Portfolio Update

Global equity markets continued to advance in July, reaching new highs and extending the recovery that began at the market’s trough in October 2022. As of July 31^st, 2026, the S&P 500 returned 12.7%, the S&P/TSX 12.5%, the MSCI ACWI 13.9%, the MSCI EAFE 14.2%, and the MSCI Emerging Markets 22.9% year-to-date in Canadian dollars.

This rally has unfolded alongside strong corporate profitability, with global earnings on track to grow by roughly 18% this year, per consensus estimates. However, valuations appear increasingly stretched, particularly in segments tied to elevated levels of AI-related capital expenditure. We view this as a sign of growing exuberance in parts of the market, with valuations in some areas leaving little room for disappointment. In this environment, we believe it is worth revisiting how we manage risk within the portfolio. Our approach is grounded not in predicting the timing of a pullback, but in the discipline we apply to what we own, the price we pay, and how the portfolio is constructed. In practice, this discipline has recently led us to take some profits in select holdings, most notably within banks, mining, and industrials. Our portfolios are carrying a moderately higher level of cash as we await more attractive entry points across the portfolio.

Knowing What We Own

The first pillar of our risk management approach is a deep, fundamental understanding of every position we own. Our investment process primarily takes a bottom-up approach, with our sector teams conducting an in-depth analysis of each company held in our portfolio. We focus on several factors such as the company’s industry dynamics, market position, cost competitiveness, growth prospects, management quality and governance structure, financial structure, environmental and labour practices and other material characteristics. This distinction matters most in the current period, where favourable business conditions and positive sentiment can mask meaningful differences in quality. Specifically, while some businesses are compounding durable earnings, others are being valued on the assumption that rapid growth will continue indefinitely, and profitability will increase meaningfully from current levels. By focusing on the fundamentals of a business, we aim to avoid being caught up in market enthusiasm for companies whose future growth remains uncertain.

Paying the Right Price

It is important to maintain discipline around the valuation of a business as paying the right price is central to how we manage risk in the portfolio. We compare a company’s share price to our own view of what the business is worth over the long term, based on its earnings power, cash flow, and growth prospects, rather than reacting to short-term price movements. This discipline naturally leads us away from businesses trading well above their fair value, and toward opportunities where the price we pay is better supported by long-term fundamentals.

In this context, we have trimmed positions in several of the Big Six Canadian banks this quarter, including Scotiabank, TD Bank, and RBC, following a period of strong performance and elevated valuations relative to their long-term historical averages. The banks have delivered strong earnings per share growth, supported in part by continued strength in their wealth management businesses, where higher equity markets have driven increased assets under management and fee income.  As their share prices have approached our estimates of their intrinsic value, we have taken the opportunity to reduce the size of these positions in our portfolios. At the same time, we remain ready to deploy capital into opportunities where the risk-reward profile and valuations are more compelling.

Diversification as a Discipline

The third pillar of our risk management approach is diversification, which emerges naturally from building a portfolio, one high-quality, attractively valued business at a time, rather than structuring it against a particular target or benchmark. Our holdings tend to be spread broadly across the economy, which helps reduce our dependence on any one industry’s fortunes. Today, our global equity strategy’s largest sector exposures include Financials at 15.5%, Health Care at 10.6%, and Communication Services at 10.8%. This diversification extends beyond sectors to geography as well. The MSCI ACWI Index allocates roughly 63% to the United States, whereas our strategy’s U.S. exposure is notably lower, at around 44%, reflecting our bottom-up approach to sourcing high-quality businesses rather than anchoring to a benchmark’s regional composition. This bottom-up discipline also shows up in valuation: the Letko Brosseau All Country World Equity Fund trades at a forward P/E of 14.5x, compared to 17.1x for the MSCI ACWI, underscoring that our diversification hasn’t come at the expense of paying up for quality. We believe this breadth provides a measure of resilience, particularly during periods when more concentrated portfolios are prone to sharper drawdowns.

Concluding Thoughts

Our focus remains on managing risk through understanding what we own, paying a price that reflects underlying value, and maintaining a portfolio diversified across industries and geographies rather than concentrated in the market’s most popular themes. We define risk as the permanent loss of capital, not short-term price volatility, and capital preservation remains our priority.

While the current rally has been supported by genuine earnings strength, a meaningful portion of it reflects improving sentiment and elevated expectations, leaving less room for error should conditions shift. Our portfolio trades at a discount to the broader market, and we believe this valuation discipline offers a measure of protection against market volatility.

Our positioning reflects a balance between discipline and patience: trimming where valuations have run ahead of fundamentals, while holding cash and standing ready to redeploy it into businesses that continue to offer an attractive combination of quality and value.