Picton Mahoney Fortified Multi-Asset Fund (the "Fund")
As market participants continue to grapple with hawkish central bank messaging and slowing economic growth expectations, the downside leadership of higher valuation equities gave way to a broader market sell-off in April. We are quick to point out that historically, slowing growth does not always necessarily lead to recession. That said, during the month, our economic cycle model did not yet offer any shifting probabilities toward a resumption in a higher rate of growth. As such, our equity positioning has remained relatively cautious from an allocation standpoint. We are keenly attuned to our cycle model for signals that might offer a lower-risk opportunity to increase equity allocation. Confirmation of either an improving economic growth outlook, or growth expectations being taken too low can set up for positive surprise and justify buying the seemingly relentless selling pressure witnessed in markets year-to-date.
The inflation narrative and hawkish central bank response has taken quite a toll on duration-sensitive fixed income. We have long highlighted the risk in assuming “rates at (or near) zero” would subject investors to the simple math that any movement higher off a very low base becomes more of a magnitude move. As such, we have been very comfortable with the allocation to the Picton Mahoney Fortified Income Fund, a mandate with a bias (and toolkit) to hedge the vagaries of traditional fixed income and that this has added value relative to traditional “balanced” portfolios. Within our fixed income strategy, we have booked gains on profitable hedges and are seeking opportunities to be buyers of selective credit issues as spreads have widened toward levels last seen in the growth scare of late 2018.
Commodities continue to be an important diversifying element of the Fund’s construction, ending largely flat, as a broad asset class, in the month. Gains in energy were largely offset by losses in industrial metals while contributions from precious metals and grains were negligible. We believe commodities are undoubtedly the beneficiaries of the inflation narrative and some of this sensitivity is probably exacerbated by the war in Ukraine. We continue to believe, however, that structurally bullish arguments for select commodities existed before the war and provide an ample case for the allocation. That said, we have been seeking opportunities to hedge some of these exposures in the near-term as they may become a source of funds for buyers of an equity rally, if one ensues.
Exposure to the Picton Mahoney Market Neutral strategy remains an uncorrelated return in the multi-asset portfolio construction. As has been noted in previous commentaries, the Market Neutral strategy has been used to “dial down” the equity beta of the overall portfolio until either or both of: 1) a resolution to the conflict in Ukraine, or 2) further signs of re-accelerating economic growth, provide a better risk/return prospect for equity risk.
Our CBOE Volatility Index (VIX) futures position has been an important hedge amid the market turmoil associated with the invasion of Ukraine and slowing economic growth expectations. Volatility has remained elevated, making ongoing / new hedges relatively more costly, but this is also often a necessary precursor to better risk/reward opportunities within the broader portfolio.
We remain firm in the view that we are in the midst of some form of mid-cycle slowdown, exacerbated by sanctions and trade impacts from the war in Ukraine and ongoing COVID issues in China. Our focus is on the leading indicators for both inflation and economic activity, either (or both?) of which could soon provide signs of hope for a better return environment in the back half of the year.
On positioning the Fund for investors, our belief is that the diversified nature of the Picton Mahoney Fortified Multi-Asset Fund offers a more enhanced diversification in a core holding that is the natural evolution of a “balanced fund”. Whether as an introductory vehicle to a diversified strategy with alternative tools and sensibility, a stable portfolio base from which to add satellite positions (individual securities, other alternative strategies, etc), or a one-ticket solution for smaller portfolios, we remain steadfast in our objective to deliver consistent risk-adjusted return in a solution focused on core diversification.