In Q2, the Picton Mahoney Fortified Income Fund (Class F) returned 0.92% and the Picton Mahoney Fortified Income Alternative Fund (Class F) returned 0.99% underperforming the blended benchmark composed of 75% ICE BofAML Global High Yield Index / 25% ICE BofAML Global Corporate Index (TR) (Hedged to CAD). While outperforming year-to-date, our relatively defensive positioning in both credit and duration contributed to the underperformance in the quarter.
The second quarter enjoyed continued strong performance across most assets as the vaccine roll-out progressed and developed economies moved closer toward re-opening. Despite some renewed uncertainty around COVID variants, the overall trend for risk-assets remained higher as fund flows and technicals remain broadly supportive.
The government bond market experienced a strong rally representing a major reversal from Q1 when yields rose significantly. After reaching a high of 1.77% on March 30th, the yield on the U.S. 10 Year Treasury Note fell to 1.47% on June 30th1. U.S Federal Reserve officials seem to struck a more hawkish tone at the June Federal Open Market Committee meeting, with several committee members shifting their forecast for rate hikes into 2022 and 2023 and the timeline for tapering of asset purchases moved forward as well. We believe this is what led to a flattening of the yield curve as the market priced in a more responsive Fed.
Credit rallied with spreads tightening to post-crisis tights in both the investment grade and high yield markets. With the economic recovery fully priced in, and as we move past the peak in accommodative monetary policy, we are becoming more cautious on credit valuations here from a margin of safety perspective.
However we continue to be very active with new idea generation and have added several new special situation investments during the quarter. We see a trend of issuers focusing on improving their balance sheets via mergers and acquisitions, asset sales, and early refinancings and these are all potential sources of event-driven investments for our portfolio. Given the stretched valuations in fixed income we believe it is a great opportunity to layer in hedges in both credit and rates to reduce potential volatility as we progress through 2021.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 15, 2021. 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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There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
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