The most notable macroeconomic theme in Q2 was the ongoing hawkishness of Central Banks around the world along with financial markets increasingly pricing in a global growth slowdown. The war in Ukraine has faded from headlines impacting market movements. Most asset classes were lower over the quarter with higher government bonds yields impacting equity valuations and credit spreads while the expectations of slower economic growth impacted growth sensitive commodities. In other words, there were not many places to hide across the global capital markets in Q2.
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund (Class F) returned -8.35% during the second quarter of 2022, outperforming its blended benchmark, which returned -9.48% in the period.
For the most part, the quarter continued to see asset markets reacting to hawkish central bank commentary, though a notable shift in sentiment occurred in June, whereby fears of a growth slowdown have given way to fears of outright recession, should central banks continue on the current hiking path. Government bond yields peaked mid-June and bond market participants seem to be pricing in increasing odds that the U.S. Federal Reserve and other central banks will choke off growth while applying policy interest rates to fight inflation.
Our multi-asset / multi-strategy framework seeks diversification benefits across multiple asset classes and uncorrelated strategies. That said, the bulk of negative performance in the quarter was attributable to our active equity strategies and almost half of this negative attribution came in the month of June alone. As for the next largest allocation, our active credit strategy (the Picton Mahoney Fortified Income Fund) contributed significantly less to the drawdown, but in a like manner, roughly two thirds of its negative performance came in the month of June alone.
The third source of notable negative attribution came from industrial metals allocation within the commodities basket. Again, a distant third in terms of negative attribution, yet the month of June saw year-to-date gains in the asset class, turn to year-to-date losses. Without question, the inflation narrative gave way to recession fears and industrial metals were subject to seemingly indiscriminate profit-taking. The month of June offered few places to hide and was an emphatic continuation of a grinding, higher volatility regime in place for much of the year to date.
We continue to hold a conservative stance in equity allocation, understanding our equity style is sometimes subject to more assertive profit-taking by market participants. That said, we believe there will be opportunity as central banks potentially “pause” on the somewhat aggressive rate-hiking path as inflation cools and broader economic data continues to disappoint. Our proprietary economic cycle model has indeed turned more negative than positive of late, but we are quick to point out that an environment of decelerating economic growth does not always progress to recession. The ball is firmly in the collective “court” of global central banks.
While we are pleased the fund has outperformed its benchmark, this is a frustrating environment for hedging, as volatility remains relatively high, making ongoing / new hedges costly at times. As such, keeping gross exposures relatively conservative potentially offers prudence, and increasing allocations will likely only be executed on improving economic and market fundamentals which will drive our cycle model to action.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) (the “Multi-Strategy Fund”) returned -8.65% during the second quarter of 2022.
While our multi-strategy portfolio construction framework continues to rely on diversification benefits, these benefits were hard to source in Q2. One of the benefits achieved in the portfolio management process was a decrease in position size as well as an underweight in Government bond exposure. Portfolio hedges offset some of the asset class declines.
Notable across Assets, Industrial Metals were the largest negative contributor with the decline being one of the largest on record in terms of quarterly returns observed in the asset class over the past 30 years. Another outlier in terms of historical performance in Q2 was the negative contribution from both Assets and Strategies. Within Strategies, both our PMAM proprietary Factor Risk Premia as well as the active strategies declined in performance. This unusual circumstance usually turns out to be transient with a normalization in asset class and strategy diversification being the more normal context for capital markets behavior. Diversification has served the portfolio well through the first quarter of 2022 and we expect a return to this type of market environment later of the year.
In Q1, we continued with the underweight exposure to our Tactical Asset Allocation model and Strategic Asset Allocation. This has generally helped the portfolio in an environment of negative asset class performance. We continue to believe that decreasing portfolio risk is warranted. We maintain our exposure to uncorrelated strategies believing that we can likely see normalization in the performance of our Factor Risk Premia and Alpha strategies.
We continue to believe that diversification across asset classes and strategies is likely the best long-term approach, and is expected to be rewarded over longer time horizons.
We maintained our exposure to the uncorrelated active strategies we manage here at Picton Mahoney Asset Management, namely the Picton Mahoney Fortified Market Neutral Alternative Fund and the Picton Mahoney Fortified Income Alternative Fund. Diversification of styles and approaches over the long term can help reduce the impact of the poor performance within a specific style or asset class.
Performance of the Multi-Strategy Fund was in line with benchmarks and traditional balanced portfolios in Q2. We believe that as the current market environment continues to evolve, our approach to source returns both directional (asset classes) and non-directional (uncorrelated strategies) should result in improved portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
The ongoing environment of slowing economic growth and ongoing attention to global central bank activity tends to suggest a continuing difficult environment is likely for most asset classes. The bad news related to other macroeconomic events such as China’s ongoing shutdowns and the energy crisis in Europe is front and center across most investors’ mindsets with depressed sentiment levels for both investors and consumers. At some point, growth expectations could potentially diminish to a point where upside surprise becomes a reasonable probability and risk/return consideration.
We still believe the near-term environment is challenging and are beginning to look further out, to perhaps the back half of the year, for a “risk-on” stance. The multi-asset strategies team continues to promote the benefits of our Fortified Portfolio Construction process as a means of aiming to delivering diversification benefits in portfolios.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 15, 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.
This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.
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