Class A Shares – Outperformance After Market Corrections

Class A Shares – Outperformance After Market Corrections

May 2, 2025

On April 2, 2025, former President Donald Trump announced sweeping reciprocal tariffs targeting major U.S. trading partners, including China, the European Union, and Japan. This sparked an intense sell-off across global markets. Over the following two days, S&P 500 Index lost $5.8 trillion in market cap, this marked one of the largest two-day loss in U.S. market history¹. Even after the recent market recovery as of April 23, 2025, the S&P 500 Index is still down 12.5% from the February 19, 2025 peak² and S&P/TSX Composite Index is down 5.2% since the January 31, 2025 peak².

The recent equity market correction may present an attractive entry point for Class A shares and may provide investors an opportunity to invest in these sectors and themes today at attractive prices.

Class A shares: Proven outperformance after market corrections

Split Corp Class A shares have historically outperformed after major market corrections due to their structural leverage and portfolio holdings in high-quality dividend-paying stocks.

Class A shares benefit from embedded leverage in split-share corporations. When the underlying portfolio rebounds, Class A shareholders receive an accelerated appreciation of assets after covering fixed obligations to Preferred shares. A majority of Split Corp portfolios concentrate on stable, dividend-paying companies in sectors like financials and utilities. These stocks tend be the leaders in their respective industries and recover faster after the major market downturn.

Using Brompton’s Dividend Growth Split Corp. Class A (Ticker: DGS) as an example, the chart below illustrates how DGS Class A shares have provided investors with out-sized 1 year forward total return over the past 20 years following major market corrections³:

1 Year Forward Total Return After Trough

Source: LSEG Eikon, as of March 31, 2025. Trough date = S&P/TSX Composite Index trough date during the market correction events.

Understanding Split Share Corporations and Class A Shares

Split Share corporations have a dual-class structure that separates capital preservation (Preferred shares) from growth-oriented participation (Class A shares). Class A shares enjoy an enhanced participation in the capital returns of the Split Share corporation’s investment portfolio as a result of the fund’s structure. Class A shareholders gain exposure to the performance of the entire underlying portfolio, while Preferred Shareholders are entitled only to its dividend and a return of capital at the end of term.

For example, if a $20 investment portfolio is split into a $10 Class A share and a $10 Preferred share, and the investment portfolio grows by 10% or $2, then all of the growth accrues to the Class A share, which represents a 20% increase ($2 appreciation on a $10 Class A share) in value. In this simple example, the market value of the portfolio went up by 10% but the Class A share increased by twice the amount, or 20% due to the structural leverage of the Split Corp. The Preferred Share in a Split Corp typically has a par value of $10 and due to its preferential features, do not participate in the investment portfolio upside beyond the $10 par value. Therefore, the Class A share’s enhanced equity return participation is the main driver for the Class A Shares’ long-term outperformance.

Brompton’s Approach

Brompton Split Corp. Class A Share ETF ( Ticker: CLSA) and Class A shares issued by Brompton’s Split Share funds provide attractive monthly income and enhanced long-term growth potential through investing in commonly held, high quality dividend stocks, like Canadian banks, lifecos, and large-cap dividend growers.

¹ Source: LSEG Eikon, total market cap change of S&P 500 Composite Index from April 2nd, 2025 to April 4th 2025

² Source: LSEG Eikon, S&P 500 Composite Index from February 19, 2025 to April 23, 2025 and S&P/TSX Composite Index from January 31, 2025 to April 23, 2025.

³ Source: LSEG Eikon, as of March 31, 2025. Trough date = S&P/TSX Composite Index trough date during the market correction events.

⁴ Returns are for the period ended March 31, 2025 and are unaudited. The table shows the compound return on each fund’s Class A share for each period indicated. The performance information shown is based on net asset value per Class A share and assumes that distributions made by each fund on its Class A shares during in the periods shown were reinvested at net asset value per Class A share in additional Class A shares of each fund. Past performance does not necessarily indicate how each fund will perform in the future.

This document is for information purposes only and does not constitute an offer to sell or a solicitation to buy the securities referred to herein. The opinions contained in this report are solely those of Brompton Funds Limited (“BFL”) and are subject to change without notice. BFL makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, BFL assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. BFL is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment. Please read the prospectus or annual information form before investing.

Commissions, trailing commissions, management fees and expenses all may be associated with exchange-traded fund investments. Please read the prospectus before investing. Exchange-traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

You will usually pay brokerage fees to your dealer if you purchase or sell shares of the investment fund on the Toronto Stock Exchange or alternative Canadian trading platform (an “exchange”). If the shares are purchased or sold on an exchange, investors may pay more than the current net asset value when buying shares of the investment fund and may receive less than the current net asset value when selling them.

There are ongoing fees and expenses associated with owning shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the funds in the public filings available at www.sedarplus.ca. The indicated rates of return are the historical annual compounded total returns including changes in share value and reinvestment of all distributions and do not take into account certain fees such as redemption costs or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Information contained in this document was published at a specific point in time. Upon publication, it is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. Certain statements contained in this document constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to matters disclosed in this document and to other matters identified in public filings relating to the funds, to the future outlook of the funds and anticipated events or results and may include statements regarding the future financial performance of the funds. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Investors should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Chris Cullen

Senior Vice President, Head of ETFs

Joining Brompton Group in March of 2006, Mr. Cullen is a CFA charterholder and is a member of the Toronto CFA Society. He graduated with a Bachelor of Applied Science in Chemical Engineering and Applied Chemistry from the University of Toronto and a Master of Business Administration from the Rotman School of Management, University of Toronto.

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