In Q3, the Picton Mahoney Fortified Income Fund (Class F) returned 0.35% and the Picton Mahoney Fortified Income Alternative Fund (Class F) returned 0.50% slightly 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 hedging gains in September were a key contributor to the outperformance in the quarter.
Toward the end of the third quarter, we saw a notable increase in volatility in both interest rates and equities. Government bond yields climbed back toward trading levels seen in the spring driven by an improving COVID situation in the US as well as hawkish U.S. Federal Reserve (“Fed”) commentary including an expected taper in Q4 2021 and a potential rate hike in 2022. The hawkish shift was justified by the risk of higher inflation as persistent supply chain disruptions and a global energy and power crisis threaten to disprove the transitory inflation narrative. The market was also caught off guard by the likely restructuring of China Evergrande with potentially significant implications for the Chinese real estate sector. An additional source of uncertainty came from questions around Fed leadership with Rosengren and Kaplan stepping down and political speculation around a new Chairperson to replace Powell.
Given these potential headwinds and the tight level of credit spreads for both investment grade and high yield, we have positioned the funds defensively with hedges in place to mitigate 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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