Equity Commentary: As at December 31, 2024

2024 has been a strong year for equity markets, with the S&P 500 index up 25% and the S&P/TSX Composite index up 22%. Momentum has led style factor returns as winners have kept winning, with stocks in the highest quintile of nine-month price momentum, outperforming the market by 23 percentage points over the past 12 months. Momentum’s strong outperformance resembles the late 1990s, leaving some investors to question if it will be sustained.

Unlike the late 1990s, momentum is not expensive relative to other style dynamics, and the diversity of the sector has improved to include non-technology companies. Today’s momentum stocks also have better fundamentals and significantly better profitability than those in the dot-com bubble.

However, as investors chase performance in the late stages of 2024, there is a growing risk that momentum has become increasingly crowded. MOMO (Momentum of Missing Out) may have morphed into FOMO (Fear of Missing Out), raising the risks of a large correction in 2025. Higher inflation and a less dovish Fed policy than the market currently expects could be catalysts for an unwind.

We believe the backdrop of an uncertain macroeconomic environment, volatile interest rates, and changes in market structure have created favourable conditions for long-short strategies.

Sectors that contributed to absolute performance:

Information Technology

Sector performance rebounded after a choppier third quarter.

The best-performing subsector was software with excitement about AI monetization boosting names such as Salesforce Inc and Atlassian Corporation.

Internet stocks performed well amid healthy e-commerce and advertising demand during the holiday shopping period.

The semiconductor sector was weaker in the fourth quarter of 2024, although generative AI names still outperformed.

In hardware and networking, results mirrored semiconductors, but with more idiosyncratic winners and losers as debates continue regarding the long-term beneficiaries of generative AI and its overall economic impact.

Financials

For the second quarter in a row, Financials outperformed the broader market, after a Republican sweep in the U.S. election reinvigorated a growth acceleration agenda, including tax cuts and de-regulation. More defensive financial stocks, including property and casualty insurance companies and the exchanges, have begun to lag, and underperformed in the fourth quarter.

We remain somewhat cautious on banks in the near term, especially given their recent strength, but are becoming increasingly more positive on the group, because headwinds due to volumes, margins, credit and capital all appear to be abating. Also, market-sensitive businesses such as wealth and asset management are starting to build momentum.

We remain bullish on life insurance: we believe a structural re-rating opportunity could be provided by a higher-rate regime, compared with the zero-interest-rate policy that followed the global financial crisis.

Many of the life insurance companies we like have built large capital-light wealth/asset management businesses that will likely continue to benefit from numerous secular tailwinds and strong growth.

We are also positive on alternative asset managers, because we believe they can continue to raise significant third-party capital and will be able to deploy it into the next cycle; they also have long-term secular tailwinds for growth as they increase penetration in the retail channel.

Sectors that detracted from absolute performance:

Industrials

Recently, we’ve seen industrials stocks waver as the market looks ahead to 2025. Erring on the side of conservatism, we have maintained a short exposure to relatively expensive multi-industrial/third-party logistics names, while also hedging cyclical long positions in broader secular themes. We are confident that the businesses we like – including those with cyclical exposure – will continue to meet our long-term return thresholds.

We continue to look for out-of-favour companies with a history of outsized growth, catalyst-driven idiosyncratic rerating angles and/or opportunities to improve structural returns on invested capital. Lately, we have been refocusing on Canadian airlines, given the valuation gap with their American counterparts, despite similar (if not better) fundamentals.

We’ve also spent more time on hazardous waste names exposed to growing infrastructure spending and onshoring. We remain bullish on the industrial leasing complex over the long term. We have hedged the cyclicality of rentals with less attractive names that have similar exposures.

More recently, we’ve also gained conviction regarding a couple of lumber-based product manufacturers and distributors. Finally, the merger and acquisition environment for serial acquirers continues to be quite favourable. Accordingly, we have shored up weightings in companies with a strong track record of acquisition and ample cash on hand.

Small Cap Spotlight

We have a positive outlook on Hudbay Minerals Inc. (HBM) – HBM is a mid-tier copper/gold producer and developer with a diversified asset base, operating mines in both North and South America. HBM has been executing on a deleveraging plan, and it now sits with one of the stronger balance sheets in the space. HBM closed the acquisition of Copper Mountain in mid-2023, and have since successfully integrated the asset into their portfolio and are growing production there, with a plan to double production at the mine in the next few years. HBM also has additional growth opportunities. This combination while trading at a reasonable valuation makes HBM a preferred way to gain exposure.

Outlook and Opportunities

While the market narrative is a consensus “soft-landing”, we see risk of a mild recessionary environment on our forecast horizon. That said, we continue to watch for more decisive signals beyond speculative/bullish positioning and softer labour market data. Moreover, it may prove foolhardy to take an immediate or decisive contrarian view to what markets are discounting at this juncture. We believe a fair bit of positive news related to a Trump presidency is already “priced in”, but we believe conditions are in place for a potential bubble environment and are taking steps to navigate the environment prudently.

Fundamentally, dispersion in equity markets still offers an attractive opportunity to demonstrate stock-picking skill and the macro backdrop should nonetheless provide a rich opportunity set for security selection and value-added allocation decisions at the sector-level. Thematically, we believe it is worthwhile to consider inflation risks in the macro landscape. Whereas the traditional “goods” inflation has moderated to the point where most central banks would argue “mission accomplished” after rate hiking cycles, we note that “services” inflation remains stubbornly high. We have therefore taken steps to align our equity portfolios with beneficiaries of this “sticky” services inflation and eschew those companies, industries and sectors which are frankly on the “losing end” of this reality.

As of December 31, 2024 (%) 1M (%) 3M (%) 6M (%) 1YR (%) 3YR* (%) 5YR* (%) Since Inception* (%) Inception Date
Picton Mahoney Fortified Equity Fund (Cl. F) 0.05 6.80 10.98 29.61 10.16 13.64 10.28 (2015-10-29)
Picton Mahoney Fortified Active Extension Alternative Fund (Cl. F) -3.14 5.43 16.08 29.18 10.32 15.45 13.92 (2018-09-27)
Picton Mahoney Fortified Market Neutral Alternative Fund (Cl. F) 0.79 3.80 6.36 15.07 7.72 9.15 8.22 (2018-09-27)
Picton Mahoney Fortified Long Short Alternative Fund (Cl. F) -1.38 4.07 9.71 19.71 8.81 15.13 (2020-07-08)

(*) Annualized performance.

Source: Picton Mahoney Asset Management

This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 11, 2025. 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 information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard.  Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

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.

Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.

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.

Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.

© 2025 Picton Mahoney Asset Management. All rights reserved.

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This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 11, 2025

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 information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

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.

Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.

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.

This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.

© 2024 Picton Mahoney Asset Management. All rights reserved.