Multi-Asset Strategies Commentary: As at May 31, 2020

Source: Michael White, CFA

Publish Date: Jun 10, 2020

Read Time: 5 minutes

Picton Mahoney Fortified Multi-Asset Fund

In the month of May, the Picton Mahoney Fortified Multi-Asset Fund (Class F) produced a return of 3.10%.

In a second full month of equity market recovery, the Class F units of the fund have managed to turn positive on a year-to-date basis while our traditional “balanced” benchmark* has remained underwater.

We believe portfolio composition has been a key driver in achieving solid risk-adjusted returns and the tools at work help differentiate the strategy from traditional balanced mandates, namely:
- The fund’s investment in the Picton Mahoney Fortified Equity Fund provides exposure to short positions which has driven more alpha opportunity and lower equity volatility in May.
- The fund’s investment in the Picton Mahoney Fortified Income Fund derives return from credit selection (long and short) rather than interest rate directional risk.
- The fund’s exposure to alternative assets like precious metals and volatility hedges help to manage risk and to drive returns that are either independent or inverse to the directional risk in long-only exposure to traditional asset classes.
- The fund’s exposure to alternatives strategies such as the Picton Mahoney Fortified Arbitrage Alternative Fund, Picton Mahoney Fortified Market Neutral Alternative Fund and Picton Mahoney Fortified Active Extension Alternative Fund can drive uncorrelated/lower volatility returns and/or provide a means of dialing risk up or down as may be warranted in the current risk environment.

In short, the basic diversification theory present in the ubiquitous 60/40 portfolio can be enhanced to include other positive returning assets/strategies to “Fortify” a portfolio.

Given all the above, we remain pleased with the fund’s performance relative to balanced peers on both short and longer-term measures, but we are most proud of the lower volatility experience given this fund offers much less exposure to government bond yields, should rates ever increase. We believe this is a pervasive risk which has “spilled over” into the equity sleeve of many traditional balanced portfolios and therefore seek to provide a more diversified set of return drivers for the fund.

Picton Mahoney Fortified Multi-Strategy Alternative Fund

The Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) returned 2.75% in the month of May.

Overall, asset allocation (both strategic and tactical) lacked diversification benefits over the month, but broader asset class participation was evident toward the end of the period, as leading economic indicators recover and gain traction (from very depressed levels). Broader asset class participation will benefit the fund’s diversification-focused approach, whereas narrow leadership (i.e. few sectors/stocks driving equity returns) tends to overestimate asset class performance when looking only at a few index-level returns.

The fund’s dedicated exposure to Factor Risk Premia has been a drag on performance and we expect this to normalize going forward, remaining a source of differentiated returns for the fund versus the more traditional long-only “balanced” portfolio constructs.

Our alpha-producing alternative investment strategies (Market Neutral Equity, Merger Arbitrage, Long Short Credit) drove over 100bps of the fund’s performance in the month and as such, we are pleased with the uncorrelated nature of those returns. Similar to the Factor Risk Premia, these strategies mentioned above were also identified as a source of differentiated returns once these strategies normalized and incremental capital allocated to them represented a compelling risk/reward opportunity.

Our own research and historical analysis of index performance suggests that post a significant drawdown, markets have tended to generate positive returns over a 12-month timeframe. We continue to believe that in an uncertain world, diversification remains the watchword.