Q3 2025 Fund Commentary

Market commentary

In the third quarter of 2025, global equities rose as trade tensions eased. Investor enthusiasm for artificial intelligence (AI) benefited growth stocks and the information technology sector. The S&P 500 Index rose 8.1% supported by strong earnings and a resilient economy. The U.S. Federal Reserve Board cut interest rates for the first time since 2024, which also supported equity performance.

European equities lagged, with Germany underperforming, though France and the U.K. saw gains. Asia outperformed, led by Chinese and Taiwanese tech stocks, and Japanese equities benefited from a weaker yen, a U.S.–Japan trade deal and ongoing reforms.

Performance

The Fund’s overweight exposure to Sony Group Corp., Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and Legrand SA contributed to performance. Sony Group reported positive results driven by its gaming business, particularly third-party software sales. TSMC posted a 45% year-over-year increase in U.S. dollar revenue driven by demand for AI and high-performance computing technologies. Legrand’s performance was driven by financial results, data centre growth and mergers and acquisitions activities.

Overweight exposure to London Stock Exchange Group PLC, RELX PLC and QBE Insurance Group Ltd. detracted from performance. London Stock Exchange fell amid concerns over AI disruption and management comments around increased competition driving pricing pressure. RELX shares sold off, driven by AI concerns and potential caps on publishing fees by U.S. federal agencies. QBE Insurance Group was affected by weak financial results, and the company facing challenges with pricing.

At a sector level, stock selection in consumer discretionary and real estate contributed to performance. Stock selection in financials and consumer staples detracted from performance.

At a regional level, selection among emerging markets and the Pacific Rim contributed to performance. Stock selection in the U.K. and continental Europe detracted from performance.

Portfolio activity

The sub-advisor added Nintendo Co. Ltd. based on its intellectual property portfolio and opportunities for expansion into movies, theme parks and digital platforms. Iberdrola SA was increased because the sub-advisor expects it to outperform European utilities, driven by strong earnings in the U.K., Brazil and Spain. It also has made investments in renewables and networks and is exposed to favourable regulatory environments.

Seven & i Holdings Co. Ltd. was sold amid uncertainties in its Japanese and U.S. convenience store businesses and slowing sales growth. It also has sensitivity to gasoline profits in the U.S. segment and the outcome of acquisition negotiations with Alimentation Couche-Tard Inc. is unclear. Air Liquide SA was reduced for valuation considerations.

Outlook

The Fund ended the period with underweight exposures to continental Europe and Japan, and overweight exposures to the U.K. and emerging markets. At the sector level, the Fund held underweight exposures to health care and materials, and overweight positions in financials and consumer discretionary.

The sub-advisor believes volatility experienced year-to-date is likely to persist. Amid high market concentration, regional diversification is important to reduce the risk of overdependence on the fortunes of tech and the broad U.S. market. With the implications of U.S. tax and tariff policies on inflation and growth still uncertain, a diversified portfolio is important to protect against volatility.

With valuations above long-term averages, investors are pricing in accelerating growth driven by fiscal stimulus and an AI-induced productivity boom, while inflation remains moderate. While earnings growth from the U.S. is expected to be resilient, uncertainty around trade and U.S. policy is leading to delayed investment by businesses and households. Meanwhile, Europe has implemented fiscal support, which could boost growth prospects. Underneath the geopolitics, the sub-advisor believes the global economy is changing, bringing consequences for the distribution of growth and, potentially, inflation.

The sub-advisor expects global profits to rise around 8.6%, with earnings growing across the major industry groups in every region. There is a gap between growth for the “Magnificent 7” stocks and the rest narrowing. It is worth noting that U.S. information technology sector valuations still reflect expectations for over 23% earnings growth from the sector. Any company forecast that indicates these expectations may be too high could cause more volatility.