The third quarter of 2025 saw significant shifts in the Canadian small-cap market, primarily driven by an unprecedented surge in gold prices. While the ClearBridge Canadian Small Cap Strategy achieved strong absolute returns across diverse sectors, its strategic underweighting in precious metals led to relative underperformance compared to the broader S&P/TSX Small Cap Index. During this dynamic period, the strategy maintained an active stance, executing portfolio adjustments through mergers and acquisitions and seizing opportunities within cyclical industries. Looking ahead, portfolio managers anticipate ongoing market fluctuations, yet remain committed to identifying high-quality growth enterprises characterized by robust fundamentals and disciplined capital allocation, even within a complex macroeconomic climate.
ClearBridge Canadian Small Cap Strategy: Q3 2025 Performance and Outlook
In the third quarter of 2025, the Canadian small-cap market experienced a significant upswing, with the S&P/TSX Small Cap Index achieving an impressive 20% return. This remarkable performance was largely fueled by an extraordinary rally in gold prices, which saw the precious metal reach a record high of US$3,873 per ounce, marking a 17.1% increase for the quarter and a staggering 46.6% year-to-date gain. Gold's ascent was driven by expectations of lower interest rates, persistent inflation, and sustained central bank purchasing, creating an environment where precious metal producers, which constitute a substantial portion of the index, thrived.
Despite the overall market surge, the ClearBridge Canadian Small Cap Strategy, managed by Michael Richmond, CFA, and Michael Shaw, CFA, faced challenges in relative performance. The strategy's significant underweight position in gold resulted in a notable underperformance of over 1,200 basis points compared to the index. This headwind was further exacerbated by a rally in cannabis equities, which the managers viewed as fundamentally challenged, and idiosyncratic movements in certain crypto-related information technology and financial stocks. Nevertheless, the strategy delivered strong absolute performance, with positive contributions from seven out of the 10 sectors in which it was invested, notably materials (including its gold exposure), energy, and real estate. The managers expressed satisfaction with their earlier decisions to increase exposure to metals and mining stocks, including gold, during previous market downturns.
Looking forward, the ClearBridge team remains highly selective in their approach to precious metals equities. Their gold exposure is concentrated in royalty streaming companies, which offer diversified participation across multiple projects and geographies, mitigating operational, geopolitical, and geological risks. While acknowledging that sector-wide capital allocation discipline remains inconsistent, and past experience suggests that the most value-destructive decisions in Canadian small-cap resources often occur when a 'higher for longer' sentiment prevails, they will continue to scrutinize their assumptions. The focus remains on identifying companies across all sectors that demonstrate prudent capital allocation, sustainable competitive advantages, and consistent growth within appropriate capital structures.
During the quarter, the portfolio underwent active adjustments in response to M&A activity and volatility within the financials, IT, and industrials sectors. The strategy introduced one new position, Triple Flag Precious Metals (TFPM), a royalty streaming company, replacing Sandstorm Gold after its merger with Royal Gold (RGLD). This move aligns with the preference for asset-light, diversified gold participation with high-quality assets. Four names were eliminated, including InterRent Real Estate Investment Trust (OTC:IIPZF) and Parkland (OTCPK:PKIUF) following M&A transactions, as their market valuations were deemed fair. Trican Well Service (OTCPK:TOLWF), a long-term oilfield services holding, was also exited after its equity outperformed and exceeded fair value estimates following an attractive acquisition. Boralex (OTCPK:BRLXF), a renewable power producer, was eliminated due to a market shift favoring larger, more capitalized organizations, despite its strong operational track record.
Conversely, positions were increased in cyclical names such as North American Construction (NOA), ATS (ATS), Boyd, GDI Integrated (OTCPK:GDIFF), EQB (OTCPK:EQGPF), and Descartes (DSGX). These additions capitalized on perceived underperformance driven by operational headwinds and sector rotations, offering opportunities to acquire high-quality businesses at attractive discounts to intrinsic value.
The investment outlook is shaped by mixed North American macro signals, with a softening labor market and tariff-related uncertainties suggesting caution. However, AI-driven investments are creating pockets of resilience and growth in sectors like software, semiconductors, and data center infrastructure. In this environment, the strategy prioritizes companies with competitive advantages, robust balance sheets, and self-funded growth capable of navigating a cooler job market while participating in AI-enabled capital expenditure cycles. The long-term, bottom-up, research-driven approach of ClearBridge Investments emphasizes high-quality growth companies as best positioned to withstand uncertainty and enhance competitive standing during market dislocations.
In Canada, a developing long-term opportunity is anticipated as the new federal government implements supportive policy measures. Initiatives aimed at reducing internal trade frictions, accelerating major project approvals, and reinvesting in national capabilities are expected to improve private-sector visibility and stimulate activity over a multi-year horizon. Potential beneficiaries include select industrial companies (engineering and construction, building products), energy and power infrastructure, and service providers associated with permitting and project execution. Canadian small-cap investors will need to balance the long-term prospects of a revitalized major-projects industry against short-term fluctuations in the North American labor market.
In conclusion, the third quarter of 2025 was a period of both significant market gains and strategic adjustments for the ClearBridge Canadian Small Cap Strategy. While the gold rally drove index outperformance, the strategy's deliberate positioning and active management across various sectors demonstrated its resilience and commitment to long-term value creation. The ongoing focus on quality, disciplined capital allocation, and adaptability to evolving macroeconomic and policy landscapes remains central to their investment philosophy.
Reflections on Dynamic Market Conditions and Strategic Agility
This report highlights the perpetual challenge for investment managers: balancing conviction with adaptability in the face of rapidly evolving market dynamics. The sheer impact of the gold rally on the Canadian small-cap index underscores how a single commodity or sector can disproportionately influence overall market performance. It serves as a reminder that even well-constructed portfolios can experience relative underperformance if their strategic positioning, however sound in theory, diverges sharply from the market's immediate drivers. The ClearBridge team's willingness to acknowledge their underweight in precious metals as a primary reason for relative underperformance, despite strong absolute gains, demonstrates transparency and a commitment to rigorous self-assessment. Their emphasis on active management, evidenced by strategic portfolio adjustments through M&A and reallocations to cyclical names, illustrates the importance of agility. In a world where macro signals are increasingly mixed and new technologies like AI introduce both opportunities and uncertainties, the focus on companies with strong fundamentals, competitive advantages, and prudent capital allocation is more critical than ever. This approach provides a bedrock of stability and growth potential, allowing investors to navigate short-term volatility while capitalizing on long-term trends and policy shifts, such as those anticipated in Canada's major-projects industry.