Year-in-Review
What a year! (What an understatement). If you turned a blind eye to markets sometime between February and May, you might have missed one of the fastest deflationary busts and subsequent recoveries on record. Systematic risks which rippled across multiple asset classes and strategies took their toll on many portfolios but were addressed by swift and sizeable central bank interventions. With no shortage of macro headline risk (global pandemic, high-stakes US Election, Brexit finality, to name a few), one would wonder how risk markets have managed to stay “in gear” at all. Reflationary impulses are shifting portfolio attribution dynamics in a meaningful way, and this provides an excellent opportunity to rethink portfolio construction and focus on some imperatives which our Multi-Asset Strategies aim to address.
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund (Class F) produced a return of 6.59% during the fourth quarter of 2020. The Fund’s core equity component (Picton Mahoney Fortified Equity Fund) drove the bulk of performance in the quarter. As equity markets remained in an uptrend, it is important to note that on a net basis (long positions minus short positions), equity exposure remained below the typical 60% allocation targeted in many balanced portfolios. This, in turn, highlights the value-add of stock selection in our equity strategy as a bias toward cyclicality benefitted performance, while the momentum associated with interest-rate sensitive “defensive” and secular growth sectors and themes continued to wane.
This shifting leadership is not so subtle when one peeks below the hood of equity index returns. With interest rates having already plumbed their lows, traditional fixed income is carried at a minimum allocation. Our allocation to the Picton Mahoney Fortified Income Fund allows investors exposure to opportunities both long and short, as well as a core focus on managing interest rate, credit and liquidity risk. Greater flexibility and manager skill is more important in a fixed income strategy than ever before and this will remain a core / defensible holding in the fixed income domain.
Diversification benefits from alternative assets like precious metals also offered differentiated returns and our volatility hedges remain in place to address complacency risk in markets. As noted immediately above, the diversification benefit of core fixed income is challenged, so alternative assets stand in to help reduce or at least redistribute a portfolio’s dependence on pure equity risk to drive returns.
Our holdings in alternative strategies such as our Picton Mahoney Fortified Arbitrage Alternative Fund, Picton Mahoney Fortified Active Extension Alternative Fund and Picton Mahoney Fortified Long Short Alternative Fund continue to drive uncorrelated/lower volatility returns and/or provide a means of tactically dialing risk up or down as may be warranted in the current market environment.
Diversification was the watchword in the fourth quarter and returns came from a variety of portfolio exposures while keeping equity exposure contained in a bullish trend. As such, we are pleased with the results driven from our portfolio construction framework and remain steadfastly focused on continuing to diversify exposures and differentiate the fund such that it can be a compliment, if not replacement to, traditional balanced allocations.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) returned 9.02% during the fourth quarter of 2020. It was an interesting quarter for the strategy with financial markets impacted by important macro events such as the US Election and news of successful vaccine trials. In addition, a reflation theme merged in full force with higher commodity prices and a weaker USD. While the outperformance of large cap tech stocks was a persistent theme throughout prior quarters of 2020, Q4 saw a widening of equity market participation via small cap, international developed and emerging markets.
The positive benefit of incorporating inflation exposure into a portfolio was evident in Q4, and a variety of strategic and tactical asset class exposures helped add differentiated returns in the Fund. While absent at various points in time through 2020, diversification proved effective in improving risk-adjusted returns in Q4.
Since this strategy aims to redistribute equity risk, we highlight continued solid returns from the uncorrelated strategies we manage here at Picton Mahoney Asset Management, namely the Picton Mahoney Fortified Market Neutral Alternative Fund and the Picton Mahoney Fortified Arbitrage Alternative Fund as well as the value-add and tactical credit exposure of the Picton Mahoney Fortified Income Alternative Fund. Diversification of styles and approaches reduced the impact of the poor performance of factor-based investment strategies experienced in Q4 and FY2020 in general.
Overall, we are pleased with the behavior of the portfolio in an unprecedented year, where a variety of market environments were compressed into 12 months. Sell-offs, rebounds and different investment themes emerged in 2020. Returns are being sourced from both directional (asset classes) and non-directional (uncorrelated strategies) means. While investors reference equity benchmark returns (which are not very diversified at all within respective benchmarks), the performance attribution of the Fund has an important context vis a vis portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
Outlook
As to the go-forward, the future will always be uncertain, but our working case at Picton Mahoney Asset Management is for a post-virus, full-on reflationary or maybe even inflationary growth environment. Timing the full extent of this is uncertain and in the near-term, taking some profits on trades where pace and magnitude of returns are outsized seems prudent. That said, we remain constructive and believe that once vaccines are in place broadly, global economic growth may surprise to the upside. With this in mind, we favour diversification to not only take advantage of new narratives as they gain traction, but also to dampen the impact of onesided portfolio outcomes (i.e. portfolios sensitive to very low interest rate beneficiaries – secular growers and “defensive” bond-proxy equities).
*15% S&P/TSX Composite Index (TR), 30% MSCI World Index (Net Returns) (in CAD), 10% FTSE TMX Canada 30 Day TBill Index (TR), 25% ICE BofAML Global High Yield Index (TR) (Hedged to CAD), 5% ICE BofAML Global Corporate Index (TR) (Hedged to CAD), 15% ICE BofAML G7 Global Government Index (TR) (Hedged to CAD)
This material has been published by Picton Mahoney Asset Management (“PMAM”) on January 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
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