Multi-Asset Strategies Commentary: As at September 30, 2024

The third quarter of 2024 saw a generally strong performance across financial markets, despite significant volatility during the period.

At the beginning of August, there was a significant sell-off in equities triggered by disappointing economic data from the U.S. and an unexpected rate hike by the Bank of Japan. The equity market sell-off created significant turmoil across financial markets with an additional cause being carry trade unwinds.

The rally in AI related stocks slowed down a bit, as there was a notable broadening out of the rally within the U.S. equity markets. Value stocks and small-cap stocks began to show stronger performance, which had previously lagged behind the technology and growth-heavy names.

Government bonds benefited from the lower rate environment and despite the early August volatility, credit spreads tightened slightly through the quarter.

Commodity markets were mixed through the quarter which demonstrates the benefits of a diversified approach to investing in the asset class. Oil prices fell significantly during the quarter a reflection of concerns over global economic health as well as commodity specific supply and demand issues. Gold prices reached new all-time highs and industrial metals rebounded during the later part of the quarter.

The U.S. Federal Reserve began its rate cutting cycle with a 50 basis point cut in September, joined by the European Central Bank and the Bank of England, which both also lowered rates, signaling a broader shift towards more accommodative monetary policies. In addition, towards the end of September, Chinese policymakers announced a series of coordinated stimulus measures, which provided a significant boost to Asian equities as well as industrial metals commodity markets.

 

Picton Mahoney Fortified Multi-Asset Fund

The Picton Mahoney Fortified Multi-Asset Fund Class F posted a 4.59% return in the third quarter of 2024.

With the U.S. posting continued negative economic data at the margin, stocks remain resilient while bond markets began pricing in some recession risk more earnestly.  Falling rates was an opportunity cost for the Fund given its historical bias to mitigate the interest rate risk pervasive within a “balanced” fund peer group.

The fund’s dedicated allocation to alternative strategies has been a source of uncorrelated return in the strategy and portfolio hedges also paid amid the volatility aforementioned.

We remain confident that the strategy continues to deliver on its mandate. Namely to deliver returns less-dependent on traditional asset classes (i.e., betas) and seek more diversified returns with a focus on mitigating downside risk relative to a traditional 60/40 “balanced” portfolio construct.

By mitigating the depth, duration and frequency of drawdowns (something colloquially referred to as the “Pain Index” of an asset or strategy), there is far less demand to capture all or more of the upside in markets. We continue to believe this is a fundamental concept underpinning successful investment strategies in the long-term.

 

Picton Mahoney Fortified Multi-Strategy Alternative Fund

The Picton Mahoney Fortified Multi-Strategy Fund Class F returned 4.62% in the third quarter of 2024.

The strong performance in the third quarter was driven by positive contributions across all but one of the portfolio components – the result of positive performance across most asset classes and all of the non-directional active strategies as well as the Quantitative Equity Factor risk premia.

The largest contribution to the Asset Allocation portion of the portfolio was from Government Bonds as well as Developed and Emerging Equity Markets. The largest detractor was due to the Energy asset class – reflecting the ongoing decrease in Energy prices such as Crude Oil.

We believe maintaining exposure to tail risk hedging is prudent as our economic cycle model continues to indicate late-stage dynamics – and the portfolio benefited from positive contribution from hedges in the third quarter. Most of these gains occurred during the portfolio volatility experienced in early August.

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 Q3 2024. 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 observed that the sensitivity of markets to bond yields moderated in the third quarter as growth data became more important than inflation data. This dynamic is likely to continue until bond yields increase to the extent that markets become concerned about inflation data. 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* (%) Inception Date
Picton Mahoney Fortified Multi-Asset Fund (Class F) 2.04 4.59 6.80 19.05 5.35 8.21 7.46 (2015-10-29)
Blended Benchmark1 1.68 5.25 6.72 19.41 5.50 6.96 6.77 (2015-10-29)
Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) 1.78 4.86 5.78 16.72 3.53 4.39 4.09 (2018-09-27)
Blended Benchmark2 2.45 4.62 7.05 16.50 3.57 5.42 5.43 (2018-09-27)
Traditional 60/40 Portfolio3 1.29 3.69 5.27 17.06 5.33 6.90 6.49 (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.

This material has been published by Picton Mahoney Asset Management (“PMAM”) on October 11, 2024. 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.

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This material has been published by Picton Mahoney Asset Management (“PMAM”) on October 22, 2024

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.