Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund Class F (“the Multi-Asset Fund”) achieved a 2.12% return in the second quarter of 2024, outperforming its blended benchmark return of 1.39%.
While returns in general equity and bond markets remained positive in Q2, the pace of returns cooled and the dispersion of returns across broader asset classes widened. Cooling inflation from Q1 translated to bond yields levelling off from a rising trend. As such, equity markets re-focused on high-growth, high-multiple tech stocks and the narrow leadership in performance at the index level. This is an important observation for traditional “balanced” investors as the volatility of interest rates related to inflation quickly changes the dynamic of interaction between bonds and stocks. This is even more confounded by the rapid re-pricing (i.e. expectations) of interest rate cuts in the current year.
As the quarter progressed, the Fund outperformed the downside generally experienced by traditional 60/40 models in April and offered competitive returns in the rest of the quarter as equities rebounded. This performance dynamic is a proof statement to the risk management and diversification benefits offered by the Fund against traditional “balanced” portfolio constructs. As the old adage “defense wins championships” attests, we continue to highlight a simple truth: the benefits of compounding are more easily (and comfortably) achieved by suffering less pain on the downside, leaving room to capture upside without the heroics of chasing returns in torrid periods of performance in risk markets.
We believe the portfolio continues to offer a well-diversified approach to portfolio construction as traditional portfolio risks (Dveloped Market Equity risk and Interest Rate risk) are generally more contained compared to traditional benchmarks. The fund’s hedges, while unprofitable in the quarter, continue to remain appropriately sized vis-a-vis risk budgets and the dedicated exposure to inflation-sensitive assets represents a ballast to the interest rate risk present in most 60/40 portfolios, as inflation (while cooling) remains unpredictable, and a likely feature of an economic cycles for many years to come.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Fund Class F (“the Multi-Strategy Fund”) returned 2.32% in the second quarter of 2024.
Q2 2024 was generally positive for risk assets but with a large dispersion across asset classes. Also, the gains observed in Q2 were smaller than those of Q1.
The character of equity markets changed as the quarter progressed with a reversion to the theme of narrow leadership and a focus on large cap U.S. technology companies, especially those related to artificial intelligence (“AI”).
As the higher inflation prints from Q1 moderated and new inflation data turned out to be weaker as Q2 progressed, government bond yields stopped increasing. The number of U.S. Federal Reserve rate cuts anticipated by the market which fell dramatically in Q1 from six to three. The number of anticipated cuts continued to decrease further in Q2 to only one at one point in Q2, with weaker inflation data the number of cuts increased slightly back to two. The market seemed to shift between no landing and soft-landing scenarios depending on incoming data.
The largest positive contribution to portfolio performance in the first quarter was from the active uncorrelated components of the portfolio. Representing the second quarter in a row with outsized returns from this part of the portfolio. The fund benefited from positive return contributions from all the core uncorrelated active strategies as well as the Quantitative Equity Factor risk premia.
The largest contribution to the Asset Allocation portion of the portfolio was from Industrial Metals and Precious Metals with Developed Equity Markets also contributing to positive returns. The largest detractor was due to the Rates asset class – reflecting the rising bond yields mentioned above.
We believe maintaining exposure to tail risk hedging is prudent as our economic cycle model continues to indicate late-stage dynamics. As markets have been relatively calm, we have been running smaller than model weights in our tail risk hedging strategies.
Diversification across asset classes and strategies is likely the best long-term approach and is expected to be rewarded over longer time horizons.
We maintained a larger than model weight 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 poor performance within a specific style or asset class.
The portfolio outperformed the benchmark as well as generic 60/40 approaches in Q2 2024 continuing that trend from the later parts of Q1. 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 a slowing in the 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. The increasing importance of growth data which we have been anticipating for some time began to emerge near the end of Q2. At some point, we will increase weight to our economic cycle model as this progression continues. 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) | 0.75 | 2.12 | 8.46 | 12.45 | 4.05 | 7.70 | 7.13
(Oct. 29, 2015) |
Blended Benchmark1 | 0.86 | 1.39 | 6.37 | 12.52 | 3.99 | 6.24 | 6.35
(Oct. 29, 2015) |
Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) | 0.12 | 2.32 | 7.45 | 11.56 | 2.23 | 4.65 | 4.85
(Sept. 27, 2018) |
Blended Benchmark2 | 1.38 | 1.52 | 6.85 | 12.27 | 4.35 | 6.45 | 6.12
(Sept. 27, 2018) |
Traditional 60/40 Portfolio3 | 1.76 | 2.11 | 8.97 | 15.08 | 4.86 | 7.22 | 6.91
(Oct. 29, 2015) |
(*) Annualized performance
Source: Picton Mahoney Asset Management
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.