The Picton Mahoney Fortified Inflation Opportunities Alternative Fund Class F (“the Fund”) increased by 1.05% in the fourth quarter of 2024, continuing to mirror inflation dynamics throughout the year.
Market participants were largely caught off guard by the hotter than expected inflation data in Q1 in the same way that inflation data generally cooled in Q2 and most of Q3. In Q4 inflation expectations increased again during the lead-up to the U.S. election and on the quick resolution of outcome. As a result, the Fund provided a positive return in Q4. We are pleased with the performance of the Fund thus far indicating the ability to preserve capital in the presence of cooling inflation data as well as provide upside capture when inflation dynamics turn positive.
Throughout 2024 we have maintained two key construction imperatives in our approach 1) we gain exposure to a diversity of inflation-sensitive asset classes, and 2) we seek diversification within each of these inflation sensitive asset classes. Both aspects ensure the portfolio is designed to properly capitalize on the emergence of an inflationary regime.
The Fund’s risk management process managed the Q3 disinflationary episode via minimum portfolio exposure across most of the inflation sensitive assets in the portfolio. Following the moderate deflationary capitulation event in that quarter, markets appeared to have overreacted in the pricing of the disinflationary process. We therefore tactically increased the exposure to the duration-hedged inflation linked bond component of the portfolio as well as increased the exposure uniformly across all components of the portfolio. Throughout the fourth quarter we moderated this exposure as we thought forward-looking inflation expectations had increased too quickly.
We have the view that services inflation is likely to be stickier than anticipated and therefore maintain a tactical adjustment in portfolio exposure that will profit from that outcome, increasing exposures that will respond more to “services” inflation as opposed to “goods” inflation.
Regarding positioning within the broader asset class allocations, our tactical risk management process has also continued to overweight Precious Metals due to their ongoing positive medium- and longer-term momentum. The opposite is the case for Industrial Metals where price dynamics have been negative for most of the fourth quarter. We see diversification across the Soft Commodities group, a positive for our portfolio which seeks diversified inflation exposures. Our risk management process has continued to maintain a minimum weighting in the Grains group which has been in a defined bear market for most of 2024, with some minor stabilization occurring near the end of the year.
From an attribution perspective, in the fourth quarter, the largest asset class contributor to positive performance was Soft Commodities, driven mostly by idiosyncratic weather and crop condition events as opposed to a broader inflationary dynamic. As a reminder, while these events may seem idiosyncratic to inflationary episodes, at times, they can feed into an inflation cycle to amplify inflationary dynamics, providing another reason why we seek breadth in our approach to allocation. Short Government Bonds and duration hedged inflation linked bonds also provided positive contribution, largely in October in the lead-up to the U.S. election and anticipation of the outcome. Precious metals were the largest contributor to portfolio volatility in the fourth quarter due to the run up in prices prior to the election and subsequent decline partly due to an orderly uncontested election outcome. The largest negative contributor to performance were the Industrial Metals – the lackluster follow through on China stimulus, along with a stronger US dollar weighed on these prices through the fourth quarter.
Performance as of December 31, 2024 (%) | 1M (%) | 3M (%) | 6M (%) | 1YR (%) | Since Inception* (%) (2023-05-04) |
Picton Mahoney Fortified Inflation Opportunities Alternative Fund (Cl. F) | 0.78 | 1.05 | 3.41 | 9.13 | 5.80 |
(*) refers to average annualized performance.
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