The closing quarter of 2024 saw continued gains (albeit well off the pace of prior quarters) to cap off a very strong year for equity returns.
While markets exhibited some optimism following the U.S. Federal Reserve’s (“Fed”) September pivot to a more accommodative monetary policy stance, the same conditions allowing for dovishness gave markets unease as the quarter progressed. Namely, a slowing labour market, coupled with geopolitical concerns and uncertainty around trade policy under President-elect Donald Trump brought heightened volatility in the month of December. The Fed also reined in expectations for rate cuts in 2025 in their December meeting, which took some wind out of the sails of risk asset investors.
Mega-cap tech companies continued to dominate, with firms like Apple Inc., Microsoft Corporation, and NVIDIA Corporation outperforming on the back of AI-driven demand and robust cloud services growth. Not to be outdone, Consumer Discretionary stocks led the pack for sector-level gains on the back of robust holiday spending trends, especially in online retail platforms.
The benchmark U.S. 10-Year Treasury yield bottomed around the time as the September Fed cut and spent the majority of the fourth quarter marching higher, ending roughly 75 basis points above the prior quarter’s closing level, largely reflecting the potential for inflationary pressures to resurge under a Trump presidency. Credit spreads remained tight on sustained demand for yield above that of government bonds.
Of the major commodities, oil fell, but significantly less than the prior quarter’s losses. Gold prices were largely flat as investors sought haven away from government bonds. “Dr. Copper” weighed in on the state of the economy with a nearly 12% decline in the quarter.
As monetary policy globally has shifted more broadly dovish, divergences will nonetheless continue to crop up and present opportunities for nimble allocation. Volatility markets have also awoken, putting skilled hedgers in a position to demonstrate the case for their craft.
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund Class F returned 2.52% in the fourth quarter of 2024, relative to its blended benchmark return of 2.18%
The post-election rally in stocks tempered, with more modest gains in December, as a combination of negative U.S. economic data (namely job numbers), uncertainty around trade and regulatory policy under Trump and a Fed dampening expectations on the number and depth of rate cuts in 2025 conspired to take stocks well off the pace of prior year-to-date gains.
The Fund nonetheless participated in equity-related gains in the quarter and, relative to traditional “balanced” benchmarks, benefitted from an underweight position in core fixed income (i.e. government bonds). Moreover, our allocation to credit, via the Picton Mahoney Fortified Income Fund, produced positive returns in the period where most long-only credit strategies suffered from duration risk (interest rate sensitivity). The Fund also benefitted from portfolio hedges related to crypto currency.
We are pleased that Q4 and 2024 at large continued to demonstrate the Fund’s ability to capture reasonable upside while mitigating downside, an outcome central to the mandate.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Fund Class F declined 0.79% in the fourth quarter of 2024, relative to its blended benchmark return of 0.34%.
The Fund’s Strategic Asset Allocation base layer, being comprised of 9 discrete asset classes, is largely designed to redistribute equity risk. Performance shortfalls relative to traditional 60/40 portfolio construction models tend to be fairly short-lived, and the Fund remains competitive with traditional “balanced” benchmarks over longer periods, despite the hot equity market environment of late.
Rates exposure was the primary detractor from performance among the 9 asset classes and tactical adjustments managed to offset some of the losses experienced in the asset class. Positive contributions among asset class betas came from energy and precious metals, but these were relatively small in comparison.
In the non-directional (i.e. uncorrelated) layers of the portfolio, our Picton Mahoney Alpha strategies were a strong positive contributor. Factor-driven returns (“Factor Risk Premia”) contributed roughly half the gains of the alpha strategies and both in combination outweighed the detraction from the rates asset class in the Strategic Asset Allocation.
We continue to believe that paying for tail-risk hedges is a worthwhile risk budget, notwithstanding the fact that volatility did not rise enough, nor on a sustained basis, for these hedges to pay off in the period.
Like our stance in the prior quarter, the Fund remains above model weight exposure to the uncorrelated active strategies we manage in-house, as noted above. We hold firm to the view that portfolio construction benefits from diversification of investment styles and approaches over the long term. Moreover, having exposures beyond traditional asset classes could help investors achieve differentiated returns as part of a broader investment portfolio.
Outlook
While the market narrative is a consensus “soft-landing”, our proprietary economic cycle model leans toward a mild recessionary environment on our forecast horizon. To the extent the model can ebb and flow between this economic cycle phase and that of reacceleration< we continue to watch for more decisive signals and believe it somewhat foolhardy to take an immediate or decisive contrarian view to what markets are discounting at this juncture. We believe a fair but of positive news related to a Trump presidency is already “priced in”, but we believe conditions are in place for a potential bubble environment.
Again, as the strategy seeks to redistribute equity risk, we believe risks in our asset allocation layers are quantifiable and modest relative to a 60/40 model. We continue to highlight the benefits of uncorrelated strategies within the Fund as a value-driver and differentiator.
Finally, 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. The Fund has a dedicated exposure to inflation-sensitive assets, and we believe this is a component that is sorely missing from most traditional “balanced / diversified” portfolio construction approaches. Timing inflation pivots can prove challenging, so a risk-budgeted strategic allocation makes eminent sense, and we encourage investors to consider the benefits of such an allocation.
A more robust palette for asset allocation beyond a traditional 60/40 model is a fundamental differentiator in creating an experience most “balanced” investors would generally prefer, especially as interest rate volatility continues to be an unwelcome feature for investors in a traditional portfolio construction framework.
1M (%) | 3M (%) | 6M (%) | 1YR (%) | 3YR* (%) | 5YR* (%) | Since Inception* (%) | Inception Date | |
Picton Mahoney Fortified Multi-Asset Fund (Class F) |
-0.68 |
2.52 |
7.22 |
16.29 |
5.22 |
8.19 |
7.54 |
(2015-10-29) |
Blended Benchmark1 |
-0.76 |
2.18 |
7.54 |
14.39 |
5.17 |
6.81 |
6.83 |
(2015-10-29) |
Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) |
-2.00 |
-0.79 |
3.80 |
11.53 |
2.68 |
5.05 |
5.07 |
(2018-09-27) |
Blended Benchmark2 |
-1.07 |
0.34 |
4.04 |
11.17 |
4.24 |
6.20 |
6.27 |
(2018-09-27) |
Traditional 60/40 Portfolio3 |
-0.48 |
2.96 |
7.80 |
17.46 |
5.49 |
7.67 |
7.39 |
(2015-10-29) |
(*) 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 BofA Merrill Lynch Global Broad Market Index (Hedge to CAD). The purpose of this comparison is to compare the funds to a traditional balanced portfolio using a 60% equity and 40% fixed income approach. We used the MSCI World Index to represent the equity market, and the ICE BofA Merrill Lynch Global Broad Market Index to represent the fixed income market.
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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.
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