Q3 2025 Fund Commentary

Market commentary

The global fixed-income market rose over the third quarter of 2025. Developed-market yields were mixed, with interest rates falling in the U.S. while generally rising elsewhere. Trade negotiations and questions tied to monetary policy were some of the factors impacting the market.

The U.S. Federal Reserve Board (Fed) cut interest rates 0.25% at its meeting in September. The European Central Bank and Bank of Japan held interest rates steady, while the Bank of England cut interest rates in August. The 10-year U.S. Treasury yield ended the quarter eight basis points lower at 4.16%.

U.S. investment-grade and high-yield credit spreads (the yield differential between securities of similar maturity but different credit quality) narrowed further, leading to positive total returns. Investor demand and falling U.S. yields supported credit markets and kept spreads narrow. Primary markets were active following a slowdown after the U.S. administration’s April tariff announcements, with September issuance in the U.S. high-yield market being the highest on record.

Performance

Security selection within credit contributed to performance driven by a rebound in the high-yield market because of lower interest rates and improved fundamentals. Retail and basic industry exposures contributed to performance as bondholders collaborated with corporate management teams to offer financing solutions. Overweight exposure to U.S. dollar-denominated securities contributed to performance as lower yields in pan-European markets lagged.

Underweight exposure to emerging market bonds detracted from performance. These securities outperformed because of their longer duration (sensitivity to interest rates) profile relative to corporate credit. Underweight duration positioning detracted from performance in a period where U.S. Treasury yields fell and spreads narrowed.

Portfolio activity

In July, Charles River Laboratories International Inc. (4.0%, 2031/MM/DD) was added for its high quality, defensive characteristics and limited debt outstanding. The Fund’s exposures to conservative businesses in retail, health care, financials and industrials were increased. Embecta Corp. (5.0%, 2030/MM/DD) was sold to reduce credit risk. The sub-advisor reduced cyclical exposures, predominately in leisure, and in telecommunications exposures to take profits.

In August, Atlanticus Holdings Corp. (9.75%, 2030/MM/DD) was added, a new issue to pay off existing debt and for general corporate purposes and potential acquisitions. Exposure to U.S. dollar-denominated credit was increased amid strong issuance, stable fundamentals and better valuations. Venture Global LNG Inc. (3.875%, 2029/MM/DD) was sold in favour of better BB-rated investment opportunities. The sub-advisor reduced B-rated credits in favour of BB-rated credits to reduce risk.

Outlook

In the sub-advisor's view, high-yield corporate credit offers higher income with reduced interest-rate risk, stable fundamentals, and a well-diversified backdrop.

A slower labour market led the Fed to cut interest rates. This may move stock valuations higher and credit spreads lower, while leading to declining base rates for loans. Defaults are below historic averages as fixed-rate coupons are serviced with earnings that benefit from inflation, tax reforms and tariff cost pass-throughs to consumers.

However, the market has become increasingly bifurcated across issuer size and quality. More liability management exercises in lieu of bankruptcies allow active managers to receive better economic outcomes relative to smaller-sized investors. Spread and yield have both come in markedly over the year, which should bring higher volatility and wider spreads.