Q4 2025 Fund Commentary

Commentary and opinions are provided by Canada Life Asset Management.

Market commentary

Credit markets rose as demand remained robust, supported by high all-in yield levels. Returns were generally positive, with good performance in the fixed-interest asset class. Very high levels of bond supply put pressure on valuations, but new corporate issuance was met with strong demand from investors. High credit demand was further supported by interest rate cuts from the U.S. Federal Reserve Board and the Bank of England.

Geopolitical risks didn’t worsen amid easing global trade tensions, which reduced the prospect of further escalation. Ongoing government debt sustainability concerns put pressure on longer-maturity bonds, particularly in the U.S. and Europe.

In the fall of 2025, the U.S. government shut down for the longest period in history, which caused increased volatility and a reduction in data flows. There were also some concerns around artificial intelligence (AI) capital expenditure and fears of an asset bubble in the technology space. However, credit markets remained relatively resilient.

Performance

Relative exposure to perpetual callable bonds issued by TotalEnergies SE (4.5%, callable in 2034) contributed to the Fund’s performance amid strong demand for corporate bonds. Holdings in Engie SA (5.625% due 2053) and Hammerson PLC (5.875%, 5.875%, due 2036) also contributed to the Fund’s performance. These holdings benefited from falling U.K. gilt yields.

Holding of perpetual callable bonds issued by SCOR SE (5.25%, callable in 2029) detracted from the Fund’s performance as the bonds were affected by profit taking. Other detractors from performance were holdings in U.S. Treasury bonds (0.5%, due 2027) and 2.625%, due 2029). The U.S. government shutdown lowered expectations of additional interest rate cuts.

Exposure to bonds with longer terms contributed to the Fund’s performance as long-term U.K. gilt yields fell after the U.K. government’s budget was introduced in November 2025. Continued demand for corporate hybrid bonds also contributed to the Fund’s performance. Foreign bond returns suffered from general strength of the Canadian dollar, which detracted from the Fund’s performance. Exposure to the Japanese yen detracted from performance as potential future interest rate hikes by the Bank of Japan narrowed following a change in fiscal policies by the new Japanese administration.

Portfolio activity

The sub-advisor added to the Fund holdings in hybrid bonds issued by Verizon Communications Inc. (5.742%, due 2056) and Merck & Co. Inc. (3.75%, due 2055) amid demand for subordinated papers. Holdings of Canadian and Japanese government bonds were increased to manage the Fund’s duration (interest rate sensitivity) and lock in attractive rates.

The Fund’s holdings of Volkswagen AG (3.748%, callable in 2027) and Comcast Corp. (1.875%, due 2036) were sold against the purchases of new issues from Merck and Verizon Communications on relative value grounds. Short-dated bonds issued by NatWest Group PLC (2.105%, callable in 2026) and Banco Santander SA (5.625%, callable in 2030) were sold to roll into new issues at more attractive levels. German bunds and U.K. gilts were sold in the quarter to manage the Fund’s duration.

Outlook

The sub-advisor favours large financial institutions due to their strong profitability and low debt. However, companies powering the AI build out are likely to issue significant amounts of debt to fund infrastructure needs, which could drag on credit markets.

In the sub-advisor’s view, risks for 2026 ahead include high valuations, government debt in the U.S. and Europe, fiscal discipline risks and the potential for inflation to rise. 2026 is likely to require careful asset selection, although the overall economic environment is expected to remain supportive and the risk of a recession is considered low.