In Q4, the Picton Mahoney Fortified Income Fund (Class F) returned -0.04% and the Picton Mahoney Fortified Income Alternative Fund (Class F) returned -0.17% slightly outperforming the blended benchmark composed of 75% ICE BofAML Global High Yield Index / 25% ICE BofAML Global Corporate Index (TR) (Hedged to CAD). Interest rate and credit hedging, as well as defensive credit positioning was a key contributor to the outperformance in the quarter.
During the fourth quarter we saw the U.S. Federal Reserve (the Fed) make a dramatic hawkish shift in response to persistently high inflation as well as a rapidly tightening labour market. Despite this change in tone, as well as the emergence of the Omicron variant and surging COVID case counts globally, risk assets held in reasonably well during the quarter with equities at all-time highs and credit spreads at post-crisis lows.
We believe this creates an awkward setup for the Fed as they may need to be even more aggressive in 2022 to tighten financial conditions to combat the risk of higher inflation. With the Fed seemingly behind the curve on inflation, we see the potential for increased volatility across markets in 2022 as we enter a phase of policy normalization.
Given these potential headwinds and tight credit spreads, we have positioned the funds defensively with hedges in place to help protect against rate and credit volatility and with dry powder to take advantage if we see higher yields. That said, we continue to be active with new idea generation and have added several new special situation investments during the quarter. We see a trend of issuers focusing on improving their balance sheets via mergers and acquisitions, asset sales, and early refinancing’s and these are all potential sources of event-driven investments for our portfolios.
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