1. Introduction and Market Context
The third quarter was shaped more by the focus on the bond market than by company results. Long-term interest rates rose in every major economy. Yields increased to their highest levels in many years, pushed by an energy-driven inflation scare, heavy government borrowing and a coordinated turn towards tighter policy from the U.S. Federal Reserve, the European Central Bank and the Bank of Japan. Ongoing uncertainty in the Middle East also resulted in volatile oil prices, which ended the quarter higher than at the start. Furthermore, during the period, market leadership narrowed to a small group of sectors and very large companies.
Beneath the headlines, corporate earnings remained strong and expectations for earnings growth continued to increase. However, multiple compression resulting from investor anxiety offset these positive fundamentals. As for quality-oriented companies, which are the consistent focus of Pembroke’s investment process, they continued to underperform compared to more momentum-driven parts of the market. As always, we encourage investors to evaluate results over full-market cycles rather than focusing on any single quarter.
2. Canadian Equity Strategies
Canadian equities rose slightly in the quarter, but the gains were concentrated in just two sectors: technology and materials. Most other sectors declined. Rising yields put pressure on growth stocks, dividend payers and other areas sensitive to interest rates, and the Bank of Canada indicated that its period of interest rate cuts was coming to an end. Canada–U.S. trade talks also broke down in late August, while the government moved to accelerate resource and infrastructure projects, a tailwind for many domestic businesses.
The Pembroke Canadian Growth Strategy declined by a low-single-digit percentage in the quarter, resulting in a low-double-digit gain year to date. Holdings in advanced materials and power transformer manufacturing were the standout contributors this year. Last quarter’s decline largely occurred in July, when a sell-off in critical minerals and AI-linked stocks affected several holdings, some of which recovered in September. From a risk management standpoint, the team took profits in a few large winners and added new positions in energy services, mining services and industrial niches that are positioned to benefit from Canada’s resource and infrastructure agenda.
The Pembroke Canadian All Cap Strategy declined by a low-single-digit percentage in the quarter and has performed modestly negatively year to date. This result is due to valuation compression across several high-quality holdings, including a flight-simulation business and a utility-pole manufacturer, rather than weakening fundamentals. Contributions came from a Canadian bank and a life insurer, while technology holdings in general led the way during the quarter. The team reduced exposure to financials as valuations became stretched and added an energy infrastructure position. For the first time in the strategy’s history, the portfolio is trading close to the market’s valuation despite higher-quality earnings.
The Pembroke Dividend Growth Strategy also declined by a low-single-digit amount in the quarter, leaving a low-double-digit gain year to date. The strongest contributors were a number of industrial-oriented businesses, including a steel distributor, a trucking and logistics company and a workforce-accommodation provider. All of these businesses have benefited from Canada’s nation-building agenda. During the period, the team added three new holdings in wealth management, insurance and directional drilling. It also exited a consumer health company following its acquisition. In addition, a few positions whose yields had fallen below the strategy’s desired level were reduced.
3. U.S. Equity Strategies
U.S. equity markets were defined by unusually narrow leadership in the quarter. A handful of the very largest technology companies drove the major indices higher, while most of the market declined. During the period, the Federal Reserve raised interest rates for the first time in approximately three years and long-term Treasury yields climbed to their highest level in almost two decades. This combination weighed most heavily on growth-oriented companies. Industrial companies and other stocks sensitive to the economy were among the hardest hit, even though earnings across much of the market continued to grow and valuations compressed.
The Pembroke U.S. Growth Strategy declined by a high-single-digit amount in the quarter, leaving a low-single-digit gain year to date. Contributions came from company-specific developments rather than broad sector strength. Weakness was prevalent across most consumer-oriented businesses and housing-exposed stocks due to rising energy prices and mortgage rates. Turnover was higher than usual, as the team added high-quality companies that have been overlooked by the market’s narrow focus on AI. The team established new positions in healthcare, payments and software companies that it believes are well positioned to benefit from AI. The team also reduced, but did not eliminate, its exposure to the housing sector.
As for the Pembroke Concentrated Strategy, it declined by a high-single-digit amount in the quarter, resulting in a low-single-digit gain year to date. Its concentrated portfolio amplified the strength of its largest technology holdings and the decline of its industrial positions, including a business supplying parts for the aviation industry and a distributor of landscaping supplies. The team initiated positions in a semiconductor controller designer and two different healthcare businesses, while exiting a few housing-related holdings.
4. International and Global Equity Strategies
Developed international markets posted modest gains, led by energy and banking stocks rather than quality growth businesses. The European Central Bank raised interest rates in response to rising inflation in the eurozone, while the Bank of Japan lifted its policy rate to its highest level in three decades, with Japanese bond yields reaching multi-decade highs. In Japan and Europe, gains were concentrated among a small group of large AI-related companies, while the yen remained weak against the Canadian dollar.
The Pembroke International Growth Strategy increased by a low-single-digit percentage in the quarter, reducing its year-to-date decline to a low single digit. A Japanese legal technology platform more than doubled in value during the quarter, as investors recognized its potential as an AI beneficiary. Holdings in helmet safety technology and Japanese consulting also contributed to the increase. However, a scientific-instrument maker affected by U.S. research-funding cuts, a luxury-goods company and an energy-technology business detracted from performance. The team added to a payments platform and a UK safety technology business, trimmed a semiconductor equipment holding and exited an eyewear company. Overall, Japan remains the strategy’s largest regional overweight.
The Pembroke Global Growth Strategy, which invests in large, established businesses across the U.S., Europe and Japan, declined by a low-single-digit amount in the quarter, leaving a low-single-digit gain year to date. The largest U.S. technology platforms were the strongest contributors in the quarter, along with a Japanese consumer retailer, while holdings in aerospace parts and chip design detracted. So far this year, leading semiconductor companies and a Japanese automation-sensor manufacturer have contributed, while holdings in athletic footwear, medical devices and real estate data have weighed on results. During the last quarter, the team initiated a position in a fire and life-safety services business and exited a healthcare holding.
5. Balanced Strategies
The Pembroke Canadian Balanced Strategy declined by a low-single-digit percentage in the quarter, leaving a high-single-digit gain year to date. Its equity sleeve is managed in accordance with the Pembroke Dividend Growth Strategy, which is discussed above.
The fixed income component faced a challenging environment during the quarter as longer-term bond yields rose sharply, putting pressure on bond prices. The strategy maintains a conservative positioning, emphasizing high-quality, liquid securities, while retaining selective exposure to corporate credits offering attractive risk-adjusted returns. With credit spreads remaining tight by historical standards, the team continues to prioritize liquidity and flexibility to capitalize on future opportunities.
The Pembroke Global Balanced Strategy declined by a low-single-digit percentage in the quarter, resulting in a mid-single-digit gain year to date. No active changes were made to the asset mix, with trading limited to rebalancing back to target weights and managing capital flows. As the underlying actively-managed equity strategies are of a similar quality-growth style, they tend to move together. This style was out of favour during the last period. The gold allocation also gave back some of its gains in September, as real yields rose.
The fixed income allocation also faced headwinds as long-term bond yields rose across major developed markets, reflecting persistent inflation concerns and renewed monetary tightening. The portfolio continues to favour a disciplined approach to interest-rate exposure and credit selection, maintaining a defensive foundation of high-quality securities alongside selective corporate credit holdings. This positioning reflects the team’s cautious assessment of current credit valuations and a desire to preserve flexibility as market conditions evolve.
6. Fixed Income Strategies
Fixed income markets experienced a difficult third quarter as long-term government bond yields rose sharply amid persistent inflation concerns, substantial government borrowing requirements and renewed monetary tightening. The U.S. Federal Reserve raised interest rates, citing the resilience of economic activity, business investment and employment. Higher interest rates in Japan also raised concerns about the potential unwinding of the longstanding yen carry trade, prompting intervention by U.S. and Japanese authorities to support the yen and limit disruption in global financial markets.
In Canada, the central bank maintained its overnight interest rate at 2.25%, acknowledging that the rise in longer-term bond yields has tightened financial conditions. Uncertainty surrounding U.S. trade policy also continued to weigh on business investment decisions, while elevated unemployment, persistent inflation and higher energy prices complicated the outlook for monetary policy.
The Pembroke Corporate Bond Strategy recorded a slightly negative return year-to-date, trailing its benchmark by a small margin. The primary detractor was the portfolio’s allocation to a vehicle rental company, where both unsecured and first-lien secured notes declined amid weak used-vehicle prices, additional capital issuance and ongoing operational challenges. These declines were partially offset by strong contributions from a Canadian construction holding, which appreciated significantly during the period, and a first-lien bond issued by a major Canadian airline. Limited Recourse Capital Notes also performed well, appreciating as investors responded favourably to higher coupon resets on securities not redeemed at their initial call dates. The strategy remains conservatively positioned, with 46.8% of assets invested in AAA/AA-rated securities, including government bonds and federally guaranteed National Housing Act Mortgage-Backed Securities (NHA MBS). Its duration of 3.7 years remains below the benchmark’s 5.5 years, while ample liquidity and selective exposure to well-structured high-yield securities preserve flexibility to capitalize on future credit opportunities.
The Pembroke Canadian Bond Strategy declined marginally since the beginning of the year, but outperformed its benchmark slightly. A Limited Recourse Capital Note issued by a major Canadian life insurer was a notable contributor, appreciating during the period, while long-duration bonds issued by a major Canadian airport authority and a toll-road operator also benefited from tightening credit spreads. The portfolio’s duration ended the quarter at 6.6 years, broadly in line with its benchmark. With corporate credit spreads trading well inside historical averages, the strategy continues to emphasize high-quality, liquid investments, including Government of Canada bonds and federally guaranteed National Housing Act Mortgage-Backed Securities (NHA MBS). This conservative positioning provides a defensive foundation and preserves flexibility to take advantage of more attractive 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.