Q1 2026 Fund Commentary

Commentary and opinions are provided by Connor, Clark & Lunn Investment Management.

Market commentary

Canadian equities posted a gain over the first quarter, supported by resilient economic data and strong corporate earnings. Sentiment shifted in March as escalating conflict in the Middle East raised concerns about slower growth alongside higher inflation, which reduced risk appetite.

Sector performance diverged during the quarter. Oil-linked industries, including energy producers, energy services and midstream companies, benefited from a sharp rise in oil prices driven by disruptions in the Strait of Hormuz and damage to oil infrastructure in the Middle East. These energy-related sectors were the strongest-performing segments of the Canadian market. In contrast, companies with high artificial intelligence (AI) disruption risk saw declines, with the information technology sector, particularly software, underperforming. Outside of those extremes, defensive sectors modestly outperformed cyclical sectors as risk appetite declined.

Performance

Security selection within the information technology sector contributed to performance, with select overweight holdings performing well relative to the sector’s broader decline. Security selection within the industrials sector also contributed, particularly among mid-capitalization companies.

Kraken Robotics Inc. contributed to the Fund’s performance. The Canadian marine technology company saw record demand for its batteries and continued momentum from its defence and commercial clients. It also completed a stock offering to support the acquisition of Covelya. Spartan Delta Corp. contributed to the Fund’s performance because of better-than-expected production and cash flow from its Duvernay asset, with rising energy prices further supporting its stock.

An overweight allocation to the information technology sector detracted from performance. An underweight allocation to the energy sector also detracted from performance.

An underweight allocation to Canadian Natural Resources Ltd. detracted from the Fund’s performance. Rising oil prices supported the stock’s commodity-linked cash flows and improving capital-return profile. Goeasy Ltd. detracted from the Fund’s performance after the company withdrew guidance and announced a write-down of delinquent loans tied to its LendCare business, which triggered a de-rating of the stock.

Portfolio activity

The sub-advisor added Exchange Income Corp., a diversified company in aerospace, aviation and manufacturing. The company’s resilient aviation platform, defence growth potential and strong cash generation supported the decision.

Suncor Energy Inc. was increased because the company’s integrated structure provides insulation from widening Canadian oil price differentials compared to pure-play producers, and it has consistently exceeded its targets in recent quarters.

Thomson Reuters Corp. was sold because of increased risk that generative AI platforms could erode the company’s long-term competitive advantage in data and analytics products.

The sub-advisor reduced WSP Global Inc. because of downside risk from elevated valuations and ongoing compression across the engineering sector.

Outlook

In the sub-advisor’s view, the base case is that the Middle East conflict may remain contained. If so, inflation effects may be limited, recession risk may stay low to moderate and the broader economic recovery may continue. The main downside risk is a prolonged closure of the Strait of Hormuz or damage to energy infrastructure, which could keep oil prices elevated and weigh on growth.

Trade policy also remains a near-term consideration, though the sub-advisor expects any changes to the Canada-United States-Mexico Agreement to result in modest tariff increases with limited impact on Canada’s outlook.

The sub-advisor has paused further increases in cyclical exposure and added selectively to defensive industries such as telecommunications and grocery retailers. The sub-advisor has also reduced exposure to business models most at risk from AI disruption and increased allocations to commodity-linked sectors, including energy and rare earths, and to companies that may benefit from higher global defence spending.

In the sub-advisor’s view, recent geopolitical events further strengthen Canada’s strategic position. As countries seek secure and reliable supplies of energy, metals and rare earths, Canada’s role as a stable political jurisdiction and net commodity exporter becomes increasingly valuable.