DRL 4th Quarter Conference Call transcript

John O'Connell

As we lap the one-year anniversary of the merger of Davis Rea and GlobeInvest, I first want to thank everybody on the team for doing a fantastic job. They put a lot of effort into it and I hope that you, our valuable clients are seeing the benefits of it. Secondly, I hope we can see everybody soon at our new house, Bedford House at 23 Bedford Rd. We've been able to see some of you and we're very much looking forward to welcoming you as time permits. Without further ado I’ll pass the call over to Christine to give an update on her views, Christine.

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Christine Poole

Thank you for taking the time to join us on this conference call. Please feel free to ask us questions following our prepared remarks.

Financial markets have shown notable resilience in 2025, with many broad equity indices delivering double-digit gains despite volatile U.S. geopolitics that triggered significant new import tariffs between major economies.

Looking ahead to 2026, several tailwinds appear supportive for equities: greater clarity around tariff policies, lower interest rates across many economies, government-led fiscal stimulus such as increasing spending in defense and infrastructure, and increased capital spending driven by artificial intelligence (AI) investment and onshoring efforts. Businesses are also in the early stages of realizing productivity improvements from integrating AI into their operations.

Canada’s economic resilience in2025 is largely underpinned by the USMCA, which has kept nearly 90% of exports to the United States tariff-free. Formal discussions to extend the agreement beyond its 2036 expiry are expected to begin this summer and could introduce periods of market volatility.

While trade-related uncertainty is likely to persist through 2026, we anticipate gradual progress in reorienting the Canadian economy toward new products and a more diversified set of trading partners. With the current rate-cutting cycle nearing completion, fiscal policy is poised to become the primary driver of future growth, supporting both near-term demand and the structural adjustments required to rebalance goods trade with other regions.

The K-shaped nature of the U.S. economy is expected to persist into 2026. Higher-income households, particularly those with significant exposure to stocks and real estate, have benefited disproportionately from rising asset prices and continue to account for an outsized share of consumer spending.

Many Baby Boomers born between1946 and 1964 - now roughly 62 to 80 years old - fall within this group.  Although growth in their disposable may be modest, rising net worth has bolstered their confidence to spend, contributing to a gradual decline in personal savings rates.

In contrast, lower-income households remain under pressure from sticky inflation, especially for essential items such as food and housing, alongside soft labour market conditions that are most acute among younger workers.  President Trump’s recent decision to exempt abroad range of food and agricultural products from tariffs as well as for government agencies to purchase of mortgage-backed securities directly reflects growing concerns over household affordability.

The One Big Beautiful Bill Act(OBBBA), enacted in July 2025, is expected to provide a meaningful boost to the U.S. economy in 2026, largely through a surge in tax refunds and renewed business incentives.  Because the legislation was passed mid-year but applied many tax cuts retroactively to January 1, 2025, most workers will experience the benefits as lump-sum payments when tax refunds are issued in April this year. This timing is likely to deliver a notable lift to disposable income and near-term consumer spending.

With valuation metrics elevated relative to historical averages, corporate profit growth remains the primary driver of equity prices. S&P 500 earnings are expected to rise by 13.3% in 2025 and accelerate to 15.2% in 2026, reflecting expectations of continued economic expansion. A broader participation in both earnings growth and stock price gains across sectors would represent a constructive and welcome development for the market.

Our investment philosophy remains centered on controlling what we can: investing in financially strong, industry-leading companies trading at reasonable valuations across diverse sectors.

Now, I will pass it back to John and he will discuss the pooled funds as well as provide additional market commentary.

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John O'Connell

I want to address the central paradox currently defining the American landscape: If corporate America is awash in record success, why does the national mood feel so bad? I am specifically going to avoid talking about politics. Let me briefly explain why:

If you try to marry your political convictions to your investment account, you are effectively trying to navigate a high-speed highway, while staring at the rearview mirror. Here is why.

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1. The Economy is a Supertanker, Politics is a Jet Ski

Governments certainly set the "rules of the road"—taxes, regulation, and trade policy—but they don't drive the ship. The US economy is a $32 trillion highly diversified engine powered by 137million households that continues to grow and millions of businesses.

• No single administration can radically "re-engineer" this machine overnight.
• The Data: Since 1950, the market has averaged positive returns under almost every configuration of government—unified or divided. If you only invested when your "team" was in power, you would have missed out on roughly 80% of the total wealth created in the last 70 years.

2. The "Emotion Tax"

Politics is designed to be emotional; it’s built on tribalism and urgency. Investing, conversely, requires the cold discipline of a surgeon.

• When people feel politically "angry," they tend to view the future with a pessimistic bias. This leads to sitting in cash while waiting for "certainty."
• The  Reality: Certainty is a myth in the markets. By the time you feel  "good" about the political landscape, the market has usually already priced in the recovery, and you’ve missed the biggest gains.

3. Markets Care About Profits, Not Parties

As we will discuss shortly, the S&P 500's record 14.7%forward margin isn't happening because of a specific bill in Congress; it’s happening because companies like Microsoft and Meta are spending billions to automate their way to efficiency.

• A semiconductor doesn’t care who is in the White House.
• A cloud server at Amazon doesn’t check which party holds the Senate before it processes a transaction.
• In the long run, earnings power is the only gravity that matters.

4. The "Wait-and-See" Trap

This is the most expensive sentence in finance.

Markets don't wait for political consensus, and neither does business.  While many investors are frozen by the 'noise' of the 2025 tariffs, the tragedies we see on TV, or the latest headlines out of Washington, you are missing the most aggressive period of corporate transformation we have seen in our lifetimes.

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The Bottom Line: We don't buy "Democratic stocks" or "Republican stocks." We buy great companies. We own the "Builders" and the "Beneficiaries" because their competitive moats are wider than any four-year political term. If you let your ballot dictate your balance sheet, you’re letting temporary noise drown out permanent signals.

David Ricardo once noted that nothing contributes more to a country’s happiness than high profits. Today, US profits are at a staggering record high, yet the "affordability crisis" remains the lead story. Let’s look at the data to bridge that gap and discuss what it means for your portfolios.

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1. The Inequality of Prosperity

Inequality is an inherent byproduct of capitalism, and it is often most visible during periods of intense growth.

• The Consumption Gap: On paper, TODAY, real household consumption is at a record $124,500. However, averages are deceptive. While the "average" American is consuming more than ever, a significant portion of the population sits below that line, feeling the pinch of the affordability crisis, even as entrepreneurs get richer by improving the very standards of living those customers enjoy.
• One of the major reasons is a demographic phenomenon. Baby boomers are mostly retired, and they are mostly investors and with markets hitting records they feel rich. Consumer spending is at records and it is 70% of the economy.
• Despite the naysayers, entrepreneurial capitalism is flourishing. We saw a record 5.6 million business applications in 2025. People are betting on themselves, fueling a level of productivity that we believe will define the rest of this decade

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2. Profit Resilience in the Face of "Tariff Turmoil"

The resilience of the US economy remains its most underrated feature.

• Record Results: In Q3-2025, pre-tax corporate profits hit $4.1 trillion. This recovery survived the pandemic, the 2022-23 inflation spike, and, most recently, the volatility of the 2025 tariffs.
• Global Footprint: Even with "Tariff Turmoil" unsettling trade routes, pre-tax profit receipts from the rest of the world hit $1.1 trillion. Our companies aren't just surviving; they are dominating the global stage.

3. The "Jobless" Profit Boom: The AI Factor

We are observing a fascinating—and perhaps unsettling—decoupling of profits from payrolls.

• Capital vs. Labor: Capital spending hit a record $4.3 trillion last year, but private-sector payroll growth slowed significantly. Why? Because half of that capital is going into technology. SOFTWARE that     enhances human productivity.
• The AI Assessment: We believe many firms spent 2025 in a "top-to-bottom" assessment of how to use AI to augment productivity. As companies realize that AI augments rather than just replaces people, we may see a surprise upside in hiring as they expand to meet booming demand. This is a risk to higher interest rates and something we are watching.

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4. Financial Health & Margins

The "fortress balance sheet" isn't just catchphrase; it’s a reality:

• Cash Flow: Corporate cash flow is at a record $3.9 trillion.
• Margins: S&P 500 profit margins matched record highs of 13.7% in Q3, and our forward-looking data as of mid-January suggests they may climb as high as 14.7%.

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The Bottom Line: While the "affordability crisis" creates a somber social backdrop, the underlying mechanics of the US economy— wealthy baby boomers, productivity, capital investment, and entrepreneurial spirit—have never been more robust. We are navigating a period where technology is rewriting the rules of the labor market, but for the patient investor, record profits and cash flows provide a very sturdy floor.

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I want to address valuations.

1. The Justification for "Expensive" Valuations

Many analysts continue to argue (as they have for ever) that the “Market” is overvalued based on historical Valuation. However, a record margins provides the fundamental "permission" for these higher multiples. Comparing valuations of old mature low margin businesses to rapidly growing ones is apples to oranges math.

• The Math: High margins mean more of every dollar in revenue drops directly to the bottom line. If we expect productivity to stay in the 3.0%–4.0% range, these margins aren't just a temporary spike—they are the new structural baseline.
• The Implication: We aren't necessarily "paying too much" if the earnings power of these companies has permanently shifted higher due to the tech-driven cost savings you’re seeing in the data.

2. The "Margin Masters"

• We are prioritizing firms that can grow revenue faster than expenses—specifically those that have successfully integrated technology and automation to cap their costs.
• As the data shows, capital spending is at a record $4.3 trillion. We want to own the companies doing the spending (to gain efficiency) and the ones receiving that spend: the tech enablers.

3. The Risk of "Mean Reversion"

• Portfolio Defense: We are maintaining a rigorous focus on quality. A company with a 15% margin can survive a 2% compression; a company with a 4% margin cannot. We are staying away from the "thin margin" or “no profit” players who are most vulnerable to the decoupling of labor and productivity.

4. Confidence in Staying Power

Finally, these record margins and the $1.2 trillion in undistributed profits provide a massive cushion, these companies are "awash in cash." This liquidity allows them to self-fund growth, buy back shares, and increase dividends regardless of what happens.

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The Architecture of the Equity Fund

Looking at our current holdings, we see a deliberate split between the Builders and the Beneficiaries of this new capital-intensive economy.

1. The Builders: Investing for the Next Decade

Companies like Microsoft, Meta, Amazon, and Google- to name a few- are the ones responsible for that record $4.3 trillion in capital spending. While the headlines focus on the sheer size of their "massive sums" being deployed, we see it as a structural moat. They are building the digital utilities that every other business—including our own—now requires to function.

• Synopsys and Cloudflare represent the "picks and shovels" of this era. You cannot have AI-driven productivity without the complex silicon designed by Synopsys or the secure, high-speed edge networking provided by Cloudflare.

2. The Beneficiaries: The Operational Leverage Play

On the other side, we have our financial holdings—JPMorgan, Bank of America, PNC and American Express. These institutions are the primary beneficiaries of a resilient US economy and record corporate cashflows.

• As     corporations remain "awash in profits," these banks see higher transaction volumes, robust advisory fees, and a stabilized credit environment. They are effectively the toll booths for the record $3.9 trillion in corporate and personal cash flow moving through the     system.

3. The Multiplier: Accenture (ACN)

If you’re wondering how the rest of the S&P 500 is going to bridge the gap between "having AI" and actually "gaining productivity," look no further than Accenture.

• They are the consultants to them all. As firms conduct their top-to-bottom assessments of how to implement technology, Accenture is the one in the room, charging a fee to implement the strategy. They turn the massive R&D of the Big Tech firms into practical, margin-expanding results for the broader economy.

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Our optimism isn’t rooted in hope; it’s rooted in data.

We are currently witnessing a generational shift where the US economy is no longer just "growing"—it is being re-engineered. With corporate profits at a record $4.1 trillion and forward margins pushing toward 14.7%, we have the strongest fundamental backdrop in modern history. We remain optimistic because our portfolio is anchored in the "Builders"—the companies providing the digital oxygen for the rest of the world—and the "Beneficiaries," who are the primary toll booths for this record cash flow.

However, we are not blind to the risks. We are closely monitoring:

• The Valuation Tightrope: With margins at record highs, and valuations stretched historically, there is very little room for operational error. This is why we prioritize quality and "fortress balance sheets" over speculative growth.
• The Interest Rate Tug-of-War: If productivity soars as we expect, and the economy continues to boom, it could ironically put upward pressure on rates. Our focus on companies awash in cash allows them to self-fund and stay immune to market volatility.
• The Policy Noise: While we ignore the headlines, we track the structural shifts—like tariffs—that could eventually bite into the cost of goods or substantially disrupt trade flows.

The Bottom Line: We are in the middle of a historic transformation. While most are distracted by the rearview mirror of politics, we are focused on the windshield. The future belongs to the efficient, and we are invested in the masters of efficiency.

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Klaudia Wilk  

Christine, due to the high risk and volatility, several countries are reducing their US bond holdings. How does this affect us from a Canadian perspective? What does this mean for our portfolios? What steps are being taken to reduce U.S. political risk, and will future investments expand beyond Canadian and U.S. markets into other geographies or asset classes like commodities or real estate?

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Christine Poole

I'll start off by saying that you, our clients, own a diversified portfolio consisting of leading companies in the respective industries. Most of the non-Canadian companies you own are US domiciled. However, they are global companies doing business around the world many with more than half their sales in non-North American markets. These multinational companies produce and or provide goods and services that are consumed globally and in many cases, they are one of the leading providers of those goods and services. That's one way to reduce risk in in your portfolios. Kind of highlighting what John said. Focus on investing in quality, financially strong and profitable companies that provide high demand goods and services. It is correct that central bank selling of U.S. Treasury bonds has attracted headlines, but the headlines don't capture the whole picture. Ed Yardeni, a strategist that we subscribed to, recently viewed the net capital inflows into US securities over the past 12 months through November 2025. Foreign official account sold 51 billion and US securities. So foreign official accounts are typically the central banks. Private foreign accounts purchased 1.5 trillion in the in the US capital market, so that's 51 billion of selling by foreign official accounts and 1.5 trillion of buying by private foreign accounts. Of the 1.5 trillion private investors purchased over 600 billion in U.S. equities and over 900 billion in U.S. bonds over the past 12 months. Why do private investors continue to buy US securities? One reason may be that the US economy is growing at the fastest pace amongst the developed countries. Third quarter 2025 US GDP was 4.4% versus Canada's 2.6%. Fourth quarter GDP in the US is expected to be over 5%. The Trump political agenda is attracting investment into the US, whether it be reshoring, the building of data centers, the build out of infrastructure to accommodate growth or increased defense spending. The US large cap names you own are market leaders in their industries and beneficiaries of these developments. The private market recognizes this. Regarding investments that are non-Canadian or non-us, we've never purposely excluded non-Canadian or non-U.S. companies from our investable universe. Admittedly, I have a strong orientation within North American large cap companies. But I also follow European based multinational companies. Our clients with segregated portfolios own a few of them. We will apply the same criteria when analyzing companies regardless of where they are domiciled.

Regarding the investments in commodities. Historically, we have not allocated a lot of capital to this asset class. Commodities tend to be very cyclical and accurate. Accurately forecasting commodity prices is very difficult. And in the case of gold, this metal is very much sentiment driven versus actual demand driven. Lastly, we do own a few real estate-based companies in our segregated portfolios. These would be Canadian Apartment REIT and Brookfield Corporation, which owns real estate located around the world and other hard assets through its operating subsidiaries. John, I don't know if you have anything to add to that question.

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John O'Connell  

I think you did a pretty good job, Christine. I think you know that there's been a narrative going on for a year of the end of American exceptionalism and I think that what people are really saying is they're angry about what's happening. American exceptionalism from maybe from a political point of view, and I'm not making a political statement here, could be called into question. But the companies that the multinational companies that Christine and I invest in are the most cutting edge, leading edge businesses in the world. Full stop. Period. And you just don't see that kind of development taking place in Europe or in the emerging markets with the kind of security and safety that we are able to invest your money in the in the United States with their rigorous accounting standards and that kind of thing. I think people are angry, but as I said in my in my prepared remarks, making your investment decisions when you're angry can be a costly mistake and we need to stay grounded in in the future and in reality and the data and the data tells us that there is no selling of US securities. There's no dumping of US securities. There are one-off accounts that sell some stuff, of course, but there are more buyers of American assets than there are sellers.

With that, I'd like to wrap up our conference call. We thank you very, very much for your trusted confidence. If you do have any further questions or you'd like to follow up with us individually, please do so. We're available all the time and have a wonderful day. Thank you.

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