Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund Class F (“the Multi-Asset Fund”) returned 4.95% in the fourth quarter of 2023.
Q4 2023 represented a reversal from the market dynamics of the third quarter. Government bond yields peaked in October 2023 and then declined for the remainder of Q4 to reverse the rise which occurred in Q3 of 2023. This decrease in yields helped spur a rally in equity markets. There was some evidence of a broadening in the equity rally but Q4 continued the theme of 2023 regarding the performance of large cap US technology companies. The disinflationary theme to markets was also evident in the decline in Food and Energy related commodity markets.
In the context of “balanced” strategies, the tailwind of declining rates contributed to positive returns from both traditional asset classes. Given the Multi-Asset Fund offers investors more diversification and a tendency to be “underweight” traditional market risks, via lower beta to Developed Market Equities and Interest Rates asset classes, a vigorous risk-on rally is an environment that is not worth chasing, given the fund’s history of diversification and risk management.
Moreover, any broad market hedging proved a cost in the quarter, yet we believe maintaining exposure to tail risk hedging is prudent as our economic cycle model continues to indicate late-stage dynamics.
Diversification across asset classes and strategies is likely the best long-term approach and is expected to be rewarded over longer time horizons.
One notable change to asset allocation versus the prior quarter involved an increase to our Emerging Market Equity exposure. This should be viewed as a modest nod to upside optionality to broader equity risk-on, as opposed to a deeply fundamental view of the emerging market asset class, per se. The increase of allocation to emerging market equity from ~3.1% to ~5.7% during Q4 2023 is a large shift off a low base in the specific asset class, but a modest rise (i.e. ~260bps) in equity risk overall.
The narrow leadership and outperformance of large cap US technology stocks makes it difficult for more diversified approaches to keep up. As the current market environment continues to evolve, our approach to source returns through a broader diversification framework will likely result in improved portfolio construction imperatives such as risk diversification, lower correlation and quality of returns. Inasmuch as markets tend to spend more time “going up than going down”, we note this strategy has a proven track record of outperformance through managing downside risk as opposed to capturing all the upside on offer in traditional markets. The “math” of managing downside risk to benefit longer-term compounding is a fundamental truth supporting our approach in this strategy.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Fund Class F (“the Multi-Strategy Fund”) returned 3.63% in the fourth quarter of 2023.
The largest contributor to positive performance in Q4 was due to Asset Allocation followed by the Alpha strategies. The largest contribution to the Asset Allocation was from Government Bonds followed by Equity markets. While the largest detractor was due to Energy Commodities. This behavior demonstrating the disinflationary nature of markets in Q4.
We believe maintaining exposure to tail risk hedging is prudent as our economic cycle model continues to indicate late-stage dynamics.
We increased exposure to the uncorrelated active strategies we manage here at Picton Mahoney Asset Management, namely the Picton Mahoney Fortified Market Neutral Alternative Fund, the Picton Mahoney Fortified Income Alternative Fund and Picton Mahoney Fortified Arbitrage Plus 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.
Two of the three active strategies as well as our quantitative equity factor risk premia provided positive returns in Q4.
The portfolio underperformed the benchmark as well as traditional 60/40 approaches in Q4 2023. This is a reversion from the more diversified environment and outperformance observed in Q3 but a continuation of the theme of 2023. The narrow leadership and outperformance of large cap US technology stocks makes it difficult for more diversified approaches to keep up. As the current market environment continues to evolve, our approach to source returns both directional (asset classes) and non-directional (uncorrelated strategies) will likely result in improved portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
Outlook
Our proprietary economic cycle model continues to ebb and flow with incoming economic data between a mild recessionary environment and a reacceleration environment while our inflation cycle model points to an ongoing moderation of inflation. Regarding the economic cycle, we are inclined to let the evidence continue to bear out before making more decisive asset allocation calls with the intent of embracing risk. As noted above, our process remains squarely focused on mitigating downside capture, so as not to be compelled to achieve all (or greater) upside capture when traditional risk asset markets are in gear.
We expect the ongoing sensitivity of markets to bond yields to moderate as growth data becomes more important than inflation data. And we believe our Fortified Portfolio Construction process offers an objective and repeatable allocation process that is evidence-based and progressive in nature. Maintaining smoother transitions through economic cycle phases and market regimes is critical in delivering target returns with lower risk than traditional “balanced” / “diversified” portfolio construction models.
| 1M (%) | 3M (%) | 6M (%) | 1YR* (%) | 3YR* (%) | 5YR* (%) | Since Inception* (%) | |
| Picton Mahoney Fortified Multi-Asset Fund (Class F) | 1.39 | 4.95 | 3.68 | 8.50 | 3.44 | 7.43 | 6.52 (Oct. 29, 2015) |
| Blended Benchmark1 | 2.67 | 6.66 | 5.78 | 12.60 | 3.82 | 6.89 | 5.95 (Oct. 29, 2015) |
| Canada Fund Tactical Balanced Category Average | 2.67 | 5.70 | 3.59 | 7.38 | 1.76 | 4.33 | 3.25 (Oct. 29, 2015) |
| Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) | 1.74 | 3.63 | 3.82 | 2.01 | 2.73 | 4.75 | 3.89 (Sept. 27, 2018) |
| Blended Benchmark2 | 2.71 | 5.66 | 5.07 | 11.88 | 4.54 | 7.19 | 5.38 (Sept. 27, 2018) |
| Traditional 60/40 Portfolio3 | 2.52 | 7.58 | 5.61 | 14.19 | 14.19 | 3.61 | 6.22 (Oct. 29, 2015) |
(*) Annualized performance
Source: Picton Mahoney Asset Management
1Blended Benchmark = 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 BofA Merrill Lynch Global High Yield Index (TR) (Hedged to CAD), 5% ICE BofA Merrill Lynch Global Corporate Index (TR) (Hedged to CAD), 15% ICE BofA Merrill Lynch G7 Global Government Index (TR) (Hedged to CAD)
2Blended Benchmark = 5% FTSE TMX Canada 30 Day T-Bill Index, 40% MSCI World 100% Hedged to CAD Net Total Return Index, 5% LMBA Gold Price, 40% ICE BofAML Global Broad Market Index (Hedge to CAD), 10% S&P GSCI Canadian Dollar Hedged Index TR
3Traditional 60/40 Portfolio = 60% MSCI World Index (Net Returns) (in CAD), 40% ICE BofAML Global Broad Market Index (Hedge to CAD)
