Multi-Asset Strategies Commentary: As at September 30, 2023

Picton Mahoney Fortified Multi-Asset Fund

The Picton Mahoney Fortified Multi-Asset Fund Class F (“the Fund”) decline 1.21% in the third quarter of 2023.
Developed Market equity exposures were the primary source of drawdown and most of this came in the last month of the quarter. Despite the fact that the Fund has maintained exposures in the traditional primary asset classes well below a standard “60/40” portfolio construction model, it was not immune to the march higher in interest rates and the impact this has finally had on equity valuations / risk appetite in the marketplace.

Following on from the prior quarter, portfolio risk as measured by standard deviation of returns, has continued to be at the lower end of our anticipated long-term range. The Fund performed well relative to a traditional 60/40 benchmark in Q3, despite capturing downside roughly inline in September. We highlight the Fund has a long history of mitigating downside capture, which has driven excellent risk-adjusted return metrics, as well as consistently high percentile performance rankings in its peer group.  We believe, quite simply, that outperforming over longer standard investor horizons is all about mitigating downside risk and doing so as consistently as possible.  To that end, we regard the month of September as an outlier and remain focused on continuing to achieve consistent risk-adjusted returns.  

Portfolio hedges paid off in the month of September, but on the whole, were a cost in the quarter, as we would expect in a generally positive return environment. 

Our proprietary economic cycle model continues to point to signs of a recovery and 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 surely 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.

 

Picton Mahoney Fortified Multi-Strategy Alternative Fund

The Picton Mahoney Fortified Multi-Strategy Fund Class F (“the Fund”) increased by 0.19% in the third quarter of 2023.
The portfolio’s return exceeded the negative returns of the benchmark as well as traditional 60/40 portfolio which were negative in Q3. While the multi-strategy portfolio had trailed traditional 60/40 portfolio with larger exposures to US large cap equities in Q1 and Q2 of 2023, the portfolio benefited from a return to more diversified behavior in Q3. This improvement in diversification occurred while equity markets became increasingly fragile. 

There was dispersion across global asset classes in Q3 with positive portfolio contributions from Energy and Industrial Metals, otherwise most asset classes declined or had small or negative contributions to the portfolio.
Through Q3 and especially near the end of the quarter, markets were becoming increasingly sensitive to the relentless rise in global government bond yields. 

In previous quarterly commentaries we mentioned somewhat strange dynamics across Deflationary asset classes and Growth & Inflation sensitive asset classes and as we suspected, these dynamics abated to a more typical dynamic in asset markets. This reinforces our forward-looking view of a more normal asset class dynamics in future months.

Through Q2 2023, we maintained exposure to our Tactical Asset Allocation model and Strategic Asset Allocation. We remain underweight Government Bonds relative to our model weight. The largest exposure from a risk-adjusted perspective (despite the tactical adjustments) is exposure to Government bonds. We believe this exposure will payoff in the event of a recession and continue to tactically hedge this exposure.

It remains to be seen if these increases in yields trigger a systemic risk event. We believe maintaining exposure to tail risk hedging is prudent at the current time. Hedges added value in September while carry and a more benign asset class environment resulted in a net cost of hedging activity in July and August.

We continue to believe that diversification across asset classes and strategies is likely the best long-term approach and is expected to be rewarded over longer time horizons.

The largest contributor to positive performance in Q3 outside of Energy commodities was the Alpha strategies. 
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 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.

All three active strategies as well as our quantitative equity factor risk premia provided positive returns in Q3.
The portfolio outperformed the benchmark in Q3 2023. Part of this outperformance was due to the diversification across asset classes as well as the abatement of the narrow leadership and outperformance of large cap US technology stocks. 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 point to signs of a recovery and 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. 

While in the near term we expect ongoing sensitivity of markets to bond yields, 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.

 

Multi-Asset Strategies Commentary: As at September 30, 2023

Related Content

Equity Commentary: As at March 31, 2024

Equity Commentary: As at March 31, 2024

The rise in equity prices has certainly been impressive. U.S. equity markets ended the first quarter of 2024 at all-time highs despite two of the MAG 7 stocks being negative year to date –...

This material has been published by Picton Mahoney Asset Management (“PMAM”) on October 13, 2023

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.