Q2 2026 Performance Commentary

SOF returned +3.03%  during the quarter as both investment-grade and high yield credit spread continued to tighten.   

Q2 was marked by a sharp shift from geopolitical stress and energy-driven inflation concern toward a more constructive environment for high-quality fixed income. Rates markets diverged across regions as US yields moved higher, particularly at the front end, as stronger data and a more hawkish policy backdrop pushed markets to price a less accommodative Federal Reserve path. Canadian yields were more stable to modestly lower, reflecting weaker domestic growth and a softer inflation backdrop and European rates were mixed, with front-end yields easing while longer maturities remained constrained by inflation risk, policy uncertainty, and heavy sovereign supply. 

Credit markets were notably resilient throughout the quarter. Investment-grade and high-yield spreads tightened across North America and Europe, supported by strong inflows, healthy corporate fundamentals, attractive all-in yields, and the easing of energy-related tail risks. Other key market themes included the ongoing AI infrastructure buildout, heavy new-issue supply from technology and data-center-related borrowers, persistent dispersion across issuers and sectors, and rising scrutiny toward lower-quality borrowers in consumer-sensitive and more levered parts of the market.  

From a credit return standpoint, financial issuers were the largest contributors during the quarter, led by banks, insurers, consumer finance credit providers. Consumer-related issuers also contributed meaningfully, particularly airlines and consumer services, supported by resilient demand and lower energy-related concerns later in the quarter. Communications and TMT exposures added to performance as AI infrastructure and data-center-related themes remained important drivers of market activity, while real estate positions benefited from spread recovery and strong carry. The portfolio’s hedging overlay detracted as credit spreads tightened and risk assets rallied, but it remains an important source of downside protection given tight valuations and ongoing macro uncertainty. 

Investment-grade credit markets were notably resilient throughout the quarter. Spreads remained near historically tight levels despite elevated rates, substantial new-issue supply, and ongoing macro uncertainty, supported by strong demand for quality all-in yield, healthy corporate fundamentals, robust institutional flows, and the gradual easing of energy-related tail risks. Key market themes include the ongoing AI infrastructure buildout, heavy issuance from technology and data-center-related borrowers, curve steepening pressure from long-dated supply, persistent dispersion across issuers and sectors, and rising scrutiny toward lower-quality and highly levered borrowers. 

From a credit return standpoint, financial issuers were the largest contributors during the quarter, led by banks and diversified financials across the US, Canada, and Europe. Communications and TMT exposures also contributed meaningfully, supported by positions linked to media, telecom, and AI infrastructure themes, while real estate, consumer, ABS, technology, energy, and auto exposures added to performance through a combination of spread tightening and carry. The Fund also benefited from its higher-quality bond exposure and North American duration positioning. The hedging and macro overlay detracted modestly as spreads tightened and risk assets rallied, but remains in place for downside protection given tight IG valuations and ongoing macro uncertainty. 

From a credit risk perspective, the Fund reduced exposure into the April rally, then selectively rebuilt investment-grade risk as market technicals improved and all-in yields remained attractive. Additions were focused on higher-quality IG opportunities across financials, Canadian communications, technology, data-center and AI-infrastructure-related issuers, utilities, infrastructure, and select consumer and real estate names where spread compensation remained compelling. The portfolio also used index hedges and synthetic credit exposures actively to manage downside risk while retaining most of its single-name short positions. Exposure to lower-quality, more levered, or supply-heavy parts of the market was managed more selectively.  

Geographically, the portfolio became more CAD-weighted on a net basis by quarter-end, while maintaining meaningful USD exposure and selectively adding EUR and GBP relative-value opportunities where yields and new issue concessions were attractive. Tenor remained deliberately focused on the front end and belly of the IG curve, rather than long-dated bonds where heavy issuance created a less favourable technical backdrop.  

Within credit, investment grade spreads tightened across both Canadian and US markets despite heavy Q2 supply, which was well absorbed by strong demand from all-in yield-driven investors. The Strategy’s high-conviction positions in Canadian and US banks, including Morgan Stanley, RBC and CIBC, as well as select consumer and AI-related issuers such as Ford and Oracle, contributed positively to returns. 

The Strategy derived positive returns from movements in credit spreads and changes in the risk-free rates in non-CAD markets. Every credit position in the Strategy delivered positive total returns, led by bank and telecom issuers, along with contributions from consumer, healthcare, and real estate issuers. 

STIP delivered strong total returns during the quarter, supported by both interest rate and credit spread exposure. Rate-driven gains were led by the portfolio’s Canadian duration exposure, which outperformed other developed market government interest rates. Credit returns were broadly balanced across CAD- and USD-denominated holdings, as the portfolio maintained limited exposure to European-domiciled issuers. 

Domestic and global systemically important bank exposures drove returns, benefiting from spread compression as financial issuers outperformed industrial counterparts. Positions in CAD-denominated bonds of energy and utility-related issuers also generated positive returns, led by sizeable holdings in the OMERS and Bruce Power affiliated investment trust, BPC Generation Infrastructure, and Maple bonds issued by the French government-owned utility, Électricité de France. 

USD-denominated media and technology holdings also contributed positively as spreads rebounded over the quarter. The portfolio remained active in AI-related credit, where elevated dispersion across hyperscaler debt stacks continues to create alpha-generating opportunities. For example, we were a significant participant in Amazon's record-setting Maple bond issuance, where the AA-rated issuer's credit spreads priced wider than the broader BBB-rated investment grade index. We believe these positions offer compelling medium-term value as investors continue to absorb AI-related supply and issuer-specific fundamentals reassert themselves.

Geographically, the portfolio remains tactically underweight European credit, where we believe compensation is limited relative to downside risks. We continue to favour Canadian exposures, along with idiosyncratic opportunities in US credit sectors not available domestically, particularly media and technology. Sector positioning remains tilted toward high-quality financials, although bank exposure was trimmed following relative outperformance. The portfolio continues to emphasize higher-quality holdings, with above-average allocations to AA- and A-rated securities, largely comprising high-quality AI hyperscaler debt, and only ~2% in high yield, which consists of BB-rated corporate hybrid debt from issuers rated investment grade at the senior security level

AGB generated strong returns during the quarter, benefiting from both the rally in US credit spreads and lower short-term Canadian interest rates. Performance reflected the Fund’s targeted positioning across regions and risk factors, favoring US credit exposure supported by stronger fundamentals and issuer-specific catalysts, alongside Canadian duration exposure backed by a softer domestic economic backdrop.  

Financial issuers were the largest contributors to performance, led by senior and subordinated debt of domestic and global systemically important banks. Subordinated debt issued by high-quality European financial institutions also contributed positively, along with relative-value positions in select UK-based banks, where the portfolio rotated into more attractively priced credit instruments to capitalize on pricing dislocations across issuers' capital structures. 

USD-denominated media and technology issuers were notable contributors as spreads rebounded significantly over the quarter. More specifically, the portfolio remained active in AI hyperscaler-related credit, ranging from the historic Maple bond issuance from Amazon and Google to direct data center-related debt. Many of these deals are trading at spreads wider than the broader BBB-rated investment grade index, despite being issued by borrowers of significantly higher quality. We believe these positions offer compelling medium-term value as investors continue to absorb AI-related supply and issuer-specific fundamentals reassert themselves. 

Positions in domestic telecoms, including USD-denominated corporate hybrid exposures in Rogers, contributed positively, as did positions in select EUR- and CAD-denominated real estate issuers. Active trading in new issues from a special-purpose vehicle established by healthcare issuer Humana and a EUR-denominated Ford bond also added to credit returns. 

Credit exposure increased modestly throughout the quarter, albeit from low levels, as we benefited from favorable market dynamics. However, the portfolio remains well below its long-run averages in credit leverage, focusing instead on relative value and idiosyncratic trades in lieu of broad exposure.  

Geographically, the portfolio legged into US credit opportunities at quarter-end, our preferred market given its supportive structural drivers. The portfolio continues to exhibit an up-in-quality bias, remaining predominantly investment grade with an above-average allocation to AA- and A-rated securities. Lastly, we increased the portfolio’s hedging overlay quarter-over-quarter alongside the modest uptick in long credit exposure, enabling the investment team to express high-conviction ideas while maintaining downside protection.

ACOF generated strong credit returns, driven by high-quality BBB, BB, and B-rated credit exposures, resulting in notable outperformance relative to passive high yield strategies. Specialty financials within consumer finance were among the largest contributors, along with select positions in debt issued by BDCs, where the portfolio tactically increased exposure when spreads widened and subsequently monetized as spreads rallied back toward local tights. Similarly, the portfolio participated in a broad rally in US regional bank exposures, particularly subordinated debt. 

Returns were also supported by a strong rebound in BB- and B-rated REIT exposures, particularly positions in Vivion, a European commercial real estate (CRE) company with a high-quality portfolio of German office properties and UK-based hotels. The portfolio’s positions in both Vivion’s senior secured and subordinated debt rallied by 4-6 points, benefiting from improving credit sentiment following successful refinancing initiatives, shareholder capital support, and continued stabilization in its property portfolio. 

Other contributions were well diversified across industrials, energy, and communications. For example, high yield debt issued by airport operators and select airlines performed exceptionally well, as did the portfolio’s multi-instrument investment in debt related to CD&R’s acquisition of Sealed Air, including first lien USD and EUR secured bonds, first lien USD term loans, and USD senior unsecured bonds. Lastly, positions across SoftBank’s USD-denominated senior debt stack and EUR-denominated hybrid securities, which offered FX-adjusted all-in yields exceeding 10.5% early in the quarter, rallied strongly and finished as the portfolio’s largest single-name contributor. The portfolio’s diversified hedging overlay detracted from performance as risk premia compressed and risk assets rallied; however, we remain committed to maintaining downside protection given elevated valuations and ongoing macro uncertainty.

We believe the portfolio’s more conservative positioning leaves it well placed to capitalize on future dislocations and attractive investment opportunities. In the meantime, we remain focused on delivering investors a differentiated source of return that complements traditional fixed income, equity, and private asset allocations.