Q2 2026 Fund Commentary

Commentary and opinions are provided by Connor, Clark & Lunn Investment Management.

Market commentary

Canadian equities delivered a strong quarter. As tensions in the Middle East eased, investor attention shifted from geopolitical risk toward resilient U.S. economic data, continued enthusiasm for artificial intelligence (AI) investment and strong corporate earnings. These factors supported gains even as the domestic economy stayed sluggish, and the market advanced mainly on stronger earnings expectations rather than a broad expansion in valuations.

Market leadership reflected the improving backdrop, with cyclical sectors outperforming. The financials sector led the market higher, helped by banks. The energy and materials sectors lagged as lower oil and precious metals prices weighed on Canada's resource sectors, and defensive sectors also underperformed as risk appetite improved.

Performance

Security selection in the industrials sector contributed to performance, helped by overweight positions that performed well. Security selection in the financials sector also contributed, notably underweight positions in an asset manager and an insurance company.

MDA Space Ltd. contributed to the Fund's performance. The aerospace and defence company, which provides satellite systems, robotics and space-based technologies, benefited from better-than-expected first-quarter results, supported by continued execution and a substantial pipeline of space and defence opportunities. Hammond Power Solutions Inc. also contributed to performance. The maker of dry-type transformers and power-quality solutions for industrial and AI-infrastructure customers reported a strong first-quarter result and a growing backlog.

An underweight allocation to the financials sector detracted from performance.

Kraken Robotics Inc. detracted from the Fund's performance. The marine technology company, which provides sonar systems, subsea batteries and underwater robotics for defence and commercial customers, announced new battery orders and progressed its Covelya acquisition, although these were offset by a broader contraction in valuations across defence technology. An underweight position in BlackBerry Ltd. also detracted, as the software company delivered consecutive quarterly beats on strength in its QNX and secure communications segments.

Portfolio activity

The sub-advisor added Apotex Health Corp., participating in the company's initial public offering because of its defensive growth profile and valuation ahead of a wave of branded-drug patent expiries in North America. The sub-advisor increased TC Energy Corp., one of North America's largest energy-infrastructure companies, because its contracted and regulated cash flows offer a defensive profile and its secured backlog supports earnings visibility. The sub-advisor sold Metro Inc. because of concern about an ongoing labour dispute at its Quebec produce distribution centre and the earnings risk from continued traffic loss. The sub-advisor reduced Canadian Imperial Bank of Commerce because capital-markets revenue is guided lower in the second half and Canadian consumer credit has softened, reallocating capital toward higher-conviction holdings in the sector.

Outlook

In the sub-advisor's view, the outlook remains constructive. Manufacturing activity has strengthened, labour markets are healthy, inflation expectations have eased modestly and earnings estimates continue to be revised higher in both Canada and the U.S. The sub-advisor believes equity markets may continue to trend higher if they are driven by earnings growth rather than expanding valuations, and as long as the U.S. Federal Reserve Board (Fed) stays on hold. Tariff-related inflation has stayed concentrated in goods, while services and housing inflation have remained relatively contained, which supports the sub-advisor's view that the Fed could remain on hold through 2026. The main risk the sub-advisor sees is a renewed rise in inflation expectations that pushes long-term rates higher and weighs on valuations.

In positioning the Fund, the sub-advisor has looked for opportunities in areas that have lagged, increasing exposure to transportation companies as improving U.S. manufacturing activity has historically supported stronger freight volumes, and adding select defensive businesses to temper the portfolio's cyclicality. The sub-advisor reduced positions in companies benefiting from higher defence spending after a strong run and continued to reduce exposure to businesses it believes face challenges from AI adoption.