Asset prices were generally positive, and equities had a strong recovery rally in Q4 with positive market news on peaking inflation and falling rates expectations. China moving away from zero-COVID policies contributed to expectation of potential accelerating economic growth in 2023 and stabilizing the global economy. However, the continued hawkishness from the U.S. Federal Reserve (Fed) and other central banks around the world to ensure higher inflation does not become entrenched in longer-term expectations has investors eyeing recession risk given such aggressive tightening in monetary conditions.
Depending on the specific reference index measured, 2022 represents one of the worst performances in Fixed Income in most current investors’ memories. The implication of the drawdown in Fixed Income markets along with declining equity markets has generally resulted in very poor performance in traditional 60/40 portfolios.
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund (F-class) returned 4.32% in the fourth quarter, relative to its blended benchmark1 return of 4.79% in the same period. Relative performance shortfalls in the first two months of the quarter were largely experienced in fixed income. December proved to be a better month of relative performance despite the choppiness in equities.
While we maintained a limited exposure to government bonds, which benefitted from falling rates in that timeframe, the opportunity cost was felt via our dedicated holding in the Picton Mahoney Fortified Income Fund, whose positioning has been very conservative (ie. limited duration, limited credit risk) year-to-date. A lag in Q4 still netted to significant value-add from this strategy on a full-year basis, in one of the worst years for traditional fixed income in the memory of most current market participants.
It was a somewhat frustrating period for portfolio hedges, as equity volatility declined meaningfully from highs near the end of the prior quarter, whereas our hedging strategy benefits most when volatility spikes from relatively low levels.
Equity exposure remained lower than a traditional 60/40 “balanced” portfolio, but gains were achieved through other cyclical exposure such as industrial metals. This, while our proprietary economic cycle model continued to hold a recession as its highest probability cycle phase on a forward-looking view. As such, we began rotating some capital toward the Picton Mahoney Fortified Market Neutral Fund as a means of managing equity exposure (beta) downward without making binary large-scale asset class calls in the portfolio.
We continue to exploit an expanded toolkit in a prospectus-based mutual fund and despite being a more market-sensitive offering within our Multi-Asset Strategies lineup, the Fund ended 2022 firmly above average in its peer group, and continued to deliver top decile returns on 3- and 5-year metrics. We remain proud of the consistency of the Fund in achieving returns which capture reasonable upside while experiencing lower downside volatility and lower sensitivity to traditional asset markets.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
Sourcing returns from diversified strategies and asset classes helped the multi-strategy portfolio construction framework in Q4. Asset prices were generally positive in Q4 and diversification benefits returned to cross-asset class movements. The negative market news shifted from the energy crisis in Europe, zero-COVID policies in China, inflation fears and therefore ongoing central bank hawkishness to recession fears. The positive news flow in Q4 was related to an observed peak in inflation measures along with China moving away from many of their zero-COVID policies.
Most components of the portfolio delivered positive returns in Q4. The largest contribution was from Asset Classes, benefiting from the general rebound in asset prices through the quarter. Across our asset allocation model, Developed Market Equity, Industrial Metals and Energy were the largest positive contributors to performance. Within our Strategies basket, the Market Neutral Equity and our PMAM proprietary Factor Risk Premia were the largest contributors to positive performance. Our approach to portfolio construction sources returns from a broader set of asset classes and strategies compared to traditional asset allocation models. This larger set proved beneficial throughout most of 2022.
In Q4, like most of 2022, we continued with the underweight exposure to our Tactical Asset Allocation model and Strategic Asset Allocation. Although this would have been a drawback in Q4 relative to the first three quarters of 2022, we believe our positioning was warranted given market behavior. Our exposure to uncorrelated strategies will help provide positive return potential when our asset class exposures are lower or in the instance that asset class returns are negative.
We continue to believe that diversification across asset classes and strategies is likely the best long-term approach, and is expected to be rewarded over longer time horizons.
We maintained our exposure to the uncorrelated active strategies we manage here at Picton Mahoney Asset Management, namely the Picton Mahoney Fortified Market Neutral Alternative Fund and the Picton Mahoney Fortified Income Alternative Fund. Diversification of styles and approaches over the long term can help reduce the impact of poor performance within a specific style or asset class.
Despite the lower asset class exposure and therefore lower risk, the Multi-Strategy Fund outperformed its blended benchmarks in Q4. We believe that as the current market environment continues to evolve, our approach to source returns both directional (asset classes) and non-directional (uncorrelated strategies) should result in improved portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
Outlook
As discussed with previous commentaries, the ongoing environment of slowing economic growth and ongoing attention to global central bank activity accurately predicted a continuing difficult environment for most asset classes. Our belief that the bad news related to other macroeconomic events such as China’s ongoing shutdowns and the energy crisis in Europe might be close to being fully priced in and did result in the peak depressed sentiment levels for both investors and consumers. The moderation in inflation expectations and removal of China zero-COVID policies created some upside in asset markets. The focus has now shifted to the soft-landing versus hard-landing debate. Potential outliers that could surprise markets would include a geopolitical event related to the war in Ukraine or a return to higher CPI prints.
Therefore, we continue our belief that the near-term environment is challenging and remain underweight in asset class exposure and continue to look further out for a “risk-on” stance. The multi-asset strategies team continues to promote the benefits of our Fortified Portfolio Construction process as a means of aiming to deliver diversification benefits in portfolios.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 13, 2023. 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.
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