Q3 2025 Fund Commentary

Market commentary

Financial markets rose in the third quarter of 2025, supported by enthusiasm for artificial intelligence and expectations for U.S. Federal Reserve Board (Fed) interest-rate cuts.

Bond markets were volatile amid political uncertainty and concerns about fiscal sustainability. U.S. fixed income had positive returns as the ten-year U.S. Treasury yield fell to 4.15%, down from 4.36% last quarter. The 10-year U.K. gilt and German bund yields rose, ending the quarter at 4.70% and 2.71%, respectively, compared to 4.57% and 2.68% last quarter.

Short-term U.S. Treasury yields declined as market focus shifted from inflation risks to concerns about slowing growth and a cooling labour market. In September, the Fed cut interest rates by 0.25%, signaling a willingness to shield the economy from further labour market weakness.

In the eurozone, government bonds declined 0.2% in a period marked by political turmoil in France, which must address a 6% budget deficit. Fitch downgraded France to A+, while upgrading Spain from A- to A+, citing economic strength, balanced growth model and productivity gains. Italy was also upgraded by Fitch to BBB+ with a stable outlook. Growth was sluggish, while inflation rose to the European Central Bank’s 2% target in August.

In the U.K., inflation remained elevated, with services inflation at 5% and wage growth at 4.7%. Activity data was weak and concerns about the fragility of government finances rose ahead of the November budget. This pushed 30-year gilt yields to their highest level since May 1998 and the broader U.K. bond market ended the quarter lower.

In Japan, political and fiscal uncertainties dominated, adding to market volatility. Messaging from the Bank of Japan (BoJ) in September pressured Japanese Government bond yields, while Tokyo core inflation remained above the BoJ’s 2% target.

Performance

The Fund’s overweight U.S. duration (sensitivity to interest rates) contributed to performance in August amid expectations for Fed interest-rate cuts. Underweight exposure to Germany contributed to performance as yields fell amid expansionary fiscal policy and inflation concerns. Overweight exposure to investment-grade corporate credit, eurozone government bond spreads and agency mortgage-backed securities (MBS) contributed to performance. Overweight exposure to Italy contributed to performance, as did exposure to emerging market currencies.

Overweight exposure to the U.K. detracted from performance. U.K. gilts sold off because of lower recession concerns and the Bank of England cutting interest rates in August.

Portfolio activity

The sub-advisor added covered bond positions. Exposure to agency mortgage-backed securities was increased based on attractive yields. Underweight exposure to Japan was eliminated amid lower expectations of monetary policy normalization. Select U.S. dollar and euro positions were reduced.

Outlook

The Fed’s interest rate cuts and upcoming fiscal stimulus, as well as increased spending in Germany and China, are expected to support growth into 2026. Inflation remains above central bank targets, but wage growth is stable for now. Global policymakers are focused on monetary and fiscal accommodation, reducing the likelihood of an economic contraction.

The sub-advisor sees opportunities in global hybrid capital notes, emerging market debt and leveraged credit. The sub-advisor prefers a long-duration bias in U.S. Treasuries and expects further U.S. dollar weakening. As fiscal and monetary stimulus take effect, the sub-advisor expects the low-volatility, high-return environment to persist, and views any market sell-off as a buying opportunity. The resilience of businesses and households, combined with accommodative policy, supports the sub-advisor’s outlook for continued economic expansion into 2026.

The sub-advisor favours diversified income-oriented strategies across corporate credit and securitized markets for attractive yields, while leveraging duration to hedge against risk. The Fund has overweight exposure to U.S. and U.K. duration and underweight exposure to eurozone duration due to divergence in fundamentals and valuations. The Fund has overweight exposure to investment-grade corporate credit as yields are still attractive and earnings so far have been strong. In the eurozone, the Fund has overweight exposure to Italy versus Germany as income remains attractive and fundamentals for Italy remain strong.