Q4 2025 Fund Commentary

Commentary and opinions are provided by Beutel, Goodman & Company Ltd..

Market commentary

During the fourth quarter of 2025, the Bank of Canada (BoC) reduced interest rates by 25 basis points at its October meeting but kept rates steady at its December meeting. In total, the BoC lowered interest rates four times in 2025, which was supportive for equity markets. Commodity prices were volatile, with gold and precious metals prices sharply higher, while oil prices declined.

The S&P 500 Index was driven by strength in the communication services and information technology sectors and, to a lesser extent, the industrials sector. The consumer staples and consumer discretionary sectors lagged through 2025, while the health care sector had a reversal of fortune in the fourth quarter of 2025, but not enough to offset weakness in the first three quarters of the year. Small- and mid-capitalization stocks fared far worse than their large-capitalization counterparts.

Performance

The Fund’s relative exposures to The Toronto-Dominion Bank (TD Bank), Royal Bank of Canada and Merck & Co. Inc. contributed to performance. TD Bank reported better-than-expected results and announced an additional $6 to $7 billion share buyback program. Royal Bank of Canada delivered strong quarterly earnings driven by capital markets and wealth management strength. Merck reported better-than-expected third-quarter 2025results, with sales increasing 3%.

Relative exposures to Kimberly-Clark Corp., Harley-Davidson Inc. and NetApp Inc. detracted from the Fund’s performance. Kimberly-Clark’s announcement to purchase Kenvue Inc., formerly the consumer health division of Johnson & Johnson, was not well received by the market. This led to a significant share price decline for the company early in November. Harley-Davidson’s earnings forecast was pulled mid-year, leaving expectations for the company uncertain. NetApp reported better-than-expected fiscal results, but investors worried about the company’s margins in 2026 as memory prices have risen.

In Canadian equities, stock selection in the financials, communication services and utilities sectors contributed to the Fund’s performance. Overweight exposure to the utilities sector also contributed to performance. In the U.S., overweight exposure to the industrials sector contributed to performance. Stock selection in the industrials and consumer discretionary sectors also contributed to performance.

Within Canadian equities, stock selection the in materials, information technology and consumer staples sectors detracted from the Fund’s performance. Underweight exposures to materials and information technology sectors and overweight exposure to the consumer staples sector also detracted from performance. In U.S. equities, stock selection in the information technology, communication services and materials sectors detracted from performance.

Among fixed income holdings, duration (interest rate sensitivity) contributed to the Fund’s performance. Overweight exposure to corporate bonds contributed to performance. Yield curve positioning also contributed to performance, as did selection among government bonds. Security selection within corporate bonds detracted from performance, particularly among lower-credit-risk corporate securities.

Portfolio activity

The sub-advisor added to the Fund a holding in Canadian Natural Resources Ltd. for the company’s large and diverse portfolio of low-cost and long-life crude oil and natural gas assets. Existing holdings in AltaGas Ltd., Boyd Group Services Inc., Canadian Apartment Properties REIT, Canadian Pacific Railway Co. and CGI Inc., among others, were increased.

The Fund’s holding in The Interpublic Group of Cos. Inc. was sold after the company was acquired by Omnicom Group Inc. Holdings in Canadian National Railway Co., Sun Life Financial Inc., Amgen Inc. and Merck were reduced.

Outlook

Despite an uncertain macroeconomic environment, the Canadian financials sector was up in the fourth quarter of 2025. Credit provisions taken in the first quarter eased and valuations expanded, reflecting expectations for economic improvement in 2026.

The thematic concentration around artificial intelligence (AI) that has characterized U.S. markets adds to general concentration and valuation concerns. Twelve of the top 20 S&P 500 Index contributors in 2025 were related to AI, accounting for nearly three-quarters of the index’s returns. AI-related gains extended far beyond the top 20. The narrowness of these gains worsens risks for the index.

The outlook for 2026 remains sensitive to the durability of domestic growth, ongoing trade uncertainty and fiscal dynamics. The sub-advisor anticipates an economic soft landing, but the Canadian economy remains vulnerable. Job growth has been limited over the past year, particularly in trade-exposed sectors. At the same time, immigration growth, which was a meaningful boost to demand over the past five years, slowed to zero. The sub-advisor expects the dynamic of slow job growth but contained unemployment to continue over the next 12 months.

Fiscal policy is likely to be a key driver in 2026. In the U.S., the sub-advisor expects the extension of tax cuts and the immediate expensing of certain capital expenditures to provide a stimulative impulse. The sub-advisor anticipates additional policy support as the U.S. 2026 midterm elections approach.