• With recent contemplation of economic exceptionalism giving way to re-emerging concerns of stagflation, the S&P 500 Index posted its worst quarter since 2022, while gold stocks helped Canadian equities deliver gains.
• The Strategy’s defensive positioning led to outperformance in the quarter as stocks deemed as higher-risk sold off during the period while defensives were the destination for investors’ flight to quality.
• It is our view that in an investment climate of uncertainty, where investors are forced to contemplate predictability, fundamental valuations, balance sheet characteristics and capital allocation, we are well-positioned.

With recent contemplation of economic exceptionalism giving way to re-emerging concerns of stagflation, the S&P 500 Index posted its worst quarter since 2022, declining 4.4% in Canadian dollars. The pullback was largely attributable to the average Magnificent Seven stock being down 16% for the period. The benchmark S&P/TSX Composite Total Return Index fared better with a 1.5% return, largely attributable to the outperformance of the gold sub-industry in the materials sector, which was up 34% and is approaching 10% of the Canadian benchmark.

The ClearBridge Canadian Dividend Strategy’s defensive positioning supported outperformance in the quarter versus the benchmark as those equities and sectors deemed as higher-risk sold off during the period while defensives were the destination for investors’ flight to quality. Top-performing holdings for the period included Toronto-Dominion Bank (TD), Franco-Nevada, TMX Group and Agnico Eagle Mines, and weaker securities included Canadian National Railway, Alimentation Couche-Tard (ATD) and Open Text.

The Strategy outperformed in this environment helped by our overweight to TD, which materially outperformed the sector and all other banks, as its share price recovered from relative weakness in 2024 on anti-money-laundering fines, regulatory monitoring and asset restrictions. In addition to accelerating its CEO transition in January, TD announced in February that it would sell its entire equity investment in Charles Schwab and use the proceeds to buy back up to 5.7% of its outstanding shares, add over 100 bps to its already strong CET1 capital ratio, and invest in the business to drive organic growth.

In utilities, a large overweight to the sector and relative strength within it contributed to performance with the robustness and predictability of regulated utility returns increasingly attractive in an uncertain environment. Utilities have benefited from lower interest rates, but their predictability seems equally, or more important in the current environment. In the sector we exited Hydro One on strength in the quarter.

An underweight to the exceptionally strong materials sector detracted, meanwhile, though Agnico Eagle Mines and Franco-Nevada were strong contributors on underlying commodity price strength. Relative weakness from our materials underweight was more than offset by an underweight to the underperforming information technology (IT) sector.

In consumer staples, we trimmed our position in Metro due to its recent strength, while we added to ATD on weakness. ATD shares have come under pressure since the company’s proposal to acquire Seven & i Holdings, parent of 7-Eleven, a global convenience store operator with dominant market positions in Japan and the U.S. ATD possesses an enviable track record of successfully consolidating convenience store networks across key global jurisdictions, significantly fortifying its competitive stance while extracting outsize synergies in the process. Recent share weakness, in our opinion, has provided an opportunity to add to a business that has historically compounded strong shareholder value over time.

In energy, we eliminated our remaining position in Topaz Energy on continued strength in favor of adding further to a recently established position in Pembina Pipeline at what we believe to be very attractive prices, especially given its strong predictable cash flows and solid track record for capital deployment.

It is our view that in an investment climate of uncertainty, where investors are forced to contemplate predictability, fundamental valuations, balance sheet characteristics and capital allocation, we are well-positioned. These considerations have been the cornerstones of our approach for decades. Our investment process is uninterrupted by market turbulence. We instead look to market volatility opportunistically, to seek out price dislocations where we believe we are being compensated for risk.

The ClearBridge Canadian Dividend Strategy outperformed its S&P/TSX Composite TRI benchmark during the first quarter. On an absolute basis, the Strategy generated gains across six of nine sectors in which it was invested (out of 11 sectors total). The top-contributing sectors were the materials, utilities and energy sectors, while IT was the main detractor.

On a relative basis, stock selection and sector allocation contributed to outperformance. In particular, stock selection in the financials, energy and utilities sectors, an IT underweight and a utilities overweight supported relative results. An underweight to materials detracted.

In terms of individual securities, the top contributors to absolute returns were Toronto-Dominion Bank, TMX Group, Franco-Nevada, Agnico Eagle Mines and AltaGas. The main absolute detractors were Bank of Nova Scotia, Royal Bank of Canada, Open Text, Alimentation Couche-Tard and Brookfield Infrastructure Partners LP.