Fellow Limited Partners,
In the second quarter of 2026, the Flexible Fixed Income Fund returned+3.5%.1 This return compares to our publicly traded high yield and investment grade benchmarks, which returned +1.7%2 and +2.2%3, respectively.
Since its inception in early 2016, the Fund has delivered a compound annual net return of 5.7%1, meeting our long-term net return expectations of 5% to 7% and exceeding both of our benchmarks.
Performance
Outside of the hyperscalers which saw underperformance (a sector which we have avoided), the broader credit market was strong. Within the market, a rebound in the software and internet space took hold. Securities of single names we hold, including ZipRecruiter, Tripadvisor and Constellation Software, all made meaningful advances as the 'SaaSpocalypse' we described last quarter abated. Bandwidth – our top holding – was particularly notable as we participated in tendering our bonds back to the company at a very healthy premium to market pricing. Bonds we bought in the 60's amidst extreme pessimism were now being exited at 95 cents on the dollar. We are increasingly finding opportunities at the intersection of debt and equity markets within the technology sector – opportunities where debt investors are far more negative about a company's future than their equity counterparts. Investments at this intersection of debt and equity contributed to results in the quarter through positions in Evolent Health and Xometry.
The Market
Despite the technological and geopolitical upheaval underway, markets remain optimistic. While we witnessed substantial risks to the global supply of oil, we saw no disorderly price action in the bond market and the S&P 500 marked an all-time high in May. Quarters like this remind us just how difficult it is to predict short-term moves in stock and bond markets. Events one might think would matter, don't. And events one might think wouldn't matter, do - at least in the short term. Charlie Munger might repeat "If you're not a little confused by what's going on, you don't understand it." John Arnold, a renowned commodity trader, philanthropist and Meta board member (in that chronological order), captured this dynamic well in a recent X post about a US Airline ETF's reaction to the Iran war.
While equity markets may move with a long tether to reality measured in the trillions in some cases, a particularly appealing aspect of corporate debt markets is that their market values tend to stay far more closely connected to their underlying economic reality. Much of this is thanks to the fact that bonds have a terminal station for value: their maturity date.
"Everything is Hyperscaler"
When peering inside a new Tesla delivered to the White House, Donald Trump uttered a phrase that caught fire: "Everything is computer". In today's debt markets, Everything is hyperscaler. The sheer scale of capital backing the AI infrastructure buildout is historic. And global debt markets are the foundation of this multi-trillion dollar buildout. Every facet of credit is being tapped: investment grade corporates, high yield, private debt, asset-backed and vendor finance. In Canada, Alphabet Inc. (Google's parent company) broke the Canadian corporate bond record in May by raising C$8.5 billion in bonds[1]. This megadeal was then shattered by Amazon in June, which issued C$14 billion[2].
Given the substantial cash generation of the hyperscalers (Google, Amazon, Meta and Oracle in particular), these companies have plenty of additional theoretical credit capacity. But practically speaking, this credit capacity will need to be supported by actual capital. And just because a credit may deserve funding, doesn't mean that capital will be available for it at a reasonable price. Although debt markets have comfortably absorbed this wave of hyperscaler debt, we can't forget that the high US fiscal deficit is also drawing in capital from the sidelines.
It is difficult to know exactly when a well runs dry other than finding its limit in real-time. With BofA's July Fund Manager Survey highlighting an "uber-low" average cash level of 3.6% (down from more than 6% in October 2022), we seem to be plumbing the depths of where investor cash balances have been over the last ~30 years. Even though an astute observer can find the exception and point out that cash levels in 2004 were at the same levels as today (a good entry point in equities and high yield), we would offer that in comparison with 2004, equity valuations and credit spreads are currently in a far less comfortable place.
The hyperscaler issuance wave reminds us of the expansion of the high yield energy sector from 2011 to 2015, once a new technology - fracking - was deployed at scale. As the high yield market grew on the back of energy issuance, it reached its saturation point. The structural overweight in energy, combined with a catalyzing event in the OPEC-induced supply glut, caused bond prices in the sector to hit levels no one would have expected. This is a space that became "over-owned". The same may become true for the hyperscalers. Given the huge sums of capital at play and potential for dislocation and opportunity, we are paying more and more attention to this growing facet of the market.
Bonds versus Stocks
We are also finding opportunity in the relative value between the debt and equity of the same company. The pattern tends to look like this: the debt sees a bleak future and is underpriced; the equity sees a great future and is overpriced. The truth is usually somewhere in the middle.
We see this in software, where a business often generates high free cash flow, holds options to shrink its cost base and carries revenues with reasonable durability. In these cases, the discounted debt can be attractive on its own merits, while the equity does not seem to be baking in its new, higher cost of debt capital, nor the rough headwind of stock-based compensation borne by a vastly smaller equity base.
We also see this in the capital-intensive corners of the AI value chain, particularly the so-called 'neoclouds', where stock investors are paying up for a blue-sky growth narrative while ignoring the very real costs of a depreciating asset (chips), that the bonds are fearfully pricing in. In situations like these, we can build positions that have potential to profit as reality asserts itself in favor of either view.
Outlook
The world has embarked on an economic project of a scale rarely seen - trillions of dollars committed to building out AI infrastructure, increasingly financed through the debt markets. Although these things take time and the path from here is unknowable in advance, a lot is likely to happen along the way. As the energy sector demonstrated a decade ago, growth financed this quickly does not always end smoothly.
With capital market conditions at such extremes (record single-stock valuations, record debt issuance), we are pleased to see the landscape's opportunity set, particularly on a relative value basis, is expanding.
Thank you for your investment in the Ewing Morris Flexible Fixed Income Fund.
1. Ewing Morris Flexible Fixed Income Fund LPreturns reflect Class P - Master Series, net of fees and expenses as of June 30,2026. Inception date of the Fund is February 1, 2016.
2. U.S. High Yield Bonds are represented by the iShares U.S. High Yield Bond Index ETF(CAD-Hedged). See Additional Disclosures below.
3. Canadian Investment Grade Bonds are represented by the iShares Canadian Corporate Bond Index ETF. See Additional Disclosures below.
Inception date of the Flexible Fixed Income Fund is February 1, 2016. Flexible Fixed Income Fund returns reflect Class P - Master Series, net of fees and expenses. We have listed the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY) and the iShares Canadian Corporate Bond Index ETF (TSX: XCB) as benchmark indices/data for the high yield and corporate bond markets, as these are widely known and used benchmark indices/data for fixed income markets. The Fund has a flexible investment mandate and thus these benchmark indices are provided for information only. Comparisons to these benchmarks and indices have limitations. Investing in fixed income securities is the primary strategy for the Fund, however the Fund does not invest in all, or necessarily any, of the securities that compose the referenced benchmark indices, and the Fund portfolio may contain, among other things, options, short positions and other securities, concentrated levels of securities and may employ leverage not found in these indices. As a result, no market indices are directly comparable to the results of the Fund. Past performance does not guarantee future returns. This letter does not constitute an offer to sell units of any Ewing Morris Fund, collectively, "Ewing Morris Funds". Units of Ewing Morris Funds are only available to investors who meet investor suitability and sophistication requirements. While information prepared in this report is believed to be accurate, Ewing Morris & Co. Investment Partners Ltd. makes no warranty as to the completeness or accuracy nor can it accept responsibility for errors in the report. This report is not intended for public use or distribution. There can be no guarantee that any projection, forecast or opinion will be realized. All information provided is for informational purposes only and should not be construed as personal investment advice. Users of these materials are advised to conduct their own analysis prior to making any investment decision. Source for data referenced and benchmark information: Capital IQ, Bloomberg and Ewing Morris. As of June 30, 2026.
Fellow Limited Partners,
In the second quarter of 2026, the Flexible Fixed Income Fund returned+3.5%.1 This return compares to our publicly traded high yield and investment grade benchmarks, which returned +1.7%2 and +2.2%3, respectively.
Since its inception in early 2016, the Fund has delivered a compound annual net return of 5.7%1, meeting our long-term net return expectations of 5% to 7% and exceeding both of our benchmarks.
Performance
Outside of the hyperscalers which saw underperformance (a sector which we have avoided), the broader credit market was strong. Within the market, a rebound in the software and internet space took hold. Securities of single names we hold, including ZipRecruiter, Tripadvisor and Constellation Software, all made meaningful advances as the 'SaaSpocalypse' we described last quarter abated. Bandwidth – our top holding – was particularly notable as we participated in tendering our bonds back to the company at a very healthy premium to market pricing. Bonds we bought in the 60's amidst extreme pessimism were now being exited at 95 cents on the dollar. We are increasingly finding opportunities at the intersection of debt and equity markets within the technology sector – opportunities where debt investors are far more negative about a company's future than their equity counterparts. Investments at this intersection of debt and equity contributed to results in the quarter through positions in Evolent Health and Xometry.
The Market
Despite the technological and geopolitical upheaval underway, markets remain optimistic. While we witnessed substantial risks to the global supply of oil, we saw no disorderly price action in the bond market and the S&P 500 marked an all-time high in May. Quarters like this remind us just how difficult it is to predict short-term moves in stock and bond markets. Events one might think would matter, don't. And events one might think wouldn't matter, do - at least in the short term. Charlie Munger might repeat "If you're not a little confused by what's going on, you don't understand it." John Arnold, a renowned commodity trader, philanthropist and Meta board member (in that chronological order), captured this dynamic well in a recent X post about a US Airline ETF's reaction to the Iran war.
While equity markets may move with a long tether to reality measured in the trillions in some cases, a particularly appealing aspect of corporate debt markets is that their market values tend to stay far more closely connected to their underlying economic reality. Much of this is thanks to the fact that bonds have a terminal station for value: their maturity date.
"Everything is Hyperscaler"
When peering inside a new Tesla delivered to the White House, Donald Trump uttered a phrase that caught fire: "Everything is computer". In today's debt markets, Everything is hyperscaler. The sheer scale of capital backing the AI infrastructure buildout is historic. And global debt markets are the foundation of this multi-trillion dollar buildout. Every facet of credit is being tapped: investment grade corporates, high yield, private debt, asset-backed and vendor finance. In Canada, Alphabet Inc. (Google's parent company) broke the Canadian corporate bond record in May by raising C$8.5 billion in bonds[1]. This megadeal was then shattered by Amazon in June, which issued C$14 billion[2].
Given the substantial cash generation of the hyperscalers (Google, Amazon, Meta and Oracle in particular), these companies have plenty of additional theoretical credit capacity. But practically speaking, this credit capacity will need to be supported by actual capital. And just because a credit may deserve funding, doesn't mean that capital will be available for it at a reasonable price. Although debt markets have comfortably absorbed this wave of hyperscaler debt, we can't forget that the high US fiscal deficit is also drawing in capital from the sidelines.
It is difficult to know exactly when a well runs dry other than finding its limit in real-time. With BofA's July Fund Manager Survey highlighting an "uber-low" average cash level of 3.6% (down from more than 6% in October 2022), we seem to be plumbing the depths of where investor cash balances have been over the last ~30 years. Even though an astute observer can find the exception and point out that cash levels in 2004 were at the same levels as today (a good entry point in equities and high yield), we would offer that in comparison with 2004, equity valuations and credit spreads are currently in a far less comfortable place.
The hyperscaler issuance wave reminds us of the expansion of the high yield energy sector from 2011 to 2015, once a new technology - fracking - was deployed at scale. As the high yield market grew on the back of energy issuance, it reached its saturation point. The structural overweight in energy, combined with a catalyzing event in the OPEC-induced supply glut, caused bond prices in the sector to hit levels no one would have expected. This is a space that became "over-owned". The same may become true for the hyperscalers. Given the huge sums of capital at play and potential for dislocation and opportunity, we are paying more and more attention to this growing facet of the market.
Bonds versus Stocks
We are also finding opportunity in the relative value between the debt and equity of the same company. The pattern tends to look like this: the debt sees a bleak future and is underpriced; the equity sees a great future and is overpriced. The truth is usually somewhere in the middle.
We see this in software, where a business often generates high free cash flow, holds options to shrink its cost base and carries revenues with reasonable durability. In these cases, the discounted debt can be attractive on its own merits, while the equity does not seem to be baking in its new, higher cost of debt capital, nor the rough headwind of stock-based compensation borne by a vastly smaller equity base.
We also see this in the capital-intensive corners of the AI value chain, particularly the so-called 'neoclouds', where stock investors are paying up for a blue-sky growth narrative while ignoring the very real costs of a depreciating asset (chips), that the bonds are fearfully pricing in. In situations like these, we can build positions that have potential to profit as reality asserts itself in favor of either view.
Outlook
The world has embarked on an economic project of a scale rarely seen - trillions of dollars committed to building out AI infrastructure, increasingly financed through the debt markets. Although these things take time and the path from here is unknowable in advance, a lot is likely to happen along the way. As the energy sector demonstrated a decade ago, growth financed this quickly does not always end smoothly.
With capital market conditions at such extremes (record single-stock valuations, record debt issuance), we are pleased to see the landscape's opportunity set, particularly on a relative value basis, is expanding.
Thank you for your investment in the Ewing Morris Flexible Fixed Income Fund.
1. Ewing Morris Flexible Fixed Income Fund LPreturns reflect Class P - Master Series, net of fees and expenses as of June 30,2026. Inception date of the Fund is February 1, 2016.
2. U.S. High Yield Bonds are represented by the iShares U.S. High Yield Bond Index ETF(CAD-Hedged). See Additional Disclosures below.
3. Canadian Investment Grade Bonds are represented by the iShares Canadian Corporate Bond Index ETF. See Additional Disclosures below.
Inception date of the Flexible Fixed Income Fund is February 1, 2016. Flexible Fixed Income Fund returns reflect Class P - Master Series, net of fees and expenses. We have listed the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY) and the iShares Canadian Corporate Bond Index ETF (TSX: XCB) as benchmark indices/data for the high yield and corporate bond markets, as these are widely known and used benchmark indices/data for fixed income markets. The Fund has a flexible investment mandate and thus these benchmark indices are provided for information only. Comparisons to these benchmarks and indices have limitations. Investing in fixed income securities is the primary strategy for the Fund, however the Fund does not invest in all, or necessarily any, of the securities that compose the referenced benchmark indices, and the Fund portfolio may contain, among other things, options, short positions and other securities, concentrated levels of securities and may employ leverage not found in these indices. As a result, no market indices are directly comparable to the results of the Fund. Past performance does not guarantee future returns. This letter does not constitute an offer to sell units of any Ewing Morris Fund, collectively, "Ewing Morris Funds". Units of Ewing Morris Funds are only available to investors who meet investor suitability and sophistication requirements. While information prepared in this report is believed to be accurate, Ewing Morris & Co. Investment Partners Ltd. makes no warranty as to the completeness or accuracy nor can it accept responsibility for errors in the report. This report is not intended for public use or distribution. There can be no guarantee that any projection, forecast or opinion will be realized. All information provided is for informational purposes only and should not be construed as personal investment advice. Users of these materials are advised to conduct their own analysis prior to making any investment decision. Source for data referenced and benchmark information: Capital IQ, Bloomberg and Ewing Morris. As of June 30, 2026.
Fellow Limited Partners,
In the second quarter of 2026, the Flexible Fixed Income Fund returned+3.5%.1 This return compares to our publicly traded high yield and investment grade benchmarks, which returned +1.7%2 and +2.2%3, respectively.
Since its inception in early 2016, the Fund has delivered a compound annual net return of 5.7%1, meeting our long-term net return expectations of 5% to 7% and exceeding both of our benchmarks.
Performance
Outside of the hyperscalers which saw underperformance (a sector which we have avoided), the broader credit market was strong. Within the market, a rebound in the software and internet space took hold. Securities of single names we hold, including ZipRecruiter, Tripadvisor and Constellation Software, all made meaningful advances as the 'SaaSpocalypse' we described last quarter abated. Bandwidth – our top holding – was particularly notable as we participated in tendering our bonds back to the company at a very healthy premium to market pricing. Bonds we bought in the 60's amidst extreme pessimism were now being exited at 95 cents on the dollar. We are increasingly finding opportunities at the intersection of debt and equity markets within the technology sector – opportunities where debt investors are far more negative about a company's future than their equity counterparts. Investments at this intersection of debt and equity contributed to results in the quarter through positions in Evolent Health and Xometry.
The Market
Despite the technological and geopolitical upheaval underway, markets remain optimistic. While we witnessed substantial risks to the global supply of oil, we saw no disorderly price action in the bond market and the S&P 500 marked an all-time high in May. Quarters like this remind us just how difficult it is to predict short-term moves in stock and bond markets. Events one might think would matter, don't. And events one might think wouldn't matter, do - at least in the short term. Charlie Munger might repeat "If you're not a little confused by what's going on, you don't understand it." John Arnold, a renowned commodity trader, philanthropist and Meta board member (in that chronological order), captured this dynamic well in a recent X post about a US Airline ETF's reaction to the Iran war.
While equity markets may move with a long tether to reality measured in the trillions in some cases, a particularly appealing aspect of corporate debt markets is that their market values tend to stay far more closely connected to their underlying economic reality. Much of this is thanks to the fact that bonds have a terminal station for value: their maturity date.
"Everything is Hyperscaler"
When peering inside a new Tesla delivered to the White House, Donald Trump uttered a phrase that caught fire: "Everything is computer". In today's debt markets, Everything is hyperscaler. The sheer scale of capital backing the AI infrastructure buildout is historic. And global debt markets are the foundation of this multi-trillion dollar buildout. Every facet of credit is being tapped: investment grade corporates, high yield, private debt, asset-backed and vendor finance. In Canada, Alphabet Inc. (Google's parent company) broke the Canadian corporate bond record in May by raising C$8.5 billion in bonds[1]. This megadeal was then shattered by Amazon in June, which issued C$14 billion[2].
Given the substantial cash generation of the hyperscalers (Google, Amazon, Meta and Oracle in particular), these companies have plenty of additional theoretical credit capacity. But practically speaking, this credit capacity will need to be supported by actual capital. And just because a credit may deserve funding, doesn't mean that capital will be available for it at a reasonable price. Although debt markets have comfortably absorbed this wave of hyperscaler debt, we can't forget that the high US fiscal deficit is also drawing in capital from the sidelines.
It is difficult to know exactly when a well runs dry other than finding its limit in real-time. With BofA's July Fund Manager Survey highlighting an "uber-low" average cash level of 3.6% (down from more than 6% in October 2022), we seem to be plumbing the depths of where investor cash balances have been over the last ~30 years. Even though an astute observer can find the exception and point out that cash levels in 2004 were at the same levels as today (a good entry point in equities and high yield), we would offer that in comparison with 2004, equity valuations and credit spreads are currently in a far less comfortable place.
The hyperscaler issuance wave reminds us of the expansion of the high yield energy sector from 2011 to 2015, once a new technology - fracking - was deployed at scale. As the high yield market grew on the back of energy issuance, it reached its saturation point. The structural overweight in energy, combined with a catalyzing event in the OPEC-induced supply glut, caused bond prices in the sector to hit levels no one would have expected. This is a space that became "over-owned". The same may become true for the hyperscalers. Given the huge sums of capital at play and potential for dislocation and opportunity, we are paying more and more attention to this growing facet of the market.
Bonds versus Stocks
We are also finding opportunity in the relative value between the debt and equity of the same company. The pattern tends to look like this: the debt sees a bleak future and is underpriced; the equity sees a great future and is overpriced. The truth is usually somewhere in the middle.
We see this in software, where a business often generates high free cash flow, holds options to shrink its cost base and carries revenues with reasonable durability. In these cases, the discounted debt can be attractive on its own merits, while the equity does not seem to be baking in its new, higher cost of debt capital, nor the rough headwind of stock-based compensation borne by a vastly smaller equity base.
We also see this in the capital-intensive corners of the AI value chain, particularly the so-called 'neoclouds', where stock investors are paying up for a blue-sky growth narrative while ignoring the very real costs of a depreciating asset (chips), that the bonds are fearfully pricing in. In situations like these, we can build positions that have potential to profit as reality asserts itself in favor of either view.
Outlook
The world has embarked on an economic project of a scale rarely seen - trillions of dollars committed to building out AI infrastructure, increasingly financed through the debt markets. Although these things take time and the path from here is unknowable in advance, a lot is likely to happen along the way. As the energy sector demonstrated a decade ago, growth financed this quickly does not always end smoothly.
With capital market conditions at such extremes (record single-stock valuations, record debt issuance), we are pleased to see the landscape's opportunity set, particularly on a relative value basis, is expanding.
Thank you for your investment in the Ewing Morris Flexible Fixed Income Fund.
1. Ewing Morris Flexible Fixed Income Fund LPreturns reflect Class P - Master Series, net of fees and expenses as of June 30,2026. Inception date of the Fund is February 1, 2016.
2. U.S. High Yield Bonds are represented by the iShares U.S. High Yield Bond Index ETF(CAD-Hedged). See Additional Disclosures below.
3. Canadian Investment Grade Bonds are represented by the iShares Canadian Corporate Bond Index ETF. See Additional Disclosures below.
Inception date of the Flexible Fixed Income Fund is February 1, 2016. Flexible Fixed Income Fund returns reflect Class P - Master Series, net of fees and expenses. We have listed the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY) and the iShares Canadian Corporate Bond Index ETF (TSX: XCB) as benchmark indices/data for the high yield and corporate bond markets, as these are widely known and used benchmark indices/data for fixed income markets. The Fund has a flexible investment mandate and thus these benchmark indices are provided for information only. Comparisons to these benchmarks and indices have limitations. Investing in fixed income securities is the primary strategy for the Fund, however the Fund does not invest in all, or necessarily any, of the securities that compose the referenced benchmark indices, and the Fund portfolio may contain, among other things, options, short positions and other securities, concentrated levels of securities and may employ leverage not found in these indices. As a result, no market indices are directly comparable to the results of the Fund. Past performance does not guarantee future returns. This letter does not constitute an offer to sell units of any Ewing Morris Fund, collectively, "Ewing Morris Funds". Units of Ewing Morris Funds are only available to investors who meet investor suitability and sophistication requirements. While information prepared in this report is believed to be accurate, Ewing Morris & Co. Investment Partners Ltd. makes no warranty as to the completeness or accuracy nor can it accept responsibility for errors in the report. This report is not intended for public use or distribution. There can be no guarantee that any projection, forecast or opinion will be realized. All information provided is for informational purposes only and should not be construed as personal investment advice. Users of these materials are advised to conduct their own analysis prior to making any investment decision. Source for data referenced and benchmark information: Capital IQ, Bloomberg and Ewing Morris. As of June 30, 2026.
Fellow Limited Partners,
In the second quarter of 2026, the Flexible Fixed Income Fund returned+3.5%.1 This return compares to our publicly traded high yield and investment grade benchmarks, which returned +1.7%2 and +2.2%3, respectively.
Since its inception in early 2016, the Fund has delivered a compound annual net return of 5.7%1, meeting our long-term net return expectations of 5% to 7% and exceeding both of our benchmarks.
Performance
Outside of the hyperscalers which saw underperformance (a sector which we have avoided), the broader credit market was strong. Within the market, a rebound in the software and internet space took hold. Securities of single names we hold, including ZipRecruiter, Tripadvisor and Constellation Software, all made meaningful advances as the 'SaaSpocalypse' we described last quarter abated. Bandwidth – our top holding – was particularly notable as we participated in tendering our bonds back to the company at a very healthy premium to market pricing. Bonds we bought in the 60's amidst extreme pessimism were now being exited at 95 cents on the dollar. We are increasingly finding opportunities at the intersection of debt and equity markets within the technology sector – opportunities where debt investors are far more negative about a company's future than their equity counterparts. Investments at this intersection of debt and equity contributed to results in the quarter through positions in Evolent Health and Xometry.
The Market
Despite the technological and geopolitical upheaval underway, markets remain optimistic. While we witnessed substantial risks to the global supply of oil, we saw no disorderly price action in the bond market and the S&P 500 marked an all-time high in May. Quarters like this remind us just how difficult it is to predict short-term moves in stock and bond markets. Events one might think would matter, don't. And events one might think wouldn't matter, do - at least in the short term. Charlie Munger might repeat "If you're not a little confused by what's going on, you don't understand it." John Arnold, a renowned commodity trader, philanthropist and Meta board member (in that chronological order), captured this dynamic well in a recent X post about a US Airline ETF's reaction to the Iran war.
While equity markets may move with a long tether to reality measured in the trillions in some cases, a particularly appealing aspect of corporate debt markets is that their market values tend to stay far more closely connected to their underlying economic reality. Much of this is thanks to the fact that bonds have a terminal station for value: their maturity date.
"Everything is Hyperscaler"
When peering inside a new Tesla delivered to the White House, Donald Trump uttered a phrase that caught fire: "Everything is computer". In today's debt markets, Everything is hyperscaler. The sheer scale of capital backing the AI infrastructure buildout is historic. And global debt markets are the foundation of this multi-trillion dollar buildout. Every facet of credit is being tapped: investment grade corporates, high yield, private debt, asset-backed and vendor finance. In Canada, Alphabet Inc. (Google's parent company) broke the Canadian corporate bond record in May by raising C$8.5 billion in bonds[1]. This megadeal was then shattered by Amazon in June, which issued C$14 billion[2].
Given the substantial cash generation of the hyperscalers (Google, Amazon, Meta and Oracle in particular), these companies have plenty of additional theoretical credit capacity. But practically speaking, this credit capacity will need to be supported by actual capital. And just because a credit may deserve funding, doesn't mean that capital will be available for it at a reasonable price. Although debt markets have comfortably absorbed this wave of hyperscaler debt, we can't forget that the high US fiscal deficit is also drawing in capital from the sidelines.
It is difficult to know exactly when a well runs dry other than finding its limit in real-time. With BofA's July Fund Manager Survey highlighting an "uber-low" average cash level of 3.6% (down from more than 6% in October 2022), we seem to be plumbing the depths of where investor cash balances have been over the last ~30 years. Even though an astute observer can find the exception and point out that cash levels in 2004 were at the same levels as today (a good entry point in equities and high yield), we would offer that in comparison with 2004, equity valuations and credit spreads are currently in a far less comfortable place.
The hyperscaler issuance wave reminds us of the expansion of the high yield energy sector from 2011 to 2015, once a new technology - fracking - was deployed at scale. As the high yield market grew on the back of energy issuance, it reached its saturation point. The structural overweight in energy, combined with a catalyzing event in the OPEC-induced supply glut, caused bond prices in the sector to hit levels no one would have expected. This is a space that became "over-owned". The same may become true for the hyperscalers. Given the huge sums of capital at play and potential for dislocation and opportunity, we are paying more and more attention to this growing facet of the market.
Bonds versus Stocks
We are also finding opportunity in the relative value between the debt and equity of the same company. The pattern tends to look like this: the debt sees a bleak future and is underpriced; the equity sees a great future and is overpriced. The truth is usually somewhere in the middle.
We see this in software, where a business often generates high free cash flow, holds options to shrink its cost base and carries revenues with reasonable durability. In these cases, the discounted debt can be attractive on its own merits, while the equity does not seem to be baking in its new, higher cost of debt capital, nor the rough headwind of stock-based compensation borne by a vastly smaller equity base.
We also see this in the capital-intensive corners of the AI value chain, particularly the so-called 'neoclouds', where stock investors are paying up for a blue-sky growth narrative while ignoring the very real costs of a depreciating asset (chips), that the bonds are fearfully pricing in. In situations like these, we can build positions that have potential to profit as reality asserts itself in favor of either view.
Outlook
The world has embarked on an economic project of a scale rarely seen - trillions of dollars committed to building out AI infrastructure, increasingly financed through the debt markets. Although these things take time and the path from here is unknowable in advance, a lot is likely to happen along the way. As the energy sector demonstrated a decade ago, growth financed this quickly does not always end smoothly.
With capital market conditions at such extremes (record single-stock valuations, record debt issuance), we are pleased to see the landscape's opportunity set, particularly on a relative value basis, is expanding.
Thank you for your investment in the Ewing Morris Flexible Fixed Income Fund.
1. Ewing Morris Flexible Fixed Income Fund LPreturns reflect Class P - Master Series, net of fees and expenses as of June 30,2026. Inception date of the Fund is February 1, 2016.
2. U.S. High Yield Bonds are represented by the iShares U.S. High Yield Bond Index ETF(CAD-Hedged). See Additional Disclosures below.
3. Canadian Investment Grade Bonds are represented by the iShares Canadian Corporate Bond Index ETF. See Additional Disclosures below.
Inception date of the Flexible Fixed Income Fund is February 1, 2016. Flexible Fixed Income Fund returns reflect Class P - Master Series, net of fees and expenses. We have listed the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY) and the iShares Canadian Corporate Bond Index ETF (TSX: XCB) as benchmark indices/data for the high yield and corporate bond markets, as these are widely known and used benchmark indices/data for fixed income markets. The Fund has a flexible investment mandate and thus these benchmark indices are provided for information only. Comparisons to these benchmarks and indices have limitations. Investing in fixed income securities is the primary strategy for the Fund, however the Fund does not invest in all, or necessarily any, of the securities that compose the referenced benchmark indices, and the Fund portfolio may contain, among other things, options, short positions and other securities, concentrated levels of securities and may employ leverage not found in these indices. As a result, no market indices are directly comparable to the results of the Fund. Past performance does not guarantee future returns. This letter does not constitute an offer to sell units of any Ewing Morris Fund, collectively, "Ewing Morris Funds". Units of Ewing Morris Funds are only available to investors who meet investor suitability and sophistication requirements. While information prepared in this report is believed to be accurate, Ewing Morris & Co. Investment Partners Ltd. makes no warranty as to the completeness or accuracy nor can it accept responsibility for errors in the report. This report is not intended for public use or distribution. There can be no guarantee that any projection, forecast or opinion will be realized. All information provided is for informational purposes only and should not be construed as personal investment advice. Users of these materials are advised to conduct their own analysis prior to making any investment decision. Source for data referenced and benchmark information: Capital IQ, Bloomberg and Ewing Morris. As of June 30, 2026.
Minimizing Tax Drag (Part 2)
Any tax-conscious investor should be transfixed by the opportunities (and pitfalls) in fixed income. This is our account of the landscape.
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Minimizing Tax Drag (Part 2)
