Quarterly Review

U.S. Market: Strong on the Surface, Narrow Under the Hood

The U.S. market remains resilient, but the strength is increasingly selective. Equity benchmarks have pushed higher on solid earnings, resilient headline growth and continued enthusiasm around artificial intelligence, yet leadership has remained narrow and heavily concentrated in AI-linked technology, energy infrastructure and other momentum-driven pockets of the market. Beneath the index-level gains, participation has been uneven, with many high-quality companies lagging despite steady fundamentals.

Macro conditions are supportive but far from clean. Consumer demand and capital spending have held up, particularly where AI infrastructure is driving investment, while sticky inflation, tariff effects, energy-price volatility and a more cautious Federal Reserve continue to keep pressure on valuations and bond yields. The result is a market that can still climb, but one that remains highly sensitive to inflation prints, employment data and any shift in rate expectations.

Overall, the setup is best described as a bull market with a narrow engine: powerful, but vulnerable if the AI trade cools or rates move higher. For disciplined investors, that creates both risk and opportunity. The market’s headline strength should not be mistaken for broad health, but the gap between crowded winners and overlooked quality companies could set the stage for a broader and more fundamentally driven advance later in the year.

Canadian Market: Quietly Rebuilding Its Market Leadership

The Canadian market is navigating a mixed but increasingly constructive backdrop: economic growth remains modest as trade uncertainty and softer domestic demand weigh on activity, while inflation is broadly contained near target and the Bank of Canada’s steady policy stance provides some support. At the equity level, the market has shown resilience, helped by strength in financials, energy and materials, even as investors continue to monitor tariff risks, commodity volatility and the health of the consumer.

Portfolio Positioning

The second quarter marked a more favourable environment for the strategy, as market leadership broadened and some of the speculative dynamics that had dominated previous quarters began to ease. The pullback in commodity-related sectors, combined with stronger performance across several areas of the market, allowed the portfolio’s positioning and quality bias to contribute more meaningfully.

The strategy benefited from its disciplined sector allocation and exposure to companies supported by solid operating performance, positive company-specific developments and attractive long-term fundamentals. While certain momentum-driven stocks continued to create short-term distortions within the benchmark, the portfolio remained focused on businesses that meet the team’s established investment criteria.

Overall, the quarter reinforced the value of maintaining a consistent investment approach through changing market conditions. The portfolio remains positioned around high-quality companies with strong balance sheets, sustainable growth prospects and compelling valuations, while avoiding excessive exposure to speculative trends or sectors where prices appear disconnected from underlying fundamentals.

Our significant Q2 contributors to performance:

• Kneat.com was the portfolio’s largest contributor following the announcement of its acquisition by Thoma Bravo at a significant premium, reflecting the strength of its market position, recurring revenue profile and long-term growth potential.
• MATTR Infrastructure Technologies contributed positively as results exceeded expectations, demand improved across several end markets and management communicated a constructive outlook for the remainder of the year.
• MDA Space performed strongly, supported by robust operating results, continued momentum across its core businesses, significant contract wins and increased visibility on future growth opportunities.

Stocks that detracted from our portfolio’s performance were :

• Boyd Group Services detracted from performance as slower same-store sales growth, margin pressure and concerns surrounding the integration of its latest acquisition weighed on investor sentiment.
• Pet Valu declined as softer consumer spending, greater promotional activity and weaker near-term sales expectations overshadowed the company’s continued store expansion and strong long-term competitive position.
• Colliers International Group detracted primarily because of valuation multiple compression related to concerns about potential AI disruption, despite positive underlying business trends and the reiteration of its full-year outlook.

Portfolio Changes

Portfolio activity remained focused on strengthening the quality and long-term return potential of the strategy while responding to significant movements in individual share prices.

New Positions

We initiated new positions in Apotex Health and Groupe Dynamite.

• Apotex is a Canadian-based global healthcare company with operations across generic pharmaceuticals, specialty generics, biosimilars, branded medicines and consumer health. Following its initial public offering, debt repayment strengthened the company’s balance sheet and increased its flexibility to pursue future growth.
• Groupe Dynamite is an omnichannel women’s apparel retailer operating 307 stores in North America and Europe through its Garage and Dynamite brands. The company combines strong operating metrics, significant momentum in the United States, attractive capital returns, free cash flow generation and a strong balance sheet.

Portfolio Positioning

The second quarter proved particularly challenging for the strategy, as the U.S. small-cap market became increasingly narrow, speculative and momentum-driven. Market leadership was heavily concentrated in AI infrastructure, semiconductors and high-beta cyclical stocks, many of which fall outside the portfolio’s established quality, valuation and growth criteria.

Although the portfolio held several high-quality companies benefiting from the expansion of AI infrastructure, these positive contributions were more than offset by pressure on software, IT services and asset-light business models perceived by investors as vulnerable to AI disruption. In many cases, this negative sentiment persisted despite strong operating results, durable competitive advantages and limited evidence of fundamental deterioration.

More broadly, the quarter continued to favour lower-quality and unprofitable companies over businesses with strong profitability and returns on capital. This created a significant disconnect between stock prices and underlying company fundamentals and weighed on security selection across most sectors.

Despite the difficult relative performance, portfolio companies continued to deliver solid earnings growth, healthy margins and strong balance sheets, with many holdings raising their financial outlooks. The investment team therefore does not believe the quarter reflected a deterioration in the portfolio’s long-term return potential or the effectiveness of its investment process.

The strategy remains positioned in high-quality companies with sustainable competitive advantages, attractive growth prospects and reasonable valuations. The team has also continued to manage risk actively, increasing exposure to select beneficiaries of long-term investment trends while reducing positions where concerns surrounding AI-related disruption or near-term execution had become more significant.

Significant contributors to performance in Q2 were:

• DigitalOcean was the portfolio’s largest contributor as accelerating demand for cloud computing and AI-related infrastructure supported stronger growth, improved financial guidance and a significant increase in investor expectations.
• StoneX Group performed strongly as favourable trading conditions, healthy market activity and initial synergies from its acquisition of RJ O’Brien supported exceptional revenue and earnings growth.
• Modine Manufacturing contributed positively following strong operating results, robust demand for its data-centre cooling products and the announcement of a significant multi-year agreement with a major hyperscale customer.

Stocks that detracted from performance in Q2 were:

• Shake Shack detracted after reducing its earnings outlook as higher costs and softer consumer traffic temporarily weighed on margins, despite continued market-share gains and unchanged long-term growth prospects.
• Planet Fitness declined following weaker new-member additions and higher customer churn in certain markets, although the team believes these pressures are temporary and do not impair the company’s competitive position.
• Software and IT services holdings were broadly pressured by investor concerns regarding potential AI disruption, despite generally solid business performance and continued confidence in their long-term competitive advantages.

Portfolio Changes

Portfolio activity remained elevated during the quarter as market dislocations created opportunities to initiate positions in high-quality companies trading below the team’s estimate of intrinsic value.

New Positions

We initiated new positions in Stevanato Group, Badger Meter and Construction Partners.

• Stevanato Group is a global provider of drug containment, delivery and diagnostic solutions serving the pharmaceutical, biotechnology and life sciences industries. Its leading market positions, high regulatory barriers, durable customer relationships and exposure to the growing injectable drug market support an attractive long-term growth profile.
• Badger Meter provides water measurement and management solutions primarily to North American utility customers. The company benefits from a large installed base, recurring replacement demand, increasing adoption of connected metering systems and growing software and service revenues.
• Construction Partners is a vertically integrated infrastructure company focused on road construction, repair and maintenance in the U.S. Sunbelt. Its localized market positions, recurring publicly funded projects and disciplined acquisition strategy provide a long runway for organic and inorganic growth.

Portfolio Positioning

The second quarter was one of the most challenging periods in the strategy’s history, as market performance became heavily concentrated in a small group of AI-related hardware, semiconductor and memory stocks. This narrow and momentum-driven environment strongly favoured thematic exposure over company quality, valuation and long-term fundamentals.

The portfolio was notably underrepresented in the small group of stocks that drove a disproportionate share of the Russell 2500’s return. Many of these companies had grown beyond the strategy’s investable market-cap range or were trading at valuations the team considered difficult to justify given the cyclical and increasingly crowded nature of the AI infrastructure theme.

At the same time, several high-quality software and consumer-oriented holdings remained under pressure despite generally solid operating performance. The team responded by reducing the portfolio’s exposure to software, where uncertainty surrounding the potential impact of AI had created an unusually difficult and unpredictable market environment.

The annual Russell index rebalancing materially reduced the benchmark’s exposure to technology hardware, removing several of the largest AI-related contributors. In response, the team also reduced positions in some of the portfolio’s strongest AI-correlated holdings, where valuations had expanded significantly.

Overall, the portfolio has been repositioned toward a more balanced collection of high-quality businesses with diversified growth drivers, strong competitive positions and attractive valuations. While the strategy remains exposed to several long-term secular themes, the team continues to prioritize sustainable earnings growth and disciplined valuation over short-term market momentum.

Substantial contributors to our Q2 performance include:

• DigitalOcean was the portfolio’s strongest contributor as accelerating demand from early-stage AI companies supported substantial upward revisions to revenue and earnings expectations, although the position was reduced following significant valuation expansion.
• First Advantage performed strongly as investors began to recognize the strength of its proprietary data, successful acquisition integration and potential to benefit from growing fraud-prevention needs.
• StoneX contributed positively, supported by continued market-share gains, accretive acquisitions and strong growth in earnings and book value.

Significant detractors from performance:

• Shake Shack detracted following reductions to its financial outlook as softer traffic, higher input costs and elevated management turnover weighed on near-term earnings visibility.
• Planet Fitness declined sharply after lowering its growth expectations because of weaker new-member additions and weather-related disruptions, although the team continues to view its franchise model and long-term growth prospects favourably.
• Option Care Health was pressured after reducing its full-year sales outlook as uncertainty surrounding drug pricing and patient treatment choices affected its chronic therapy segment.

Portfolio Changes

Portfolio activity during the quarter focused primarily on reducing risk in areas affected by uncertainty surrounding AI disruption and redeploying capital toward businesses with more diversified growth drivers.

New Positions

We initiated new positions in Primoris Services, Gates Industrial, Option Care Health and CSW Industrials.

• Primoris Services provides infrastructure services across utilities and energy markets. The position was initiated following significant share-price weakness related to project execution issues in its renewables business, which created an attractive entry point as new leadership works to improve contract discipline and project controls.
• Gates Industrial is a global manufacturer of highly engineered power transmission and fluid power solutions. The company benefits from leading market positions, recurring replacement demand, margin expansion opportunities and exposure to several attractive industrial end markets.

Portfolio Positioning

The second quarter delivered strong absolute returns across the portfolio, with gains broadly distributed across regions and individual holdings. However, relative performance was challenged by an exceptionally narrow market in which a small group of companies linked to semiconductors, memory and AI infrastructure accounted for a disproportionate share of benchmark returns.

Against this backdrop, the portfolio continued to follow a barbell approach. On one side, the strategy maintained exposure to credible, long-term beneficiaries of the AI investment cycle, particularly in less crowded areas of the physical supply chain such as infrastructure services, industrials, water solutions and mining technology. On the other, the team selectively added to high-quality companies that had been broadly categorized as AI losers despite maintaining strong competitive positions and attractive long-term prospects.

The strategy remains cautious toward areas where earnings expectations are being driven primarily by shortages, pricing and speculative positioning. The preference continues to be for companies whose growth is supported by volumes, market-share gains, recurring capital requirements and diversified end markets.

Overall, portfolio performance remained closely aligned with the earnings growth of the underlying businesses rather than broad multiple expansion. The team believes the strategy is well positioned to benefit from a gradual broadening of market leadership, while continuing to manage concentrated thematic risk without compromising its quality or valuation discipline.

In Q2 2026, key portfolio performers included these names:

• DigitalOcean contributed strongly as accelerating AI-related cloud demand supported improved growth expectations, although the position was reduced following significant valuation expansion.
• StoneX performed well as elevated volatility across currencies, commodities and interest rates supported strong customer activity across its diversified global platform.
• Badger Infrastructure Solutions contributed positively through higher fleet utilization, disciplined execution and growing demand linked to infrastructure, utilities and data-centre construction.

While among detractors, we can mention:

• EPAM Systems remained under pressure as investors continued to question the long-term impact of generative AI on traditional IT services, while slower discretionary spending limited near-term revenue growth.
• Shake Shack detracted as investors became more cautious about consumer traffic, cost pressures and the company’s ability to balance unit expansion with sustained profitability.
• Vital Farms declined following a sharp fall in conventional egg prices, which increased promotional pressure, weakened margins and materially reduced the visibility of the company’s long-term financial outlook.

Portfolio Changes

Portfolio activity during the quarter focused on expanding exposure to differentiated long-term growth opportunities while reallocating capital away from positions offering less attractive prospective returns.

New Positions

We initiated new positions in CCC Intelligent Solutions, Gates Industrial, Imdex, Kurita Water Industries and Kulicke & Soffa Industries.

• CCC Intelligent Solutions provides a cloud-based platform connecting participants across the U.S. property and casualty insurance ecosystem. Its deeply embedded workflows, proprietary data and expanding AI-enabled capabilities support a durable competitive position and attractive long-term growth potential.