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Picton Mahoney Fortified Multi-Asset Fund Monthly Positioning: As at February 28, 2022

Source: Michael White, CFA
Publish Date: Mar 22, 2022
Read Time: 7 minutes
Picton Mahoney Fortified Multi-Asset Fund Cl. F icon  Fund profile icon
Picton Mahoney Fortified Multi-Asset Fund  (the "Fund")

The ongoing tension on the Ukrainian border boiled over on February 24th with Russia attacking.  Given the downside to risk assets as the buildup occurred, many seemed quick to quote the old adage “buy to the sound of cannons”.  In our view, however, given the backdrop of slowing global growth, flattening yield curves and uncomfortable inflation, we do not believe the risk/reward setup is asymmetrically positive in the very near term.  As such, we continued to “dial down” equity risk by shifting allocation from the Picton Mahoney Fortified Long Short Alternative Fund to the Picton Mahoney Fortified Market Neutral Alternative Fund.  We will be monitoring the situation in Ukraine closely for tactical opportunities which may be risk-positive and seek opportunities to capture equity upside as cost-effectively as possible (i.e. equity index options strategies).

Fixed Income
Fixed Income positioning continues to remain consistent with prior months.  While the invasion of Ukraine would see capital seek the safe haven of (developed market) sovereign bonds, we continue to believe the yield curve is vulnerable to flattening and eventual inversion, given the uncomfortable mix of slowing economic growth and high / persistent inflation (likely exacerbated by the invasion).  Our core fixed income positioning, the Picton Mahoney Fortified Income Fund, seeks to hedge interest rates, credit risk and liquidity risk, which we believe continues to be the most prudent approach for the asset class meant to be a diversifier to equities.

Our research supports the role of commodities in a well-diversified portfolio as both a proxy for economic growth sensitivity and therefore a means of redistributing (diversifying) equity risk, but also as an inflation hedge.  We believe the situation in Ukraine will expose some uncomfortable realities about global food and energy security and as such, a structural bull case may be reinforced for select commodity exposure.  In our portfolio construction framework, we see commodities as both a strategic and tactical asset class, but in the near-term, a tactical approach to monetizing gains will be important in what generally is, at the essence, a volatile asset class.

Alpha Strategies
Exposure to Merger Arbitrage and Market Neutral strategies continue to offer diversification benefit to the Fund, given return streams focus on manager skill and are largely independent of the directional risk in traditional asset markets. As noted above in the equity commentary, we are utilizing the Market Neutral strategy to “dial down” the equity beta 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.  We continue to maximize the 10% limit on alternative mutual funds within the portfolio.

Our VIX futures position has been an important hedge amid the market turmoil associated with the invasion of Ukraine.  We are not in a position to predict outcomes to this conflict, but are comfortable in the view that volatility could remain elevated for the foreseeable future.  As such, new hedges become more expensive, so we will be seeking opportunities to monetize some of the volatility premium to fund other hedges.  To the extent positioning in the rest of the portfolio is conservative, we could also seek out hedges which can offer some participation in a risk asset recovery – this we think is a very cost-effective way to pivot the portfolio toward the potential for “good news”.

The war in Ukraine is certainly a new and appreciable risk dynamic, but we remain constructive that the global economic backdrop has not suffered enough to tip us into recession in the near-term.  Overall, this conflict is likely to weigh on certain geographies for economic growth given the potential impact of sanctions on global trade and commodities prices.  As we alluded to above, it would be foolhardy to attempt to predict outcomes to this conflict, but opportunities to monetize some of the volatility associated with this war will likely present decent risk/reward opportunities on a medium-term basis.

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.

Performance table for Picton Mahoney Fortified Multi-Asset Fund (Cl. F) as of February 28 2022

This material has been published by Picton Mahoney Asset Management (“PMAM”) on March 22, 2022. It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value.

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