Portfolio Update

Global equity markets have adjusted modestly this month, factoring in inflation concerns amid the continuing conflict in the Middle East. As of August 31^st, the S&P 500 returned 14.4%. the S&P/TSX 16.0%, the MSCI ACWI 16.2%, the MSCI EAFE 15.6%, and the MSCI Emerging Markets 25.5% year-to-date in Canadian dollars.

Attention has also turned to renewed U.S. tariff announcements on Canadian goods. New 50% tariffs on approximately $28bn of Canadian goods affect approximately 5% of Canadian exports to the U.S., while the vast majority of Canadian exports – approximately 80% – remain protected under CUSMA and continue to enter the U.S. tariff-free. In our view, these announcements do not change the trajectory of the Canadian economy. We continue to expect subdued, but positive, growth, with real GDP advancing in the range of 1-2% this year and next. Trade uncertainty around tariffs and CUSMA renegotiations remain a complicating factor, but activity continues to be underpinned by resilient consumer spending and supportive fiscal and monetary policies.

Rising Yields: A Global Phenomenon

Bond markets have taken center stage, as a sharp global sell-off pushed yields to multi-year, and in some cases, multi-decade highs. The most has been swift and broad-based, reflecting a convergence of pressures: persistent inflation, heavy government borrowing needs, and renewed geopolitical risk. As of September 8^th, the 10-year U.S. Treasury yield reached 4.79%, its highest level since late 2023, while the 30-year touched 5.25%, near its highest level since 2007. Canadian yields have moved in tandem, with the 10-year Government of Canada bond climbing to 3.80%, its highest level in over two years.

While stubborn inflation and renewed conflict with Iran have contributed to the move, we believe the more structural driver lies in heavy government borrowing needs and the wave of issuance required to fund them. The U.S. federal government continues to borrow heavily, with federal debt surpassing $40 trillion for the first time. At the same time, major technology companies have issued roughly $220 billion in debt this year alone to fund AI-related investments, including data centers, adding further to the supply investors must absorb.

Fundamentally, this repricing reflects an issue of supply. Federal, corporate, and AI-related debt issuance are converging simultaneously, and the resulting volume of new bonds is placing considerable pressure on yields across the curve. With government and corporate borrowers competing for a limited pool of savings, the market is being asked to absorb a greater volume of debt than it has in years, and higher yields are the mechanism by which that additional supply is being cleared.

Positioned for a Higher-Yield Environment

While this additional supply is placing pressure on yields, we believe our portfolios remain well positioned to navigate the current environment. As yields have continued to creep higher, we have been gradually extending duration, adding incrementally to intermediate-term bonds at increasingly attractive levels. Importantly, this extension has been made into rate-expectation volatility rather than against it, allowing us to take advantage of dislocations as they emerge rather than fighting the prevailing trend. We continue to hold no exposure to bonds with maturities beyond 20 years, which has kept our portfolios largely insulated from the sharpest losses at the long end of the curve. This approach builds on our broader strategic decision to maintain a shorter duration in bonds within our bond portfolios, complemented by active curve positioning and a high-quality credit profile, with no exposure below BBB and a meaningful weighting toward AAA and AA rated issuers. Together, this combination has driven our bond portfolios’ performance relative to the benchmark[1]. Throughout this period of heightened market speculation, we have remained disciplined in our valuation approach, an approach that has helped us rank within the first quartile on eVestment among Canadian fixed income (core) strategies, a landscape of 48 firms and 77 strategies, over one, three, and five-year periods[2].”

Concluding Thoughts

Our fixed income strategy has been shaped by a disciplined, risk/reward-driven approach to positioning across the yield curve, allowing us to preserve capital while limiting undue risk. Over the past five years, our bond strategy has produced an annualized return of 2.8%, compared with a 0.4% return for the FTSE Canada Universe Bond Index over the same period[3].

As heavy federal, corporate, and AI-related issuance continues to pressure yields higher, we believe our portfolios remain well positioned to navigate this environment, reflecting not only our decision to avoid long-duration exposure, but also our positioning along the curve, the credit quality of our holdings, and the securities we own. We will continue to extend duration selectively as opportunities emerge, while maintaining the price discipline that has guided our approach throughout periods of market volatility. With a continued emphasis on long-term vision and valuation, we remain confident in our ability to protect capital while positioning portfolios to benefit as the current supply dynamics evolve.

[1] The benchmark since inception is 5% FTSE Canada 91 Day T-Bill Total Return Index and 95% FTSE Canada Universe Bond Total Return Index. Performance results reflects the reinvestment of dividends, income and other earnings and are presented net of all foreign withholding taxes. Reclaimable withholding tax refunds are recognized when received. The benchmark is fully invested and its returns include the reinvestment of dividends, income and other earnings and are presented net of withholding taxes. Performance results are presented before management fees and custodial fees but after trading commissions.

[2] eVestment (evestment.com), information collected directly from investment management firms by eVestment with their agreement. Individual ranking provided by eVestment on the Canadian Fixed Income (core) Universe, gross returns, across 48 firms and 77 unique strategies as of August 31, 2026. More information can be provided upon request.

[3] Data is preliminary. The performance numbers are annualized and presented in Canadian dollars and refers to the Letko Brosseau Canadian Fixed Income Composite as of August 31, 2026. This Composite was created in January 1991 and is defined to include all discretionary Canadian dollar based fixed income mandates with asset mix targets for Canadian equities of less than 10%. The benchmark since inception is 5% FTSE Canada 91 Day T-Bill Total Return Index and 95% FTSE Canada Universe Bond Total Return Index. Performance results reflects the reinvestment of dividends, income and other earnings and are presented net of all foreign withholding taxes. Reclaimable withholding tax refunds are recognized when received. The benchmark is fully invested and its returns include the reinvestment of dividends, income and other earnings and are presented net of withholding taxes. Performance results are presented before management fees and custodial fees but after trading commissions.