. 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