In the third quarter of 2025, the Franklin LifeSmart Portfolios demonstrated strong relative performance, largely attributable to strategic underweighting in fixed income and, for many portfolios, a diversified allocation into alternative investments. This period saw a significant uplift across most vintages, primarily benefiting from a regionally focused fixed income strategy that favored an overweight position in US bonds while reducing exposure to non-US bonds. As the quarter concluded, our outlook on equities became more optimistic, balancing elevated valuations against a generally favorable global economic climate, robust corporate earnings, and ongoing monetary policy adjustments.
The financial markets experienced a positive shift during the third quarter of 2025. Global equity markets showed collective strength as concerns over tariffs gradually subsided, and numerous central banks began to ease their monetary policies. This supportive environment provided a tailwind for risk assets and contributed to the positive performance observed in the LifeSmart Portfolios.
A critical aspect of the portfolios' success was their tactical asset allocation. By maintaining a lower-than-benchmark exposure to fixed income, particularly non-US bonds, and emphasizing domestic bond holdings, the portfolios were able to navigate market conditions effectively. This deliberate positioning helped to enhance returns, especially for shorter- and mid-duration portfolios, by capitalizing on the nuances of the regional bond markets.
Looking ahead, the decision to upgrade the view on equities was made after careful consideration of several factors. Despite extended valuations, the macroeconomic backdrop remained largely positive, corporate fundamentals showed resilience, and central banks indicated a sustained trajectory toward accommodative policies. These elements collectively suggested that equities would continue to offer attractive opportunities for growth.
Conversely, the underweight position in fixed income was maintained due to persistent inflationary pressures and concerns regarding fiscal deficits and rising yields. These factors suggested a less favorable environment for traditional bond investments, reinforcing the strategic choice to limit exposure in this asset class and seek returns elsewhere.
Regarding individual fund contributions, certain underlying funds played a significant role. While the Franklin Growth Fund and Putnam Large Cap Value Fund experienced some drag on relative performance, the Franklin U.S. Core Equity (IU) Fund and BrandywineGLOBAL High Yield Fund delivered positive contributions, showcasing the importance of active management and selection within the broader portfolio strategy.
The third quarter of 2025 proved to be a period of strategic success for the Franklin LifeSmart Portfolios, driven by astute asset allocation decisions and a responsive approach to evolving market conditions. The emphasis on US bonds and alternative investments, coupled with a cautious stance on broader fixed income and an increasingly positive outlook on equities, positioned the portfolios favorably amidst a backdrop of improving financial sentiment and supportive monetary policies.
