Picton Mahoney Fortified Multi-Asset Fund (the "Fund")
Equities
The month of March offered some relief for equity investors and the Fund benefitted in kind, despite our somewhat cautious macro view. Global yield curves flattened aggressively in the month, a harbinger of slowing global growth and we took advantage of the counter-trend rally to continue to “dial down” equity risk by shifting allocation from the Picton Mahoney Fortified Equity Fund and Picton Mahoney Fortified Long Short Alternative Fund to the Picton Mahoney Fortified Market Neutral Alternative Fund. We continue to believe that from a risk-budgeting perspective, positioning for equity upside is best achieved through equity index options strategies. Given near-term uncertainty, we view these as more cost-efficient means of hedging upside risk than making a more wholesale allocation to active equity strategies.
Fixed Income
We noted in our last update that despite a war stance on the periphery of Europe, the traditional “safe haven” of government bonds is under an attack of its own. Inflation readings continue to remain stubbornly high (which we believed would be the case, contrary to central bank notions of “transient” inflation) and rates pushed higher toward important thresholds on benchmark bond yields such as the US 10-Year Treasury yield (rising to 2.5% on March 25, 2022). The Picton Mahoney Fortified Income Fund remains an ideal “core” fixed income position in our view, given its focus on credit selection while hedging interest rates and other vagaries of fixed income.
Commodities
For another month, commodities have proven to be an important diversifying element of the Fund’s construction. Exposures in direct commodity asset classes like energy, industrial metals, grains, and precious metals, respectively, continue to be additive to returns. Our portfolio construction process utilizes commodities for the role they can play to redistribute equity risk and hedge inflation etc. We therefore hold positions to target weights in a strategic asset allocation, which means short-term or outsized gains are largely monetized. Beyond that, we have begun to employ hedges in select commodity futures in the event any resolution in Ukraine sees a sharp correction in the “war premium” attributed to certain commodities.
Alpha Strategies
Exposure to Merger Arbitrage and Market Neutral strategies continue to offer diversification benefit to the Fund, given return streams focus on manager skill and are largely independent of the directional risk in traditional asset markets. As noted above in the equity commentary, we are utilizing the Market Neutral strategy to “dial down” the equity beta until either or both of: 1) a resolution to the conflict in Ukraine, or 2) further signs of re-accelerating economic growth, provide a better risk/return prospect for equity risk. We continue to maximize the 10% limit on alternative mutual funds within the portfolio.
Other
Our CBOE Volatility Index (VIX) futures position has been an important hedge amid the market turmoil associated with the invasion of Ukraine and slowing economic growth expectations. While volatility (both realized and implied via options markets) has come off the boil, this represents an opportunity to hedge outcomes in a more cost-efficient manner. We also continue to seek out cost-effective ways to pivot the portfolio toward the potential for “good news”, as slowing economic growth expectations will eventually be a “lower bar” for positive news in the macro economy.
We continue to believe that the world is experiencing a mid-cycle slowdown, albeit exacerbated by sanctions and trade impacts from the war in Ukraine. A flattening yield curve has largely reflected this reality, but other telltale signs of looming recession have not yet shown themselves. We therefore remain constructive and believe that economic growth will re-accelerate later this year, presenting an opportunity to “reload” on equity risk.
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 in a solution focused on core diversification.
