Quarterly Review

U.S. Market: Easing Cycle Resets Investor Sentiment

The U.S. market entered Q3 with a noticeably different tone than earlier in the year. The political turbulence surrounding tariffs and DOGE actions receded, and attention shifted almost entirely to the Federal Reserve’s pivot toward easing. Despite signs of labour-market cooling and a stalled housing recovery, the broader economy proved resilient: consumers continued to spend, inflation moderated, profits held firm, and the AI-driven capex boom remained a powerful contributor to GDP. These conditions supported another strong quarter for U.S. equities.

A notable development was the long-awaited outperformance of small caps, supported by compelling valuations and improving earnings visibility. Meanwhile, AI-related companies continued to attract enthusiasm, even as questions grew about the sustainability of returns on the massive capital being deployed. Still, with rate cuts beginning and economic data stabilizing, the environment for U.S. risk assets remained highly supportive.

Canadian Market: Precious Metals and Small Caps Lead a Powerful Rally

Canadian equities surged in Q3, propelled by soaring precious-metal prices and synchronized strength across small-cap names. Gold reached fresh all-time highs after rising more than 16% during the quarter, while silver climbed over 30%, lifting the materials-heavy TSX Small Cap Index to a robust 20.9% gain—well ahead of the TSX Composite’s 12.5% advance. Despite uneven economic signals, including rising unemployment and a muted GDP recovery, investor sentiment remained firmly positive, supported by falling rates, strong global risk appetite, and increasingly compelling valuations in smaller Canadian companies.

Year-to-date, small caps have now risen more than 36%, extending a leadership trend that began earlier in the year. With inflation nearing the Bank of Canada’s target and further rate cuts likely, the setup for continued small-cap strength remains highly attractive heading into the final quarter of 2025.

Portfolio Positioning

During the third quarter of 2025, the Canadian small-cap market experienced one of the most speculative and distorted environments we have seen in many years. While the TSX Small Cap Index rose approximately +21.7%, our strategy returned +3.6%, resulting in meaningful underperformance. Although disappointing from a relative performance perspective, we believe the drivers of index performance during the quarter were fundamentally misaligned with our investment philosophy.

The quarter was dominated by a powerful resurgence in commodity-driven and speculative trading behavior. Gold and silver surged approximately +16% and +31%, respectively, driving a historic rally in junior mining and precious metals companies. The Materials sector rose roughly +41% and now represents more than 35% of the benchmark, creating a structural headwind for strategies, like ours, that do not participate in capital-destructive mining businesses. Investor flows gravitated heavily toward cannabis, crypto-exposed equities, AI concept stocks, defense names, and heavily shorted securities, all of which we deliberately avoid.

Macroeconomic conditions were mixed. Inflation continued trending toward the 2% target, retail spending remained stable, and housing activity showed signs of resilience. However, unemployment increased above 7%, GDP growth was fragile, and the overall economic environment remained uneven. Despite these realities, market pricing became increasingly detached from fundamentals, supported largely by global rate cut expectations and speculative enthusiasm.

From a factor standpoint, asset allocation detracted approximately 8.9%, primarily due to our underweight in Materials and lack of exposure to Energy. Stock selection detracted approximately 8.7%, as high-quality holdings failed to keep pace with speculative segments of the market. Industrials were particularly challenging, as the sector slowed from +22.6% in Q2 to approximately +5.1% in Q3.

Importantly, the underlying fundamentals of our holdings remained strong. Across the portfolio, companies continued to execute well operationally, with healthy balance sheets, strong free cash flow generation, and improving competitive positioning. We believe this quarter represents another late-cycle environment where speculation temporarily dominated quality, similar to past commodity-driven cycles that ultimately reversed in favor of fundamentals.

Our significant Q3 contributors to performance:

• 5N Plus (+90.3% in Q3, +130.5% YTD) was our largest contributor, benefiting from strong demand for specialty semiconductor materials and continued displacement of Chinese suppliers. The company remains uniquely positioned as a critical non-Chinese supplier to renewable and space-based solar applications.
• AutoCanada (+42.6% in Q3, +80.3% YTD) performed exceptionally well as the company executed against its “Project Elevate” cost reduction plan. EBITDA margins expanded materially, and management announced the divestiture of underperforming U.S. assets, improving both leverage and earnings quality.
• D2L (+31.9% in Q3) rebounded meaningfully after a difficult prior quarter. The company exceeded earnings expectations and raised guidance, while industry disruption following competitor bankruptcies accelerated anticipated market share gains.

These contributors reflected our focus on companies with durable structural advantages, recurring revenue, and improving financial profiles

Portfolio Positioning

During the third quarter of 2025, our U.S. small-cap strategy navigated one of the most speculative and disconnected market environments we have experienced in recent years. While equity markets advanced significantly, the composition of returns was inconsistent with our disciplined, quality-focused investment philosophy. Market leadership was driven by low-quality, narrative-driven segments of the market, creating a difficult backdrop for portfolios built around durable fundamentals.

The macroeconomic environment was broadly supportive. Inflation continued to moderate, consumer spending remained resilient, and corporate earnings proved more stable than feared. Investor sentiment improved sharply as markets increasingly priced in Federal Reserve rate cuts and focused heavily on the acceleration of AI-related capital expenditure. These dynamics contributed to a powerful rally in risk assets and a sharp re-rating of speculative parts of the market.

Small-cap stocks began to outperform large caps, as expected, supported by historically attractive relative valuations, improving earnings expectations, and the early stages of monetary easing. However, the leadership within small caps was highly concentrated in areas that were fundamentally inconsistent with our process — including unprofitable technology, quantum computing, crypto-exposed companies, heavily shorted stocks, biotech, and speculative AI-related names.

Operationally, our portfolio companies delivered very strong results. During the reporting season in late July and early August, we saw excellent execution across our holdings. Approximately 89% of the portfolio exceeded EPS expectations by an average of 18%, while revenue, EBITDA, and EPS grew by roughly 12%, 15%, and 15% year-over-year, respectively. Following earnings, our relative performance versus the Russell 2000 peaked at approximately +450 basis points.

However, as the quarter progressed into September, market behavior became increasingly disconnected from company fundamentals. Security selection became the primary drag on performance, as capital flowed aggressively into lower-quality and highly speculative stocks. Sector allocation also detracted due to our lack of exposure to Energy (+17.8%) and Materials (+24.3%), and a lower weighting in Information Technology (+16%). Despite this environment, we maintained our commitment to owning businesses with strong competitive positions, high returns on capital, and durable earnings power.

Significant contributors to performance in Q3 were:

• Primoris Services (+83%) delivered exceptional performance, driven by strong demand across power delivery, data centers, telecommunications, pipelines, and renewable infrastructure. Management raised full-year guidance and backlog growth remained robust.
• Laureate Education (+37%) performed well following consistent earnings execution and improving investor recognition of its strong positioning in Latin American higher education.
• Installed Building Products (IBP) (+49%) delivered one of the strongest earnings surprises in the portfolio, demonstrating operational resilience and market share gains despite a soft housing environment.
• RadNet (+59%) contributed quickly as the market recognized the quality of its diagnostic imaging platform.
• Additional contributors included Chart Industries (prior to exit), Armstrong World Industries, Federal Signal, and SPX Technologies, all of which generated strong absolute returns during the quarter.

Stocks that detracted from performance in Q3 were:

• Shake Shack (-32%) declined sharply after a strong prior quarter, despite reporting results ahead of expectations and raising EBITDA guidance.
• Iridium Communications (-27%) weakened materially amid growing concerns around satellite spectrum competition and perceived threats from Starlink.
• WillScot Holdings (-22%) was pressured by persistent weakness in non-residential construction and more cautious end-market demand commentary.

We believe the weakness in these holdings was largely driven by market structure and sentiment rather than deterioration in the long-term business fundamentals.

Portfolio Changes

We were highly active during the third quarter, using market volatility to improve the long-term quality of the portfolio.

New Positions

• BrightView, the leading U.S. commercial landscaping services company, attracted by its recurring revenue base, operational turnaround, and consolidation opportunities.
• RadNet, a high-quality diagnostic imaging provider benefitting from long-term secular demand and potential AI-enabled clinical applications.
• SPS Commerce, a mission-critical cloud-based supply chain software platform with strong customer stickiness and network effects.
• EPAM Systems, a global digital engineering and IT services leader, positioned to benefit from long-term enterprise modernization and AI integration.

Portfolio Positioning

During the third quarter of 2025, our U.S. small–mid cap strategy experienced one of the most challenging market environments since the strategy’s inception. The quarter was dominated by extreme speculative behavior, with market leadership driven almost entirely by artificial intelligence-related narratives, quantum computing, crypto-exposed equities, and highly promotional concept stocks. This created a difficult backdrop for a portfolio deliberately constructed around durable fundamentals, profitability, and long-term compounding.

Investor sentiment shifted aggressively toward a “risk-on” posture, particularly in September, as declining interest rate expectations ignited renewed enthusiasm for speculative areas of the market. This environment increasingly resembled the late-1990s technology bubble, with capital flowing indiscriminately toward story-driven companies and away from established businesses with real earnings power. We observed a growing willingness among investors to price cyclical industrial and infrastructure businesses as if they possessed recurring, software-like economics simply because of AI-related exposure.

While the AI buildout represents a meaningful long-term thematic opportunity, we believe current market pricing assumes a degree of profitability and persistence that is unlikely to materialize across much of the speculative universe. At the same time, traditional software companies were broadly de-rated on the assumption that AI would rapidly commoditize their existing business models, a risk we believe remains overstated at this stage.

From a portfolio construction perspective, stock selection was the primary driver of underperformance, particularly within Information Technology, Industrials, and Health Care. Sector allocation was modestly additive, benefiting from our underweight to Consumer Staples and Real Estate and an overweight to Industrials. However, that benefit was overwhelmed by aggressive valuation compression across our holdings.

This was especially frustrating given that underlying fundamentals remained solid. The Q2 reporting season, which occurred during the quarter, was strong across the portfolio. The vast majority of our companies met or exceeded expectations, and very few displayed meaningful deterioration in business quality. Despite this, multiple compression accelerated as capital rotated toward low-quality, narrative-driven stocks.

Within Information Technology, five of our seven holdings produced negative returns, despite solid operational performance. Only PTC and Entegris outperformed the broader technology sector. In Industrials, seven of our twelve holdings underperformed despite steady operational execution, as business services companies with technology exposure were broadly labeled “AI losers.” Despite these challenges, we remain confident that the portfolio is positioned in resilient, profitable businesses with strong balance sheets, and we believe broad indices have become increasingly vulnerable to a correction. The portfolio, by contrast, has become increasingly undervalued.

Substantial contributors to our Q3 performance include:

• Laureate Education (+37%) generated strong returns, benefiting from its leading positions in Mexico and Peru and strong seasonal execution.
• Maximus (+34%) performed well after delivering strong organic revenue growth, margin expansion, and raising full-year guidance.
• Installed Building Products (IBP) (+48%) was one of our strongest performers, delivering results materially ahead of expectations despite ongoing housing market volatility.
• Grocery Outlet (+32%) improved as operational execution stabilized and margins began to recover.

Additional contributors included Construction Partners (+22%), Somnigroup (+28%), Grand Canyon Education (+19%), PTC (+22%), and Armstrong (+~15%).

A number of holdings detracted materially, largely due to valuation compression despite stable fundamentals:

• Shake Shack (-32%) was the largest detractor. The stock declined following cautious near-term messaging, despite the long-term thesis remaining intact.
• WillScot Holdings (-22%) struggled due to continued weakness in non-residential construction and multiple rounds of tempered guidance.
• Euronet (-11%) underperformed despite delivering strong operational results and consistent earnings growth.
• Paylocity (-10%) declined despite beating expectations and raising guidance, as investors focused on perceived AI disruption in payroll and HR software.

Portfolio Positioning

The third quarter of 2025 was a striking reminder of how quickly market sentiment can shift from anxiety to euphoria. Concerns around tariffs and economic slowdown faded rapidly as markets rallied on the back of rate cuts, resilient earnings, and a powerful acceleration in AI-related investment. The result was one of the most powerful six-month recoveries in modern market history, with the MSCI ACWI rising approximately 36% from the April lows, a move comparable only to the rebounds following the Global Financial Crisis and the COVID market trough.

Across geographies, a similar pattern emerged: a broad-based risk-on rally that consistently favored low-quality and speculative assets. While these conditions distorted short-term performance, we view them as creating a unique opportunity to identify mispriced businesses that are quietly compounding value through fundamentals. We continued to focus on those opportunities throughout the quarter.

In the United States, a firm Federal Reserve easing cycle, a resilient consumer, and a major AI-driven capital expenditure boom reignited investor optimism. The recession narrative that dominated earlier in the year was largely priced out as lower inflation and falling yields restored confidence. Small-cap equities finally began to outperform large caps, supported by multi-decade-low relative valuations, improving earnings momentum, and the early stages of monetary easing. However, the tone of the market was uneven. Quality underperformed, while unprofitable technology, AI, and quantum computing themes dominated leadership. While we acknowledge the near-term excitement around AI, we believe there are increasing questions as to whether the staggering capital being deployed will ultimately translate into attractive shareholder returns. History suggests industrial buildouts tend to benefit society well before they benefit shareholders.

In Canada, market distortions were even more extreme. The TSX Small Cap Index rose approximately 21% in Q3, driven by a 41% surge in the Materials sector, as gold and silver rose roughly 16% and 31%, respectively. This commodity-driven momentum, amplified by demand for perceived inflation hedges and U.S. dollar weakness, created one of the most distorted market environments in recent memory. Fundamentals were largely ignored, as capital concentrated in speculative, pre-profitability names across cannabis, crypto, AI, and junior mining.

In Europe, the tone was more sober and gradually constructive. At pan-European investor meetings, we observed evidence that several depressed sectors — chemicals, consumer, and select industrials — have stabilized. Commentary from MedTech, Defence & Aerospace, and Energy Equipment companies was more positive. While tariff uncertainty and currency volatility remain, management teams are responding with operational discipline. We continue to find opportunities linked to European Sovereignty, including digitalization, energy independence, healthcare innovation, and supply-chain resilience.

In Asia, China and broader regional markets outperformed, supported by easing financial conditions and renewed capital inflows. The MSCI China Index rose approximately 20.8% in USD terms, with large technology companies benefiting from AI and recovering consumer demand. Japan’s market reforms and fiscal support improved sentiment, although our domestically oriented Japanese holdings lagged as investors favored exporters. Across Asia, valuation dispersion remains wide, creating attractive conditions for bottom-up stock selection.

From a portfolio perspective, following a very strong second quarter, we delivered a +9.14% return in Q3 and a +21.4% return year-to-date. While we lagged the benchmark by approximately -1.3% in Q3, we are comfortable with the source of this underperformance, as it was driven primarily by exposure we deliberately do not own. Over a quarter of the portfolio delivered returns exceeding 20%, and three holdings were materially re-rated following private equity take-private offers. Europe was a standout region, contributing more than 200bps of relative performance.

In Q3 2025, key portfolio performers included these names:

• JTC plc (+55.9%) benefited from competing take-private interest from private equity firms. The stock moved rapidly toward our estimate of intrinsic value, reflecting recognition of the quality of the underlying business.
• Primoris (+79.8%) delivered exceptional operational performance, beating expectations and materially raising guidance, driven by strong execution and exposure to infrastructure, energy, and data center buildout.
• AutoStore (+56.6%) rebounded sharply as results exceeded expectations after a period of significant derating earlier in the year.

These contributors reflected our focus on high-quality franchises with strong management and long-term compounding potential.