ClearBridge Canadian Small Cap Technique Q2 2025 Commentary

By Garey J. Aitken, CFA & Michael Richmond, CFA

Market Overview

The second quarter proved risky for fairness markets, with the VIX index hitting ranges not skilled for the reason that onset of the COVID-19 pandemic. Canadian small cap buyers needed to deal with the fallout from U.S. President Trump’s “Liberation Day” tariff announcement and the following information move from commerce deal negotiations; volatility within the power market from OPEC+ quantity will increase and the Israel-Iran battle; a brand new federal authorities in Canada; and the continued implications of the AI revolution.

Commerce coverage remained the most important driver of equities within the quarter. The S&P/TSX Small Cap Index dropped by 12.9% from the beginning of the quarter to a put up–Liberation Day low on April 8. The index then went on to rally by a formidable 28% off the low, setting a brand new all-time excessive on June 17, because the commerce dispute between Canada and the U.S. gave the impression to be approaching an amicable consequence and North American economies weathered the uncertainty higher than initially anticipated.

Power markets added to the volatility. OPEC+ started unwinding its prior voluntary manufacturing cuts in April and has since introduced again 960,000 barrels per day of manufacturing into an already well-supplied market, inflicting oil costs to steadily decline in April and Might. The outbreak of hostilities between Israel and Iran injected a geopolitical threat premium into the market in June, which was partially unwound because the preventing eased towards the top of the quarter.

Domestically, a brand new Canadian authorities spurred cautious optimism round a extra supportive coverage setting. Initiatives such because the elimination of inner commerce limitations, investments within the Canadian Armed Forces and the passing of Invoice C-5 — meant to hurry up the approval of main “nationwide curiosity tasks” — have all been well-received. Though companies usually are not excessively optimistic concerning the consequence, the completion of the Trans Mountain Growth Mission pipeline and the beginning of LNG Canada three way partnership underscore the affect that these kinds of main tasks can have on the Canadian economic system.

The strong efficiency of the Canadian small cap index was broad based mostly, with all 11 sectors posting constructive returns through the quarter. Extra cyclically oriented sectors — industrials, financials, supplies and client discretionary — led efficiency. Defensive sectors reminiscent of actual property, client staples, communication providers and utilities posted in any other case robust quarters however lagged the general index.

Exhibit 1: Sector Efficiency Broadly Optimistic

Efficiency in Canadian {dollars} as of June 30, 2025. Supply: FactSet (FDS), Commonplace & Poor’s.

Canadian index returns have been supported by the power within the Canadian greenback. The loonie was up 5.4% versus the U.S. greenback through the quarter and is nicely off its February low. In Canadian greenback phrases, the S&P/TSX Small Cap Index outperformed the Russell 2000 Index within the quarter, with the Canadian small cap index up 11.8% versus the U.S. small cap index up 2.8%.

The ClearBridge Canadian Small Cap Technique’s absolute efficiency was robust within the quarter; nevertheless, it underperformed the benchmark. An underweight within the robust supplies sector and adverse inventory choice within the industrials, utilities and power sectors weighed on relative efficiency. The Technique was supported by constructive efficiency in client staples, financials, data expertise (IT) and well being care.

Portfolio Positioning

Volatility early within the quarter allowed us actively to shift from extra defensive equities into cyclicals that we believed the market was overly punishing. Our defensive posturing going into the quarter allowed us to be consumers of threat on phrases the place we seen threat/reward to be stacked in our favor.

We added to industrials, supplies and power shares that traded sharply decrease following the U.S. tariff bulletins reminiscent of Capstone Copper (OTCPK:CSCCF), Methanex Company (MEOH), North American Development Group Ltd (NOA), Enerflex Ltd. (EFXT), Chook Development (OTCPK:BIRDF), ADENTRA Inc. (OTCPK:HDIUF), Richelieu {Hardware} Ltd. (OTCPK:RHUHF), Colliers Worldwide Group Inc. (CIGI) and The Descartes Techniques Group Inc. (DSGX). We trimmed our defensive positions in AltaGas Ltd. (OTCPK:ATGFF), ATCO Ltd. (OTCPK:ACLLF) and Empire Co that carried out higher through the volatility early within the second quarter. We additionally trimmed our positions in Main Drilling Group Worldwide Inc. (OTCPK:MJDLF) and Sandstorm Gold Ltd. (SAND), rotating into base steel publicity that traded decrease on the recession fears.

We additionally added Pet Valu Holdings Ltd. (OTCPK:PTVLF) to the portfolio via a secondary providing. Pet Valu is Canada’s largest specialty pet retailer, working 830 shops primarily via a franchise mannequin. The Technique owned Pet Valu in 2021 and exited because the inventory surpassed our view of intrinsic worth on the time. The corporate has since expanded its attain into Quebec, invested in its distribution community and simplified its possession construction. The fairness traded decrease in early 2025 on fears of client weak spot and ongoing normalization of pet-related demand in a post-COVID setting. We seen the secondary providing from Pet Valu’s personal fairness sponsor as a pretty degree to re-enter the identify below a extra simplified possession construction. With the foremost investments in its distribution facilities behind it and an enhancing same-store gross sales outlook, we anticipate Pet Valu to materially develop free money move and earnings within the coming years.

Outlook

Our funding method is a bottom-up technique that prioritizes figuring out and capitalizing on market inefficiencies, utilizing our proprietary analysis and making the most of time arbitrage via our long-term funding horizon. This method is supported by our affected person tradition, enabling us to make well-informed selections when expectations and underlying fundamentals diverge.

We stay steadfast in our dedication to our funding model, diligently looking for out companies that exhibit prudent capital allocation practices, sturdy aggressive benefits and the flexibility to generate sustainable progress below applicable capital constructions.

Markets seem to have largely moved on from “Liberation Day” and are not pricing in a worst-case consequence from commerce disputes. Whereas the intense draw back from U.S. tariffs is much less possible than 1 / 4 in the past, their final affect on world commerce stays unknown.

Canadian buyers might want to assess the affect of tariffs, that are settling in at a meaningfully increased degree than a yr in the past. The affect on inflation, employment and output will possible be adverse however the results on Canadian small cap equities will range. No matter how occasions unfold, we consider that high-quality progress corporations — with applicable capital allocation insurance policies, capital constructions and sturdy aggressive benefits that produce above-average returns — shall be nicely ready to climate the uncertainty. Furthermore, these corporations shall be well-positioned to be proactive in enhancing their aggressive positions in risky markets.

Portfolio Highlights

The ClearBridge Canadian Small Cap Technique underperformed its S&P TSX Small Cap Index benchmark within the second quarter. On an absolute foundation, the Technique posted beneficial properties throughout all 10 sectors wherein it was invested. The first contributors to absolute returns have been the supplies, financials and industrials sectors.

Relative to the benchmark, constructive sector allocation results have been offset by adverse inventory choice. Particularly, inventory choice in industrials, utilities and power, an underweight to supplies and an data expertise obese detracted from efficiency. On the constructive facet, inventory choice in client staples and financials, an obese to industrials and underweight to well being care contributed to outcomes.

Amongst particular person securities, the main relative contributors to efficiency have been Propel Holdings (OTCPK:PRLPF), Kinaxis (OTCPK:KXSCF), Hudbay Minerals (HBM), Empire Co and Lundin Mining (OTCPK:LUNMF). The biggest detractors from relative efficiency have been Descartes Techniques, PHX Power Providers (PHXSF), AltaGas, Methanex and Enerflex.

Garey J. Aitken, CFA, Head of Canadian Equities

Michael Richmond, CFA, Managing Director, Portfolio Supervisor

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