In Q1, the Picton Mahoney Fortified Income Fund returned 2.23% (Class F) and the Picton Mahoney Fortified Income Alternative Fund returned 2.42% (Class F) outperforming the blended benchmark composed of 75% ICE BofAML Global High Yield Index / 25% ICE BofAML Global Corporate Index (TR) (Hedged to CAD). Our special-situation investments contributed to performance in the quarter including several event-driven situations. Our interest rate hedges added significant value during the quarter as global government bond yields rose.
The quarter enjoyed continued strong performance in most risk assets as the vaccine roll-out progressed and the US passed a $1.9 trillion stimulus package. Despite pockets of volatility in equities (e.g. retail investors, SPACs, growth/momentum), the overall trend remained higher especially in cyclical and value-oriented sectors of the market.
The government bond market experienced a dramatic sell-off as yields rose significantly. Main drivers of the yield increase were 1) growth and inflation expectations moving higher as the re-opening draws nearer, 2) unprecedented levels of supply as governments finance fiscal deficits with bond issuance, and 3) US Federal Reserve policy communication around remaining accommodative until sustained higher levels of inflation are achieved.
Credit rallied with spreads tightening toward post-crisis tights in both the investment grade and high yield markets. With a strong economic growth backdrop and highly accommodative monetary policy we remain constructive on credit as an asset class although we are cautious on valuations here and see limited room for further spread tightening.
We continue to be very 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 we believe these are all great potential sources of event-driven investments for our portfolio.
Given the stretched valuations in fixed income we believe it is a great opportunity to layer in hedges in both credit and rates to reduce potential volatility as we progress through 2021. So far credit seems largely immune to rising interest rates, but we believe there is risk of a taper-tantrum style broad sell-off in fixed income if the rise in interest rates were to become disorderly.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on April 15, 2021. 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.
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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 be additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
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