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Fixed Income Commentary: As at December 31, 2022

Source: Phil Mesman, CFA | Sam Acton, CFA
Publish Date: Jan 10, 2023
Read Time: 4 minutes
Picton Mahoney Fixed Income Fund Class F icon     Picton Mahoney Fortified Income Alternative Fund Class F icon     Fund profiles icon   

In Q4, the Picton Mahoney Fortified Income Fund Cl F returned 0.87% and the Picton Mahoney Fortified Income Alternative Fund Cl F also returned 0.87% underperforming the blended benchmark composed of 75% ICE BofAML Global High Yield Index / 25% ICE BofAML Global Corporate Index (TR) (Hedged to CAD). Defensive positioning and portfolio hedging were the primary drivers of the underperformance in the quarter. This positioning benefited the portfolio (Picton Mahoney Fortified Income Alternative Fund Cl F) on the year with 9.2% outperformance against the benchmark.

During the fourth quarter, we saw tremendous volatility across asset classes as the market began pricing in the peak in inflation and an eventual pause and pivot from the U.S. Federal Reserve (the Fed). The government bond market was violently flat as the U.S. Ten Year Treasury yield was only up 4 bps at the end of the quarter, but traded in a 93 bps range from the October 21st highs to the December 7th lows.

Risk assets including corporate bonds performed very well during October and November and then gave back some performance in December as global central banks reinforced a hawkish tone. Despite the Fed’s messaging, the interest rate market is pricing in a terminal rate of just below 5% and ~50 bps of rate cuts in the second half of 2023. There seems to be inconsistency with the level of optimism implied by equities and credit spreads while monetary policy remains uncertain and the rate market appears to be pricing in a higher chance of an economic slowdown.

We continue to observe some encouraging signs of inflation rolling over, however we also see a risk that the Fed would rather be a quarter too late instead of a quarter too early and therefore may need more conclusive evidence of inflation coming down before we get a more substantial shift in policy stance. Global central bank policy, particularly Japan, also remains uncertain.

Despite the macroeconomic risks, with yields on corporate bonds at March 2020 levels and trading at the highest level since 2009, there is a compelling opportunity to buy high-quality short duration credit. However, given the uncertainties, we believe it is critical to maintain a hedged long/short approach as we enter 2023.

Performance table for Picton Mahoney Fortified Income Fund (Cl.F), Picton Mahoney Fortified Income Alternative Fund (Cl.F) and various indices as of December 2022

This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 10, 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 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.

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