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Picton Mahoney Fortified Multi-Asset Fund Monthly Positioning: As at December 31, 2021

Source: Michael White, CFA
Publish Date: Jan 7, 2022
Read Time: 6 minutes
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Picton Mahoney Fortified Multi-Asset Fund  (the "Fund")

We noted in our last monthly update that for the past 3-4 months, our Economic Cycle Model has seen some probability of re-accelerating economic growth, which is a normal mid-cycle occurrence.  While this probability is not overwhelming, it is still significant enough to allow equity exposure to drift higher, mostly passively, through performance.  We continue to optimize the 10% on alternative mutual funds and utilize the Picton Mahoney Fortified Long Short Alternative Fund as a "beta dial" for equity exposure at the margin.  At just under 55%, net equity exposure (long minus short) remains below the 60% traditional “balanced” benchmark.  We remind investors that the Fund has other exposures to seek return with less reliance on the direction of equity markets.  Overall, equities (hedged as they are) remain favoured to add on pullbacks and as we await further confirmation of accelerating economic growth.  Inflation cues are also being monitored and inflation-sensitive assets may garner allocation at the expense of equities.

Fixed Income
Exposure to government bonds is down slightly from the prior month, mostly due to passive performance.  With roughly 80% probability to Economic Cycle “Phase 2” (decelerating economic growth), our model argues for some rates (government bond) exposure, notwithstanding relatively unattractive yields.  While the diversification benefits of this exposure have yet to be disproven, we continue to utilize a core allocation to the Picton Mahoney Fortified Income Fund as a more conservative / defensible allocation within fixed income, as it maintains a toolset to hedge interest rates, credit risk and liquidity risk. 

Commodity exposure is up slightly over the past month, again largely through passive weight increase.  To reiterate the key message in this update, we await further increase to the probability of re-accelerating economic growth in order to increase exposure to commodities as an asset class.  Being sensitive to economic growth generally, commodities can help redistribute equity risk and diversify a portfolio, but also add direct exposure to inflation impulses in the marketplace.  We expect that reported inflation may “come off the boil” in the near-term, but this could present the opportunity to re-express the inflation trade in conjunction with further evidence of accelerating economic growth.

Alpha Strategies
Merger Arbitrage and Market Neutral strategies primarily in use with no material change of late.  Target weights are relatively stable (and small), and we have been cognizant of outsized returns in this bucket some months ago.  That said, and as noted above, our alpha strategies can offer the portfolio the opportunity to garner returns (and diversify risk) in a manner that does not depend on the direction of risk markets.  These strategies remain diversifiers, but relatively small allocations are in the context of the 10% limit on alternative mutual funds noted above.

Risk hedges (in the form of VIX futures) continue to be a small, but dedicated allocation in the portfolio continues to make sense as we believe near-term policy concerns (withdrawing monetary stimulus – when and how fast) are likely to be a near-term headwind.

As we start a new year, we believe tactical opportunities will present themselves with respect to both hedging and adding to risk assets, depending on the macro backdrop in the months ahead.  We have always subscribed to the view that core diversification and prudent hedging reduces the need for decisive asset allocation shifts and the current environment should continue to support that philosophy.

On positioning the Fund for investors, our belief is that the diversified nature of the Picton Mahoney Fortified Multi-Asset Fund offers a more enhanced diversification in a core holding that is the natural evolution of a “balanced fund”.  Whether as an introductory vehicle to a diversified strategy with alternative tools and sensibility, a stable portfolio base from which to add satellite positions (individual securities, other alternative strategies, etc), or a one-ticket solution for smaller portfolios, we remain steadfast in our objective to deliver consistent risk-adjusted return.

This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 7, 2022. 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 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.

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