Market Update

February might be remembered as the month the dreams of AI started to turn into a nightmare.  After a few years in which just mentioning AI in a press release would get you a multiple boost, that suddenly flipped. Fears of AI disrupting business models and destroying jobs across the entire economy took over. This was the predominate theme that emerged during earnings season, and it may take a while to go away.

Earnings season has come and gone, overall, with positive results. With multiples near record levels, the only way for equity markets to move higher is for earnings to expand. This has been the main concern for US markets for a few years, and while earnings were strong, share prices often did not have a positive reaction. After years of being the strongest global market led by technology stocks, the future of those business models has come into question, causing a change in leadership. The divergence between winners and losers has been massive and can be seen in the long-awaited sector rotation many have been watching for. Value is finally working, while growth is stuck in the penalty box trying to convince investors AI will not kill their business models.

One recent knock-on effect of these AI fears can be seen in the credit markets. For years, private credit has been expanding at a rapid pace as banks tightened lending requirements, leaving a void for many new businesses. With many of these companies in the technology sector, private credit has become overexposed to software. As multiples of public software companies were adjusted down rapidly, a realization has emerged that many of these private credit funds will have to take markdowns. This has led to a mini run on these funds resulting in several being ‘gated’, meaning no redemptions. Suddenly the volatility of a daily mark to market in public companies does not look so bad. Watch for this story to gain more traction until we get clarity on the underlying business models of SAS and software companies.

But volatility creates opportunity, and one market benefiting from these fears has been Canada. For years, the criticism of the Canadian economy and stock market has been that it is too exposed to commodities and ‘old economy’ companies. But now those are the factors everyone is looking for, and the S&P/TSX is off to one of its best starts in years. Suddenly having a market that is less exposed to technology is not such a bad thing.

Recent developments in the Middle East look to further extend the commodity rally. Investors have become conditioned to ‘buy the dip’. But that might be too easy this time around? There exists a lot of complacency amongst investors who remember other geopolitical events as buying opportunities. The question will be if it is ‘different this time’? That remains one of the most dangerous sayings in investing, but what if energy prices do remain elevated for a few months due to supply concerns? The market has been set up for rate cuts in the second half of the year once inflation subsides. Military action is usually inflationary, add to that the prospects of higher oil prices and rate cutting plans might be pushed back.

Higher geopolitical risk, AI fears and the prospects of sticky inflation are not a great setup for what worked over the last cycle. Yet it might lead the transition towards the next cycle. Gold and silver experienced a fantastic run last year, and while there was some profit taking in February, they could experience a lift given global tensions. The energy sector should also benefit. This group lagged the rally last year but has started to get more attention recently. Higher sustained commodity prices and attractive valuations are leading to an improved flow of funds. Combined with increased power demand, energy is a sector that might return to a leadership position.

The financials have also gained attention led by surprisingly strong bank earnings. The Canadian banks experienced very strong share price performance last year, but given concerns around housing and consumer spending, many have expected a pause. Strength in capital markets and asset management are helping to provide some much needed growth. When the financials, materials, and energy sectors are working, it makes sense that the S&P/TSX will be doing well.

So far, 2026 is building nicely upon the gains of 2025 in most markets. But the divergence between winners and losers is extreme. If you stuck with what worked for the last few years, it has been a very different experience. Under the surface, the sector rotation has been extreme, as AI fears have taken on a life of their own. Adding to that the US/Israel-Iran conflict affecting global trade and commodity supply lines, and the conditions are setting up for an uncertain environment. The Ides of March usually signal increased volatility, and this year that seasonality looks likely to occur.

Performance

The Pender Alternative Multi-Strategy Income Fund returned 1.2%¹ for February and is now higher by 2.2%YTD. The Fund’s blended benchmark returned 0.5%² and 1.2% for the same period.

Returns for the Fund were largely driven by the Pender Corporate Bond Fund (PCBF). The Fund owns PCBF for its total return and opportunistic credit approach which was a key factor in its strong returns for the year. PCBF was up 2.2%³ for the month and is now higher by 4.3% YTD.

For our long/short credit exposure, the Pender Alternative Absolute Return Fund (PAARF), is used to dampen volatility and provide downside protection in choppy markets. PAARF was higher for February by 0.9% and is now positive by 1.3%⁴ YTD. These returns are well within the expected outcome given the return profile of the US market during the month. The Fund’s benchmark returned 0.5%⁵ and 1.6% for the same period.

The market neutral/merger arbitrage exposures through the Pender Alternative Arbitrage Plus Fund (PAAPF) were positive by 0.3%⁶ for February. Now positive by 0.7% YTD. The Fund’s benchmark returned 0.4%⁷ and 0.7% for the same period. Last year was a record year for corporate activity in the United States and the environment looks strong for that to continue in the new year 2026.

Portfolio Positioning

We continue to monitor correlations across the different Fund exposures and will introduce additional asset classes or make tactical shifts should opportunities arise. Entering 2026, given the current phase of historically tight credit spreads, we are looking to move towards a more defensive stance and increase our allocation to PAARF. We believe that M&A activity is expected to increase, which should act as a catalyst for PAAPF. Entering March, we are looking at more of a neutral stance given the higher amounts of uncertainty that exist in the market. Cash can be used as a component of the asset mix but is not material at this point in time.

Greg Taylor, CFA
March 11, 2026

¹ All Pender performance data points are for Class F of the Fund unless otherwise stated. Other classes are available. Fees and performance may differ in those other classes. Standard Performance Information for the Fund may be found here: https://penderfund.com/fund/pender-alternative-multi-strategy-income-fund/

² The Fund’s blended benchmark consists of 9% FTSE Canada Universe Bond Index, 25% ICE BofA US High Yield Index, 33% HFRI Credit Index (Hedged to CAD), 33% HFRI ED: Merger Arbitrage Index (Hedged to CAD)

³ All Pender performance data points are for Class F of the Fund unless otherwise stated. Other classes are available. Fees and performance may differ in those other classes. Standard Performance Information for the Fund may be found here: https://penderfund.com/fund/pender-corporate-bond-fund/

⁴ All Pender performance data points are for Class F of the Fund unless otherwise stated. Other classes are available. Fees and performance may differ in those other classes. Standard Performance Information for the Fund may be found here: https://penderfund.com/fund/pender-alternative-absolute-return-fund/

⁵ The benchmark used is the HFRI Credit Index (USD). The Fund’s benchmark is the HFRI Credit Index, hedged to CAD.

⁶ All Pender performance data points are for Class F of the Fund unless otherwise stated. Other classes are available. Fees and performance may differ in those other classes. Standard Performance Information for the Fund may be found here: https://penderfund.com/fund/pender-alternative-arbitrage-plus-fund/

⁷ Benchmark HFRI ED: Merger Arbitrage Index (USD)