1. Introduction and Market Context
Although the path was uneven, global equity markets produced positive results during the second quarter of 2026. Markets entered April cautiously due to concerns related to the conflict in the Middle East. Energy prices rose meaningfully through the first quarter and into April, which reignited inflation fears and prompted a broad de-risking across asset classes. However, a powerful recovery followed once a memorandum of understanding was announced and signed in mid June. As a result, most major indices finished the period at or near their highs. For investors focused on full-period results, the second quarter was a strong one. The turbulence in the middle months was real, but it proved temporary.
The composition of returns matters as much as their direction. Leadership across most markets was narrow and concentrated. In the United States, a significant portion of the small-cap market’s gains came from biotechnology and life science companies, where acquisition activity and speculative rerating drove outsized returns, and from a small cluster of artificial intelligence momentum names. In international markets, gains were similarly concentrated in semiconductor equipment and a handful of large-cap technology names. Quality-oriented, profitable businesses—the consistent focus of Pembroke’s investment process across all mandates—participated in the recovery, but did not lead this particular phase.
Monetary policy decisions differed across the major central banks. The Bank of Canada held its policy rate at 2.25% for the fifth consecutive meeting. The June statement acknowledged a genuinely two-sided path: a deterioration in trade conditions could require cuts, while a sustained energy price shock could require the opposite. The U.S. Federal Reserve also held rates unchanged through the quarter and adopted a more cautious tone. The institution removed the prior expectation of a 2026 rate cut and signalled that the inflation implications of the energy shock warranted patience. As for the European Central Bank and Bank of Japan, they tightened policy in June. For Pembroke’s strategies, monetary policies were not a material constraint. The businesses held across mandates are not dependent on rate relief to execute on their long-term growth plans.
On a year-to-date basis through June 30, the first half of 2026 produced a range of outcomes across Pembroke’s strategies, with the degree of absolute return reflecting both the market environment specific to each mandate’s opportunity set and the particular portfolio construction decisions. The sections below address each strategy in turn.
2. Canadian Equity Strategies
Canadian equities increased during the second quarter, delivering positive year-to-date results through June 30. The primary drivers of the market’s gain were the financial sector, where the major banks and large life insurers recorded extraordinary appreciation, and AI-and data-centre-linked industrial names. As for gold, it retreated meaningfully from its first-quarter highs as the safe-haven premium that had supported precious metals earlier in the year unwound in a risk-on environment. Overall, outside of financials and the AI infrastructure themes, returns across the Canadian market were more varied.
Pembroke’s Canadian equity mandates are all built around quality businesses with durable competitive advantages and visible long-term earnings potential, selected through bottom-up fundamental research. The absolute results delivered across the three Canadian strategies in the first half of the year reflect the earnings progress of those businesses and the specific portfolio decisions.
The Pembroke Canadian Growth Strategy delivered a solid double-digit positive absolute return year-to-date. Performance reflected meaningful contributions from holdings in power infrastructure, satellite manufacturing and advanced materials. These businesses were identified through the team’s bottom-up research process well before the AI and data-centre capital cycle became a consensus theme.
The team was also active in managing the portfolio during the period, harvesting gains in holdings that had appreciated to their full valuation and redeploying capital into what it views as the next layer of opportunity within the Canadian small- and mid-cap universe. The strategy’s long-term absolute return record remains strong, and the team retains high conviction in the underlying businesses and the depth of the research pipeline.
The Pembroke Canadian All Cap Strategy delivered a low-single-digit positive absolute return year-to-date. The strongest absolute contributions came from the portfolio’s aerospace and defence exposure, where new contract awards and accumulating execution milestones drove substantial appreciation; energy holdings, which benefited from both operational performance and the acquisition of a portfolio company at a meaningful premium; and financial services positions. These gains were partially offset by absolute declines in the portfolio’s software and technology services holdings, where valuation multiples compressed as investors continue to reassess the long-term competitive implications of artificial intelligence for business models. A collision-repair holding also faced a cyclically soft operating environment.
During the period, the team was active, exiting positions where conviction has diminished and redirecting capital toward what it views as more attractively priced opportunities, including engineering services, copper and industrial auction businesses. Overall, the investment theses across the portfolio’s core holdings remain intact. The team sees the current valuation of many of its key titles as favourably positioned relative to their long-term earnings potential.
Lastly, the Pembroke Dividend Growth Strategy delivered a strong double-digit positive absolute return year-to-date, representing one of the stronger outcomes across Pembroke’s mandates in the period. The strategy’s mandate, focused on businesses that generate durable dividend income from internally generated cash flow without reliance on capital markets, proved well suited to the investment environment. Meaningful contributions came from holdings in the industrial services, financial services and materials sectors.
The team exercised disciplined capital management throughout, exiting positions where exceptional price appreciation had compressed yields below the level consistent with the income mandate. It also initiated new positions in businesses with attractive income profiles and long-term growth prospects. The strategy’s multi-year absolute return record continues to track ahead of its stated long-term objective.
3. U.S. Equity Strategies
U.S. equity markets delivered strong absolute results during the second quarter, and positive returns year-to-date in Canadian dollar terms. A notable feature of the period was a pronounced rotation away from the mega-cap technology concentration that has defined the last few years, with capital broadening into small and mid-sized companies. The team views this shift as an early signal of a more durable change in market leadership after an unusually extended large-cap cycle.
Pembroke’s U.S. mandates invest in profitable, growing businesses. The fundamental progress of the underlying portfolio companies through the first half was strong: revenue and earnings growth across the portfolios are running above the broader market, free cash flow generation is healthy and balance sheets are conservatively financed. The team’s conviction in the long-term earnings power of its holdings has not changed. The absolute returns delivered in the first half were driven by that earnings progress. It was most visible in the portfolios’ data-centre and AI-infrastructure holdings, where demand continues to exceed expectations.
The Pembroke U.S. Growth Strategy delivered a high-single-digit positive absolute return year-to-date. The largest absolute contributions came from the strategy’s holdings serving the artificial intelligence data-centre build-out, including commercial HVAC, thermal management and power semiconductor businesses. Order growth, margin expansion and multi-year demand visibility drove substantial share price appreciation. Holdings in government services, freight and consumer end markets also contributed positively.
These gains were partially offset by a modest decline of housing-adjacent holdings in a soft residential construction environment, and by absolute declines in the strategy’s software positions. Valuation multiples compressed across this sector amid investor concern about the long-term competitive implications of artificial intelligence for business models.
The team reduced this exposure during the period, exiting positions where conviction on competitive durability had diminished. Capital was redeployed into secularly growing businesses across industrials, government services, healthcare and consumer sectors. Overall, the team is confident in the outlook for its core holdings over the second half of the year.
The Pembroke Concentrated Strategy delivered a solid double-digit positive absolute return year-to-date. The strategy’s construction—a smaller number of higher-conviction holdings drawn from the same opportunity set as the Pembroke U.S. Growth Strategy—amplified the contribution of its largest positions. The portfolio’s core data-centre and industrial holdings were the dominant drivers of the result: thermal management and commercial HVAC positions delivered exceptional absolute gains as demand for data-centre cooling continued to exceed expectations, and a power semiconductor holding contributed meaningfully.
The team made notable additions to its highest-conviction ideas during the period, including a substantial increase in an aviation parts and logistics business with long-dated contractual revenues, while exiting software positions facing structural uncertainty. Absolute declines among housing-adjacent distribution holdings were modest in the context of the portfolio’s general result. The team views the portfolio as well positioned for the second half of 2026.
4. International and Global Equity Strategies
International developed market equities delivered positive results in the second quarter, with most major markets recovering from a mid-quarter selloff driven by the energy price spike, finishing the period near multi-year highs. On a global scale, markets followed a similar pattern, with mega-cap leadership shifting toward AI beneficiaries. European equities proved broadly resilient, while Japanese equities continued to benefit from improving corporate governance and sustained earnings momentum. However, the yen’s historically weak level against major currencies created a translation drag for Canadian-dollar investors.
Third-party research tracking market breadth also shows that strong headline returns in international markets have been generated by an unusually small number of contributors. The team regards this breadth compression as a potential precursor to broader market participation, which would favour the quality-growth businesses held across Pembroke’s mandates.
The Pembroke International Growth Strategy recorded a low-single-digit absolute negative return year-to-date. This performance follows a challenging first quarter in which significant multiple compression across the strategy’s quality-growth holdings weighed heavily on results despite strong underlying fundamental performance. The second quarter produced a meaningful recovery, with holdings in precision instrumentation, power infrastructure and energy management delivering strong absolute gains as the market recognized the earnings trajectory and competitive positioning of those businesses.
The team made selective adjustments during the period, initiating positions in a UK-based safety and sensing compounder and in a European payment technology platform, while exiting holdings where the risk-reward profile has become less favourable. The strategy’s allocation to Japanese equities was increased to its highest level since Pembroke took over managing the strategy, reflecting the quality of the underlying businesses and the view that improvements in corporate governance and shareholder returns represent a structural rather than a cyclical dynamic. Overall, the investment theses across the portfolio’s core holdings remain intact and the team retains conviction in the long-term earnings potential of the businesses.
The Pembroke Global Growth Strategy produced a low single-digit positive absolute return year-to-date. The first quarter was challenging as several mega-cap technology stocks that had led the global market in recent years declined at the same time as geopolitical concerns weighed on global equities. The second quarter produced a strong recovery as the portfolio’s artificial intelligence-related holdings drove substantial absolute gains. The largest contributors were a European semiconductor equipment manufacturer that occupies an essential position in the advanced-chip supply chain, a semiconductor intellectual-property licensor that was initiated as a new position during the period, and a large-cap and cloud-computing platform whose results exceeded expectations.
During the period, the team initiated positions in power semiconductors, freight, payment technology, and a global consumer franchise with a durable royalty-income model. The team also exited holdings in luxury goods, medical technology and data services, as there was less upside at the prevailing valuations. Two of the portfolio’s largest technology holdings were trimmed as they appreciated beyond the team’s valuation targets. Position sizes across the portfolio are continuously ranked on a risk-adjusted upside basis. This is the same bottom-up discipline that Pembroke applies to all its strategies. The team believes the portfolio is well positioned as global market leadership continues to broaden.
5. Balanced Strategies
Pembroke’s balanced strategies demonstrated the value of holding diversified exposure to multiple asset classes during a quarter in which the path of markets proved volatile. The combination of equity, fixed income and real asset allocations moderated the impact of mid-quarter geopolitical volatility, while preserving meaningful participation in the recovery that followed.
The equity portion of the Pembroke Canadian Balanced Strategy is managed in accordance with the Pembroke Dividend Growth Strategy and served as the primary driver of the mandate’s equity results during the period. Year-to-date, the equity allocation delivered a strong positive absolute return, consistent with the outcome described in the Canadian equity section. As for the fixed income allocation, it delivered a positive absolute contribution year-to-date, supported by income generation, tightening credit spreads and strong results from select corporate credit positions.
The Pembroke Global Balanced Strategy delivered a mid-single-digit positive absolute return year-to-date, reflecting contributions from both the equity and fixed income allocations. The equity component, diversified across Pembroke’s Canadian, U.S. and international mandates, as well as several broad-based Exchange Traded Funds, generated positive results that reflected the strength of AI-adjacent and quality industrial holdings across geographies. This was partially offset by the challenging first quarter experienced by the international equity allocation. The fixed income component also contributed positively to the year-to-date absolute return.
Lastly, over the past six months, the strategy’s allocation to gold, which is held within the real asset portion of the balanced structure, behaved as intended, stabilizing the portfolio. It made a meaningful, positive contribution in the first quarter, when geopolitical uncertainty was at its peak. It then gave back some of these gains in the second quarter, as risk appetite recovered and the safe-haven premium in precious metals unwound.
6. Fixed Income Strategies
The fixed income backdrop in the first half of 2026 was shaped by central banks holding policy steady amid elevated inflation. While the U.S. Federal Reserve followed this trend, held rates unchanged and adopted a more cautious tone, the new Fed chair curtailed the statement released after rate-setting meetings, removing the forward guidance that has historically signalled the Fed’s next move to markets. This change may increase volatility in the Treasury market.
Given the borrowing needs of the U.S. Treasury, any additional premium demanded by investors could put the government’s fiscal situation under pressure. Heavy bond issuance by the large technology companies to fund AI and data-centre investment may also crowd out other borrowers, including the government.
As for the Bank of Canada, it maintained its overnight interest rate at 2.25% in June, citing financial conditions that have loosened on higher equity prices and tight credit spreads. Canadian Gross Domestic Product (GDP) also rebounded quickly from a technical recession early in the year, though housing activity declined and business investment remains weak amid uncertainty related to the United States-Mexico-Canada Agreement. Canadian inflation remains elevated at 2.8%, driven by higher energy and food prices.
The Pembroke Corporate Bond Strategy delivered a low-single-digit positive absolute return year-to-date. Key contributors included a position in a Canadian construction company, which more than doubled year-to-date, and a first-lien 2029 issue of a major Canadian airline. Limited Recourse Capital Notes also generated strong returns as credit spreads tightened. In addition, following issuers’ decisions not to redeem these securities at their initial call dates, coupons were reset at significantly higher levels for the subsequent five-year period.
The primary detractor was the portfolio’s allocation to a vehicle rental company, where both the unsecured and first-lien secured notes declined amid weak used-vehicle prices, additional capital issuance late in the period and ongoing operational challenges. The strategy’s shorter duration also meant it participated less fully in the appreciation of long-term bonds as long-term interest rates declined.
The portfolio remains conservatively positioned, with nearly half of assets in AAA/AA-rated securities, the majority of which are government bonds, including federally guaranteed National Housing Act Mortgage-Backed Securities (NHA MBS). The strategy maintains a duration of approximately four years, well below that of the broad bond market, while keeping an exposure to select well-structured high-yield issues and ample liquidity to capitalize on future credit opportunities.
The Pembroke Canadian Bond Strategy delivered a low-single-digit positive absolute return year-to-date. Limited Recourse Capital Notes issued by a major Canadian life insurer were a strong contributor, benefiting from the same spread-tightening and coupon-reset dynamics noted above. A long-duration bonds of a major Canadian airport authority also contributed, as declining long-term yields combined with spread tightening to drive prices higher.
The portfolio’s duration ended the period at approximately six and three-quarter years, slightly shorter than the broad market, which moderated its participation in the strong performance of longer-duration securities. With corporate credit spreads trading well inside historical averages, the strategy maintains a conservative positioning emphasizing high-quality, liquid investments, including AAA-rated Government of Canada bonds and NHA MBS. Such a defensive foundation preserves flexibility to capitalize on future credit opportunities as they emerge.
7. Strategy Roles Within a Portfolio
Each Pembroke strategy is designed to fulfil a specific function within a diversified portfolio.
Canadian equity strategies can be used as a core holding in a portfolio, providing exposure to Canadian companies and their domestic and international economic growth as well as, in many cases, to a reliable dividend income stream. These strategies aim to deliver long-term returns by investing in high-quality companies.
U.S. equity strategies expand the opportunity set by providing access to the world’s largest equity market. These strategies focus on high-quality growth companies and add diversification through exposure to sectors and business models that are less common in Canada.
International and global equity strategies further enhance diversification by investing across Europe, Asia and other regions. They provide exposure to varied economic cycles and secular growth trends, helping to reduce reliance on any single market.
Balanced strategies can also be used as a core holding in a portfolio. They aim to capture the full range of market capitalization and to achieve diversification, providing a steadier investment experience.
Fixed income strategies can be used either to balance an equity portfolio or to generate income.
Together, these strategies are designed to complement one another. They are all managed using a consistent, long-term approach with the aim of delivering disciplined, risk-aware growth that is aligned with investors’ financial goals.