Q1 2026 Performance Commentary

The Iran conflict dominated headlines in March, with uncertainty around the Strait of Hormuz driving a sharp increase in oil prices. This pushed inflation expectations higher and led to a 50-60 bps rise in overnight rates across Canada, the US, and Europe, alongside a broad upward shift in yield curves. Meanwhile, investor sentiment remained influenced by macro headlines, including AI-driven disruption and ongoing stresses in private credit markets, which spilled over into the technology and consumer sectors within public fixed income.

Against this backdrop, both long credit exposure and interest rate duration detracted from performance, with duration becoming a larger headwind toward quarter-end as yields moved higher. Credit hedges, primarily through high-yield CDX indices and equity index put options, performed well and partially offset losses, alongside gains from select CDS short positions. The portfolio’s up-in-quality bias, with over half of assets in investment-grade securities, proved advantageous as lower-quality segments underperformed.

Credit markets experienced a volatile quarter as strong technicals early in the period gave way to a more uncertain macro and geopolitical backdrop. January saw a risk-on tone supported by robust demand and record issuance that was easily absorbed. However, as the quarter progressed, weaker economic data, concerns around AI-driven disruption and private credit, and escalating geopolitical tensions contributed to broader credit spread widening and increased dispersion. By March, a sharp rise in energy prices and short-term inflation expectations drove higher risk-free yields and a more pronounced risk-off tone across markets.

Against this backdrop, both long credit exposures and interest rate duration acted as net detractors during the period, with the latter becoming a more meaningful headwind into quarter-end as yields moved sharply higher amid the escalation in the Middle East conflict. The Fund’s macro hedges and single-name short positions helped limit downside as index-level investment-grade spreads widened 10-20 bps across geographies. 

The portfolio entered the month with a moderate level of risk exposure, with duration at 2.6 years and credit duration at 2.7 years. Over the course of the month, we incrementally increased duration exposure as short-end yields moved higher - particularly in Canada, where we see the upward move as punitive and unjustified - ending the month at 2.9 years. Approximately 2/3s of the fund’s total interest rate exposure is sourced from CAD-denominated securities.

We maintained a similar level of overall credit exposure throughout the month but took the opportunity to rebalance within sectors. Specifically, we reduced exposure to Canadian energy and utilities, redeploying proceeds into areas where we have higher conviction, such as US financials and Canadian communications. From a credit perspective, we continue to prefer USD-denominated issuers, as the deeper and more liquid US market offers a broader set of idiosyncratic opportunities. The strategy remains well diversified across sectors. The portfolio’s yield has reset meaningfully, ending the month at 4.0% - nearly 60 bps higher than a month ago and more than 30 bps above the Index.

Credit markets experienced a volatile quarter as strong technicals early in the period gave way to a more uncertain macro and geopolitical backdrop. January saw a risk-on tone supported by robust demand and record issuance that was easily absorbed. However, as the quarter progressed, weaker economic data, concerns around AI-driven disruption and private credit, and escalating geopolitical tensions contributed to broader credit spread widening and increased dispersion. By March, a sharp rise in energy prices and short-term inflation expectations drove higher risk-free yields and a more pronounced risk-off tone across markets.

Against this backdrop, the Fund’s performance was driven primarily by credit spread widening. Interest rate exposure provided a cushion through much of the quarter as government bond yields declined, partially offsetting credit losses. However, this dynamic reversed into quarter-end, as yields moved sharply higher and rate exposure became a detractor.

From a credit perspective, high-conviction CAD-denominated energy infrastructure issuers were key contributors, including positions in Maple bonds of Électricité de France, alongside active trading within Keyera and BPC Generation Infrastructure Trust debt stacks. US healthcare issuers also contributed positively, led by participation in new issues from Amgen and AbbVie, which offered attractive new issue concessions and performed well in the secondary market. These positions were actively monetized, with proceeds rotated into higher-quality healthcare exposures. While spreads in select technology and communications issuers widened during the period, the investment team remains confident in the underlying fundamentals of these holdings and believes the bonds offer compelling relative and absolute value.

AGB returned -1.26% during the quarter amid elevated volatility across interest rates and credit spreads.

High-yield markets faced a challenging quarter, with spreads widening more than 80 bps from local tights to wides amid a combination of AI-related disruption and private credit contagion concerns, coupled with broader macro uncertainty. February and March were particularly weak, as rising geopolitical tensions drove higher energy prices, increased inflation uncertainty, and a sharp sell-off in risk-free yields. Simultaneously, heavy M&A-driven issuance and persistent outflows created additional headwinds, resulting in the weakest 1-month performance for USD high-yield markets since 2023. Dispersion across sectors and ratings was pronounced, with energy the primary area of strength supported by higher oil prices.

Against this backdrop, the Fund’s gains from select credit positions and hedging activity were offset by broad weakness across high-yield credit markets. Both long credit exposures and interest rate duration acted as net detractors during the period, with the latter becoming a more meaningful headwind into quarter-end as yields moved sharply higher. The Fund’s macro hedges and single-name short positions helped limit downside amid the broad selloff.

From a credit perspective, energy-related exposures were a bright spot, benefiting from supportive commodity dynamics. The Fund’s position in Heavy Metal Equipment – a specialized provider of ultra-class mining equipment serving investment-grade Canadian oil sands operators – realized significant spread compression relative to Canadian B-rated peers. 

The Fund also actively participated in elevated M&A and LBO-related issuance, including Electronic Arts (the largest LBO in history) and Nexstar Media Group’s acquisition of Tegna. These transactions were well absorbed, but represented some of the largest high-yield supply since 2021 and contributed to broader market weakness during the quarter. The portfolio participated across both USD- and EUR-denominated tranches of the Electronic Arts financing and quickly monetized positions following strong secondary market performance. The Fund was also an active participant in the Nexstar transaction and continues to hold the position, which has performed well and has traded more constructively into the second quarter.

The portfolio reduced interest rate duration in late February as yields rallied prior to the escalation in geopolitical tensions. In March, rate cuts were priced out, and rate hikes were priced into Canadian and US markets. We used this opportunity to add duration exposure, primarily by reducing rate hedges to capture higher all-in yields.  While we have high conviction in this exposure in the medium-term, it contributed to modest mark-to-market pressure late in the quarter.