Risk markets were generally positive in the quarter, but not without some meaningful action “under the hood”. As interest rates rose with some vigor in the quarter, thematic performance continued to shift in notable fashion. Long duration themes (especially the secular growth nature of technology) experienced a meaningful “speed wobble” as long-term winners saw some valuation shaved via equity risk premium (i.e. interest rates / “cost of money”) moving higher. Against this backdrop, “diversification” continued to be the watchword…
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund (Class F) produced a return of 2.88% during the first quarter of 2021, outperforming the Fund’s blended benchmark1 return of 1.74%. As equity markets generally remain “in gear”, the Fund’s core equity component (Picton Mahoney Fortified Equity Fund) was the primary contributor to performance.
Overall, however, net equity exposure (long positions minus short positions) remained below the typical 60% allocation targeted in many balanced portfolios. Our dedicated fixed income strategy (Picton Mahoney Fortified Income Fund) was also a respectable contributor given traditional fixed income allocations would have been subject to rising interest rates driving disappointing returns.
The meaningful outperformance of cyclical themes and sectors over the past several months “cooled off” to some extent over the quarter, but we believe the macro backdrop is one of accelerating growth and thus argues for a bias toward allocations which are more cyclical in nature. We remain cognizant that this has evolved to somewhat “consensus” thinking.
The Fund seeks diversification benefits from alternative assets and strategies, but we note that positions such as government bond exposure and precious metals (though small in and of themselves) were a drag on performance during the period. As real interest rates (effected for inflation expectations) power through a seeming Maginot Line of 0%, the likelihood of outsized contributions from precious metals has dimmed and thus, allocations have been reduced in favour of small increments to government bonds as nominal interest rates become (slightly) more attractive in absolute terms. Overall, however, the portfolio is relatively less exposed to interest rate sensitivity (“duration”) than we believe one would see in traditional balanced portfolios.
Being able to point to the beneficial outcomes of diversification in the current environment is especially critical to understanding the merits of the Fund. Whilst being underweight the traditional equity allocation in a “balanced” mandate, the Fund has also ensured that the redistribution of equity risk to other assets / strategies does not bring with it unwelcome effects of realized volatility or increased sensitivity to other macro risks. As such, we continue to uphold the Fund as a more than viable compliment, if not replacement to, traditional balanced allocations.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) returned 2.30% during the first quarter of 2021. While the reflation theme continued in Q1 of 2021, there was no shortage of idiosyncratic events such as the storming of the United States Capitol, the market volatility around GameStop and the blockage of the Suez Canal. Diversification proved once again to be an effective tool in portfolio construction.
The sharp rise in government bond yields caused some stress in the speculative and high P/E corners of the equity markets. The reflation theme continued but with a bit more realized volatility in comparison to Q4/2020. More dispersion in asset class performance was evident in Q1/2021. Despite the increase in government bond yields, the Fund’s impact from holdings of government bonds and the spill-over impact on precious metals was more than offset by other pro-cyclical and more inflationary components of the Fund.
The positive benefit of incorporating inflation exposure into a portfolio was evident in Q1, and a variety of strategic and tactical asset class exposures helped add differentiated returns in the Fund. Diversification proved effective in improving risk-adjusted returns in Q1 continuing this theme from the second half of 2020.
Since this strategy aims to redistribute equity risk, we highlight the uncorrelated 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 reduces the impact of the poor performance within a specific style of asset class. Diversification continues to form the basis of our portfolio framework.
Overall, we are pleased with the behavior of the Fund as the current market environment continues to evolve. Returns are being sourced from both directional (asset classes) and non-directional (uncorrelated strategies) means. While investors reference equity benchmark returns (which are not very diversified at all within respective benchmarks), the performance attribution of the Fund has an important context vis a vis portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
While we believe that positioning in the marketplace around reflationary themes is somewhat consensus, it may still be too early to be contrarian. During a period of accelerating economic growth, it might be true that the “trend is your friend”, but opportunities to demonstrate alpha continue to present themselves via sector allocation, stock-picking and taking a measured approach to credit when spreads (the “margin of safety” over government securities) remain very tight. We believe that as the global economy continues to gain momentum.
Perhaps the biggest macro risk remains inflation. According to most central bank commentary, inflation risk is more “transitory” in nature, but we continue to highlight longer-term inflation expectations are hitting levels well through their comparable shorter-term expectations. In a nutshell, the market seems to expect inflation to be “sticky”. This will be the tug-of-war in asset markets for the foreseeable future and positioning should account for these changing probabilities.
1 The blended benchmark of the Picton Mahoney Fortified Multi-Asset Fund is comprised of 15% S&P/TSX Composite Index (TR), 30% MSCI World Index (Net Returns) (in CAD ‡), 10% FTSE TMX Canada 30 Day TBill Index (TR),25% ICE BofAML Global High Yield Index (TR) (Hedged to CAD), 5% ICE BofAML Global Corporate Index (TR) (Hedged to CAD), 15% ICE BofAML G7 Global Government Index (TR) (Hedged to CAD).
This material has been published by Picton Mahoney Asset Management (“PMAM”) on April 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 be additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
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