April 2026
TABLE OF CONTENT
1. Introduction and Market Context
2. Canadian Equity Strategies
3. U.S. Equity Strategies
4. International And Global Equity Strategies
5. Balanced Strategies
6. Fixed Income Strategies
7. Strategy Roles Within a Portfolio
1. INTRODUCTION AND MARKET CONTEXT
The first quarter of 2026 unfolded in two distinct stages. Equity markets began the year in positive territory, and central banks appeared to have reached a period of monetary stability. That constructive backdrop gave way in late February, when the outbreak of conflict in the Middle East reshaped the quarter.
The conflict triggered a global energy price shock, reignited inflation concerns and prompted a broad de-risking across equities. By quarter end, it had become the defining event of the period, affecting markets across geographies and investment styles.
Major central banks responded with caution rather than action. The Bank of Canada held its policy rate at 2.25% at both its January and March meetings. Its March statement noted that the conflict had lifted energy price volatility, tightened financial conditions and raised risks to both growth and inflation.
The U.S. Federal Reserve and the European Central Bank similarly held rates unchanged, with each citing the conflict as a new source of material uncertainty. The direction of monetary policy was unclear, and equity markets found this difficult to price.
Overall, the key differentiator of quarterly returns was not stock selection, but index composition. Benchmarks with meaningful exposure to energy and materials—the beneficiaries of the oil price surge—outperformed. Quality growth strategies with little exposure to these sectors faced a structural headwind that was largely independent of the underlying businesses.
This distinction provides important context for evaluating the quarter’s results across Pembroke’s strategies. It also underscores why we continue to encourage investors to focus on long-term results rather than any single quarter.
2. CANADIAN EQUITY STRATEGIES
The S&P/TSX Composite Total Return Index advanced approximately 3.9% in the quarter. This result reflected the index’s resource-heavy composition as much as the health of the Canadian economy. Energy and materials were the primary drivers of the benchmark’s gain, supported by rising commodity prices in the wake of the Middle East conflict.
Gold-related equities contributed early in the quarter, though gold gave back a portion of its gains in March as sentiment shifted. Outside of commodity-linked sectors, returns across the Canadian market were broadly neutral to negative.
This composition effect created a headwind for Pembroke’s Canadian equity strategies. Our mandates are built around quality growth businesses with durable competitive advantages and visible earnings, characteristics that are found more commonly outside of commodity producers. The underperformance of Pembroke’s Canadian strategies relative to the index was driven primarily by this allocation difference, rather than by any deterioration in the underlying portfolio companies. The majority of holdings continued to perform in line with or ahead of expectations.
The Pembroke Canadian Growth Strategy generated a low-single-digit positive absolute return during the quarter, but trailed its benchmark. The primary driver of relative underperformance was the strategy’s structural underweight to energy and materials, which together were the two strongest-performing areas of the index. However, stock selection was beneficial within the sectors the strategy does own.
The team added modestly to energy exposure late in the quarter through companies with attractive underlying economics that do not depend on elevated commodity prices. New positions were initiated across communications, energy, healthcare and defence-adjacent industrial businesses, reflecting the breadth of the team’s bottom-up research. The strategy’s multi-year absolute return record remains solid, and the team retains conviction in the long-term earnings potential of its holdings.
The Pembroke Canadian All Cap Strategy recorded a mid-single-digit negative absolute return and underperformed its benchmark during the quarter. As with the Canadian Growth Strategy, the primary driver was the underweight to energy and materials, which together accounted for the bulk of the benchmark’s gain.
Industrials represented the most notable area of relative weakness within the sectors the strategy owns. Performance there reflected a combination of macro-driven multiple compression and company-specific developments at select holdings, where near-term earnings visibility temporarily narrowed. Management teams at these companies continue to affirm their medium-term targets, and the investment theses remain intact.
The team made selective adjustments during the quarter, including adding to energy names at attractive valuations and to defensive positions intended to improve portfolio balance across scenarios. An underweight to information technology, which was among the weaker areas of the benchmark, provided a partial offset to the commodity-linked headwind.
The Pembroke Dividend Growth Strategy delivered a low-single-digit positive absolute return during the quarter, trailing its benchmark modestly. The underperformance reflected the same structural factor evident across Pembroke’s other Canadian strategies: a meaningful underweight to energy and materials. This was partially offset by the strategy’s underweight to information technology, which underperformed during the period, and by positive stock selection within Industrials.
The strategy’s design, focused on income-paying businesses with durable competitive positions and visible cash flow profiles, provided relative stability in a volatile environment. The multi-year absolute return record remains ahead of the strategy’s stated long-term objective, with three- and five-year compounded returns consistent with the discipline of the investment process. New positions initiated during the quarter spanned a range of sectors, consistent with the objective of owning a diversified group of businesses capable of growing their dividends over time.
3. U.S. EQUITY STRATEGIES
The Russell 2000 Total Return Index, in Canadian-dollar terms, delivered a low-single-digit positive return during the first quarter of 2026. The composition of that return was concentrated. Energy, materials and defensive sectors led, while growth-oriented areas of the index, including technology and software, faced renewed pressure.
That pressure reflected the combination of geopolitical uncertainty, recession concerns, and continued questions about the long-term competitive implications of artificial intelligence for software business models. Quality and profitability factors, which typically provide some protection in periods of market stress, did not outperform as investor sentiment rotated toward hard assets and defensive exposures.
The U.S. Federal Reserve held rates unchanged at both its January and March meetings, with its March statement acknowledging that the implications of the Middle East conflict for the U.S. economy were uncertain, a departure from the more confident tone of prior quarters. In general, the environment was a challenging one for active growth managers invested in the U.S. small-cap universe.
The Pembroke U.S. Growth Strategy recorded a high-single-digit negative absolute return during the quarter and underperformed its benchmark by a notable margin. Performance was affected by two related forces. First, the strategy’s growth orientation was a headwind in an environment where energy and materials drove the bulk of benchmark returns. The strategy carries minimal exposure to either sector.
Second, residual software exposure, which the team has been reducing in recent quarters, continued to detract as valuations in that category compressed further. The team took additional steps during the quarter to reduce software exposure, redeploying capital into what it views as secularly growing cyclical businesses. These are companies with structural growth drivers across industrial, healthcare services and infrastructure-related end markets.
The team views the geopolitical shock as a temporary rather than structural disruption, and the underlying growth trajectories of these cyclical businesses remain intact. The strategy has tended to perform well on days when geopolitical sentiment improves and risk appetite recovers, a fact the team views as a constructive signal about positioning for recovery.
The Pembroke Concentrated Strategy* delivered a low-single-digit negative absolute return during the quarter, faring better than the U.S. Growth Strategy in both absolute and relative terms. The more resilient outcome reflected the strategy’s positioning in its highest-conviction holdings, where the larger-weighted names demonstrated greater relative stability. Core industrial positions contributed the most to this differentiation, performing well on both an absolute and relative basis.
As with the U.S. Growth Strategy, software-related exposure was a headwind and the team continued its program of reducing weight in this category. Selective additions were made to positions where recent price weakness created more attractive entry points relative to the team’s long-term assessment of value. The Concentrated Strategy’s mandate—to own a smaller number of higher-conviction stocks drawn from the same opportunity set as the broader U.S. Growth Strategy—means that results in any given quarter reflect a narrower set of drivers.
*Also known as the Pembroke Select Strategy
4. INTERNATIONAL AND GLOBAL EQUITY STRATEGIES
The MSCI Europe, Australasia and Far East (MSCI EAFE) Net Total Return Index, in Canadian-dollar terms, was broadly neutral during the first quarter of 2026. The headline figure concealed pronounced dispersion at the country and sector level.
European markets, which account for the majority of the index, faced headwinds from the region’s energy import sensitivity and from the combination of rising inflation expectations and slower growth that the Middle East conflict introduced. The European Central Bank and the Bank of England both held rates in March, each noting that the conflict had created new upside risks to inflation and downside risks to growth.
By contrast, Japanese equities delivered positive returns in local-currency terms, supported by improving corporate sentiment and continued monetary accommodation from the Bank of Japan. The Japanese yen traded at historically weak levels against major currencies, a dynamic that affected the Canadian-dollar returns of yen-denominated holdings. However, the team views this as an opportunity as currency normalization eventually proceeds.
The Pembroke International Growth Strategy recorded a double-digit negative absolute return during the quarter and underperformed its MSCI EAFE benchmark by a wide margin. The source of underperformance was not fundamental deterioration in the portfolio companies, as the majority of them reported results in line with or ahead of expectations. Rather, it was a broad compression of valuation multiples across the growth-oriented businesses the strategy owns. Companies with exposure to luxury goods, technology consulting and software verticals, saw particularly sharp derating as investor sentiment rotated toward commodity-linked and defensive exposures.
Reflecting long-term conviction in the portfolio, the team made selective additions during the quarter, consolidating exposure toward its highest-quality positions, while exiting holdings where the risk-reward profile had become less compelling. The strategy also increased its allocation to Japanese equities to its highest level since inception, reflecting both confidence in the underlying businesses and the view that the yen, at historically weak levels, offers a potential source of incremental return over time.
Overall, the investment theses for the companies in the portfolio remain intact. The team views the current disconnect between valuations and the quality of the underlying businesses as an opportunity for patient, long-term investors.
The Pembroke Global Growth Strategy recorded a high-single-digit negative absolute return during the last quarter, while underperforming its MSCI World benchmark by a wide margin. The source of underperformance was structural rather than fundamental. The strategy’s large-cap growth mandate carries minimal exposure to the energy and materials sectors that drove benchmark returns. It also has meaningful exposure to the three sectors that de-rated most severely: Information Technology, Consumer Discretionary, and Healthcare. Together these sectors accounted for the overwhelming majority of the shortfall, each detracting approximately two percentage points on a relative basis.
Partial offsets came from positioning in Materials and Consumer Staples, where holdings benefited respectively from the positive commodity backdrop and the rotation toward defensive assets. As for currency effects, they were a modest positive. Overall, most of portfolio companies continued to deliver fundamental results in line with or ahead of expectations. The team views the dislocation as a consequence of a temporary geopolitical shock rather than a structural change in the earnings power of the underlying holdings.
5. BALANCED STRATEGIES
Pembroke’s balanced strategies demonstrated the value of diversification during a quarter in which individual asset classes and geographies delivered uneven results. The combination of equity, fixed income and real asset exposure moderated the volatility experienced within the equity allocations, illustrating the role that balanced mandates are designed to play within a client’s overall portfolio.
The Pembroke Canadian Balanced Strategy recorded a low-single-digit positive absolute return during the first three months of 2026, trailing its blended benchmark modestly. The equity allocation was the primary driver of the quarter’s absolute return, benefiting from the resilience of the dividend-oriented holdings. These titles delivered a positive result despite the broader headwinds facing quality growth businesses. The fixed income allocation also provided a stabilizing influence, with government bond exposure offering insulation as credit spreads widened during the period.
The modest shortfall relative to the benchmark reflected the same structural dynamics evident across all of Pembroke’s Canadian equity strategies: an underweight to Energy and Materials, which were the dominant contributors to the benchmark’s return. This was partially offset by the defensive characteristics of the bond allocation.
The Pembroke Global Balanced Strategy recorded a low-single-digit negative absolute return during the quarter and modestly underperformed its blended benchmark, which itself returned approximately 0.3% in Canadian-dollar terms. The result reflected the challenging environment faced by the strategy’s underlying equity holdings across all geographies, which was partially offset by the stabilizing influence of the fixed income and real asset allocations.
The MSCI All Country World Index component of the blended benchmark declined modestly in Canadian-dollar terms during the quarter. The Canadian bond component was roughly flat, consistent with the rate-hold environment maintained by the Bank of Canada. Lastly, the strategy’s gold allocation performed well early in the quarter as investors sought hard-asset protection, contributing positively to relative resilience.
The Pembroke Global Equity Strategy recorded a low-single-digit negative absolute return during the last period and underperformed its blended benchmark. The strategy is implemented through a combination of Pembroke’s underlying equity strategies, together with supplementary passive exposures to Canadian, U.S., international and emerging-market indices. Its performance is therefore the aggregation of drivers discussed elsewhere in this commentary.
The principal sources of relative underperformance were the allocations to Pembroke’s growth-oriented mandates, most notably the International Growth, Global Growth, and U.S. Growth strategies. Each of which underperformed its respective benchmark for the reasons set out in the preceding sections. Offsetting contributions came from the allocation to the Dividend Growth Strategy, which generated a positive absolute return. The strategy’s passive allocations to the S&P/TSX 60, MSCI EAFE and MSCI Emerging Markets indices also delivered positive returns in Canadian-dollar terms.
6. FIXED INCOME STRATEGIES
Global bond markets experienced a difficult quarter as the Middle East conflict introduced a new set of risks for fixed income investors. The blockade of the Strait of Hormuz pushed crude oil prices sharply higher, raising concerns about both inflation and economic growth. The most pronounced selling was concentrated in shorter-term yields, reflecting fading expectations for near-term rate cuts from the U.S. Federal Reserve.
The Federal Reserve Chair indicated that the central bank was inclined to hold rates steady and look past the energy shock, while cautioning that the Fed may need to act if rising prices begin to shift public expectations about inflation over time. As for the Bank of Canada, it maintained its overnight rate at 2.25% during its March meeting. The central bank noted that financial conditions had tightened as a result of higher bond yields, lower equity prices and wider credit spreads. Inflation in Canada is also expected to rise due to increases to the price of gasoline in response to the conflict.
The Pembroke Corporate Bond Strategy recorded a slightly negative absolute return during the quarter and underperformed its benchmark modestly. Performance was supported by the strategy’s equity positions in select holdings received through prior credit restructurings, which contributed positively. The portfolio’s significant allocation to federal government bonds also outperformed corporate credit and provided meaningful insulation as credit spreads widened more broadly. In addition, a few Limited Recourse Capital Notes contributed as they approach their first call or reset dates.
Underperformance was driven primarily by a high-yield position in the transportation sector, where increased volatility and widening spreads led to notable price declines. A shorter-than-benchmark duration and an underweight to long-term bonds were modest contributors to relative performance as yields rose.
The strategy continues to be conservatively positioned, with the majority of assets invested in high-quality, investment-grade securities, including a meaningful allocation to federally guaranteed National Housing Act Mortgage-Backed Securities. Duration remains below that of the benchmark, and the portfolio maintains select exposure to well-structured high-yield issues that are attractive from a risk-adjusted perspective. With ample liquidity, the strategy is well positioned to take advantage of future credit opportunities as they arise.
The Pembroke Canadian Bond Strategy recorded a slightly positive absolute return during the first quarter and trailed its benchmark by a narrow margin. Interest rates rose during the period and, while the strategy maintained duration neutrality relative to the benchmark, a modest overweight to long-term bonds had a negative impact on performance. The primary detractors were long-dated positions in the regulated utilities sector, as rising yields and spread widening weighed on prices. Performance was led by a position in a Limited Recourse Capital Note issued by a major Canadian insurance company, which benefited from spread tightening. This position is not a constituent of the benchmark and contributed positively to relative returns.
Duration ended the quarter in line with the benchmark and the strategy remains positioned conservatively given that corporate spreads are inside historical averages. The emphasis is on high-quality liquid instruments, including AAA-rated Government of Canada bonds and National Housing Act Mortgage-Backed Securities, which are defensive in nature and provide flexibility to fund future credit opportunities.
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 steady, 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 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.
