Q1 2026 Fund Commentary

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

Market commentary

Global fixed income markets produced negative absolute returns for the first quarter of 2026. Excess returns were also negative as corporate bond spreads widened across most sectors. Early in the quarter, sovereign bonds were supported by easing inflation trends and stable central bank policy, particularly in the eurozone where inflation had moved toward target levels. However, the market backdrop shifted materially at quarter-end as the escalation of the conflict in the Middle East drove a surge in energy prices and a broad repricing of inflation expectations.

The U.S. Federal Reserve Board (Fed) maintained its federal funds rate throughout the quarter, noting the need to monitor how geopolitical events and energy prices flow through to inflation and economic growth. The European Central Bank held its deposit rate steady, describing its approach as data-dependent, though by quarter-end markets had shifted to pricing in potential rate increases. The Bank of England held its policy rate unchanged as rising energy and commodity prices pushed up household and business costs. The Bank of Japan held its policy rate unchanged but acknowledged the complex mix of inflationary pressure and downward pressure on economic activity from higher oil prices. The Reserve Bank of Australia raised its policy rate amid renewed inflationary pressures. Emerging market debt was positive through the first two months before reversing in March, resulting in negative full-quarter returns.

Performance

Duration and yield curve positioning contributed to the Fund’s performance. An underweight duration posture in several developed markets aided relative performance as sovereign yields increased. The combined effect of sector allocations and security selection was also positive, driven mostly by selection within global sovereigns. Exposure to inflation-protected securities helped as inflation expectations increased.

Currency positioning detracted from the Fund’s performance. Exposure to the Egyptian pound and a short position against the U.S. dollar weighed on performance as the U.S. dollar strengthened and the conflict in the Middle East affected the Egyptian currency.

Portfolio activity

The sub-advisor added agency mortgage-backed securities, moving to a neutral posture as spreads looked more attractive relative to other sectors. The sub-advisor added long-duration exposure in the U.K. because, in the sub-advisor’s view, too many interest-rate increases were being priced into the market. The sub-advisor also added securitized credit where subsectors offered better value.

The sub-advisor closed the Fund’s Zambian kwacha exposure to take profits. The sub-advisor reduced exposure to global investment-grade corporate bonds because spreads appeared too narrow given the risks from a more prolonged conflict in the Middle East. The sub-advisor also shifted the Fund’s duration overweight from South Korea to Singapore, believing the latter would hold up better in a broader regional decline.

Outlook

With the escalation of the Mideast conflict and resulting energy price shock, the near-term outlook for inflation and growth is more uncertain. The sub-advisor still believes there are longer-term factors supporting global economic growth and plans to remain flexible while markets contend with shifting sentiment around a resolution to the conflict. Developed-market sovereign yields climbed as the quarter ended and could decline on growth concerns if the conflict proves more prolonged. However, the sub-advisor believes major developed sovereign yields may continue to face upward pressure over the long term from fiscal spending and growth.

The sub-advisor expects the Fed to keep interest rates unchanged in the near term. Recent data suggest the labour market remains stable while inflation, though moderating, continues to run above target, supporting a cautious approach. Absent an acceleration in core U.S. inflation, interest-rate reductions in the second half of the year may be possible.

On the growth side, U.S. fiscal stimulus may support investment, but larger deficits and heavier issuance could keep pressure on long-term yields. In Europe, modest fiscal expansion may steepen yield curves. Growth momentum in Japan also appears strong, with improving business and consumer sentiment.

Corporate bond spreads widened amid deterioration in the risk environment. Fundamentals, however, have been resilient, and the sub-advisor’s overall view on corporate bonds remains mostly constructive. The sub-advisor doesn’t believe a material change in credit risk exposure is warranted in the near term but plans to remain tactical as valuations change. The sub-advisor views inflation-linked securities as a near-term hedge against potential spikes in oil prices and volatility in interest rates.