Q2 2026 Fund Commentary

Commentary and opinions are provided by Canso Investment Counsel Ltd..

Market commentary

The U.S. Federal Reserve Board (Fed) maintained its federal funds rate steady, and its rate-setting committee’s quarterly forecast indicated broad support for rate increases during the remainder of the year to curb inflation. The new Fed chair began his term by severely curtailing the statement released after the rate-setting meeting, removing forward guidance that signalled the Fed’s next move to the markets. In the sub-advisor’s view, this may result in increased volatility in the U.S. Treasury market. Given the borrowing needs of the U.S. Treasury, any additional premium demanded by investors could cause deterioration in the U.S. government’s fiscal situation.

U.S. hyperscalers are spending on data centre buildout, semiconductors and computing equipment tied to artificial intelligence infrastructure. In the sub-advisor’s view, these high-quality companies are tapping the bond market aggressively, which may crowd out other borrowers, including the government.

The Bank of Canada maintained its overnight interest rate at 2.25% in June. The central bank cited that financial conditions had loosened because of higher equity prices and tight credit spreads. Canada’s economy rebounded quickly from a technical recession early in the year. Housing activity has declined and business investment remains weak because of uncertainty relating to the United States-Mexico-Canada Agreement. In the sub-advisor’s view, the U.S. administration’s refusal to renew the agreement may affect business investment decisions. Canadian inflation is elevated at 2.8% because of higher energy and food prices.

Performance

Air Canada (4.625%, 2029/08/15) contributed to the Fund’s performance as spreads tightened by roughly 40 basis points (bps). Avis Budget Car Rental LLC (8.25%, 2030/01/15) also contributed as spreads tightened by roughly 108 bps. Bird Construction Inc. contributed to performance, with the equity position appreciating in the quarter.

Select high-yield issues contributed to performance as spreads tightened over the quarter.

The Hertz Corp. (12.625%, 2029/07/15), a first-lien secured position, detracted from performance because of negative sentiment. The Hertz Corp. (8%, PIK 2029/07/15), a second-lien convertible position, detracted from performance amid the same negative sentiment. The Hertz Corp. (5%, 2029/12/01), an unsecured position, also detracted from performance because of negative market sentiment.

Hertz Global Holdings Inc. detracted from performance because the issuer faces challenges executing its plans to improve operations and better control costs. A relative underweight position in long-term bonds also detracted from performance because yields fell during the quarter.

Portfolio activity

The sub-advisor added Alphabet Inc. (4%, 2033/05/15), participating in the company’s inaugural maple bond deal at a credit spread of roughly 60 bps. The sub-advisor also added WTH Car Rental ULC Series 2026-1 Class A (3.665%, 2029/08/20) at a spread of roughly 85 bps. The sub-advisor increased Bank of Montreal (3.539%, 2032/03/03) following participation in the bank’s February 2026 new issue.

Spirit AeroSystems Holdings Inc. (3.85%, 2026/06/15) matured during the quarter. The sub-advisor reduced Canada Housing Trust (3.45%, 2035/03/15) to fund purchase activity and reduced The Hertz Corp. (8% Payment-in-Kind, 2029/07/15) at prices above par.

Outlook

With credit spreads inside historical averages, the sub-advisor continues to position the Fund conservatively, with a significant allocation to AAA/AA-rated securities. This allocation includes Government of Canada bonds, National Housing Act mortgage-backed securities, bank covered bonds and high-quality corporate issues. The Fund maintains a smaller weight in BB and below-rated positions alongside non-rated positions. Portfolio duration remained steady and shorter than the benchmark’s duration.