Q3 2025 Fund Commentary

Market commentary

Fixed income investments performed well during the period, particularly in the corporate segment.

The U.S. economy stayed strong thanks to a boost to consumption. Despite trade tensions and pressure on the U.S. Federal Reserve Board (Fed) raising concerns over its independence, the U.S. showed resilience. However, the housing market slowed, labour market data showed weakness and inflation had not returned to target. The Fed made its first interest-rate cut in September.

In the eurozone, the investment backdrop was resilient, benefiting from consumer behaviour. Despite tariff announcements from the U.S. administration, Europe benefited from the 15% blanket rate negotiated by the European Commission in the summer.

The European Central Bank paused interest-rate cuts, having cut by 1.00% so far in 2025. Eurozone inflation hovered close to the 2% target and the economy did not shows signs of recession. There was optimism about the fiscal stimulus, particularly the announcement of defence and infrastructure spending by the German government. France’s sovereign debt rating was downgraded, the U.K.’s long-term borrowing costs rose and there were concerns over debt sustainability in both countries.

Performance

Relative exposure to perpetual callable bonds issued by Allianz SE (3.2%, callable in 2027) and SCOR SE (5.25%, callable in 2029) contributed to performance. Zurich Finance (3.0%, 2051) was another contributor to performance. These holdings performed well because of their low duration (sensitivity to interest rates) and high coupon rates.

Exposure to Hammerson PLC (5.875%, 2036) detracted from performance as 12-year tenors underperformed amid new issues. A perpetual callable bond issued by Development Bank of Latin America and the Caribbean (6.75%, callable 2030) detracted from performance amid uncertainty over U.S. trade. Another detractor from performance was a perpetual callable bond issued by JPMorgan Chase & Co. (6.5%, callable in 2030).

Softness of the Canadian dollar, especially against European currencies, contributed to performance. Weakness in the Japanese yen detracted from performance.

Portfolio activity

U.S. Treasuries were increased and U.S. Treasuries and Spanish government bonds were sold to manage the Fund’s duration.

Outlook

Having passed the peak of post-global financial crisis valuations for credit markets, the sub-advisor is more cautious and focused on security selection. The sub-advisor expects the financials sector, particularly global banking groups, to perform well. Interest rates are likely to stabilize in Europe, and 2026 could see discussions about hiking interest rates. The sub-advisor expects further interest-rate cuts in the U.S. and the U.K., where the cutting cycles began after Europe.

In the U.S., the Fed is more divided than ever, leading to the possibility of a change in outlook. Fed Chair Jerome Powell's mandate is expected to end in May 2026. For this reason, the sub-advisor believes there will likely be curve movements, not necessarily because the economy requires them, but because of political factors.