In Q1, the Picton Mahoney Fortified Income Fund (Class F) returned -1.74% and the Picton Mahoney Fortified Income Alternative Fund (Class F) returned -1.43% significantly outperforming 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 primarily drove the outperformance in the quarter.
During the first quarter we saw the U.S. Federal Reserve (the Fed) continue its hawkish tone in response to high inflation and a tight labour market. While geopolitical events created uncertainty on the growth outlook, the near-term impact of higher commodity prices put additional pressure on central bankers to push back against inflation. Despite the US 2-Year Treasury Yield rising 161 bps during the quarter2, risk assets including equities and credit spreads were only modestly weaker.
Given the Fed’s use of financial conditions as a policy transmission mechanism to the real economy, we believe the resilience of equities and credit creates an awkward setup for the Fed as they may need to be even more aggressive than current expectations to effectively combat the risk of higher inflation.
With these potential headwinds and still 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 as we see higher all-in yields on high quality credit.
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