In Q3, the Picton Mahoney Fortified Income Fund Cl F returned -1.9% and the Picton Mahoney Fortified Income Alternative Fund Cl F returned -1.3% 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 third quarter, we saw the U.S. Federal Reserve (the Fed) re-enforce its hawkish stance in response to high inflation with a 75 bps rate hike in both July and September. This drove the market to unwind any hopes for a near term policy pivot leading to a significant intra-quarter selloff in risk assets. Government bonds yields rose significantly during the quarter with extreme volatility in the 10- and 30-year part of the curve especially in the UK and Europe.
We continue to observe some encouraging signs of inflation rolling over with commodities and inflation breakevens falling during the quarter and supply chains normalizing. There are also some leading indicators pointing to an eventual decline in wage growth and shelter cost inflation. Given the market volatility, slowing economic growth, and emerging signs of progress on the fight against inflation – we see the potential for the Fed to strike a more balanced tone during Q4. However, we also see a risk that the Fed would rather be a quarter too late instead of a quarter too early so we may need to see more conclusive evidence of inflation coming down before we get the shift in policy stance.
With yields on corporate bonds above March 2020 levels and trading at the highest level since 2009, we believe this is a compelling opportunity to buy high quality credit. However, given the economic and geopolitical uncertainty, we believe it is critical to maintain a hedged long/short approach as we navigate the fourth quarter.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on October 7, 2022. 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.
Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.
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 additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.
® Registered trade-marks of Picton Mahoney Asset Management.
© 2021 Picton Mahoney Asset Management. All rights reserved.