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Multi-Asset Strategies Commentary: As at June 30, 2023

Source: Michael White, CFA | Neil Simons
Publish Date: Jul 19, 2023
Read Time: 9 minutes
Picton Mahoney Fortified Multi-Asset Fund
Picton Mahoney Fortified Multi-Asset Fund Cl. F icon  Fund profile icon

The Picton Mahoney Fortified Multi-Asset Fund Class F (“the Fund”) produced a return of 1.17% in the second quarter of 2023.

The Fund continues to provide a well-diversified return utilizing both traditional stock/bond exposures as well as a broader set of asset classes (i.e. commodities) and uncorrelated return streams. Despite weakening economic indicators and continued hawkishness from central banks, equities furthered year-to-date gains, albeit with narrow (i.e. high growth / high multiple tech) leadership.

Portfolio risk as measured by standard deviation of daily returns was quite consistent through the quarter and remains at the lower end of our anticipated long-term range. Given the Fund has captured less downside than traditional balanced benchmarks over the past year or more, we are contemplating neutralizing some of the positioning that has driven value-add over a longer lookback period than the current quarter under review.  Namely, the Fund bears significantly less interest rate exposure than many Tactical Balanced Category peers and traditional 60/40 benchmarks, so this is one aspect of asset allocation which could change, especially given the path higher in interest rates and the potential for central banks to ease up on hikes in the months ahead.

In the quarter, and particularly in the month of June, volatility hedges were a drag on Fund performance and explained a significant portion of the shortfall relative to traditional benchmarks, notwithstanding the more obvious fact the Fund has been broadly “underweight” equities relative to a traditional 60/40 construction.

Whereas the Fund does bear some traditional market risks, it has weathered the macro environment well; a testament to the diversification achieved through the portfolio construction imperatives which guide our Multi-Asset Strategies team and the funds it manages. The Regional Bank events of Q1 did not result in further financial market stress in Q2 and we continue to maintain a small risk budget to volatility hedging strategies.

Overall, we are pleased with the return and risk characteristics of the Fund. We believe the longer-term track record of the strategy supports the notion that compounding of returns benefits from less downside capture than participating fully in upside to markets.  Investors should note that top quartile (and in many cases, top decile) performance in longer timeframes owes to more consistent shorter-term performance, achieved with less risk (i.e. standard deviation of daily returns) than many peers or reference benchmarks.

Picton Mahoney Fortified Multi-Strategy Alternative Fund
Picton Mahoney Fortified Multi-Strategy Alternative Fund Cl. F icon Fund profile icon

Markets in Q2 of 2023 represented a continuation of the main theme of Q1 with the outperformance of US large cap technology stocks. Although the multi-strategy portfolio trailed traditional 60/40 benchmark with larger exposures to US large cap equities, we continue to believe that sourcing returns from diversified strategies and asset classes will help investors over the long run. Global asset classes were mostly lower in Q2 with minimal diversification benefits available across asset markets. Market participants continue to focus on central bank activity as their resolve to stamp out inflation marches on with more resilient economic data pushing out the mostly mainstream view of an impending recession. Systemic risks abated with minimal follow-on after the banking issues of Q1.

The largest contributor to positive performance in Q2 was the Alpha strategies. Contributions from other portfolio components were relatively mostly negative due to the declining asset class dynamics mentioned above.

Across our asset allocation model, only Developed & Emerging Market Equity were the positive contributors with additional small gains from High Yield and Investment Grade Credit. Government Bonds and Energy and Industrial Metals were negative contributors to portfolio returns. This somewhat strange dynamic of losses across Deflationary asset classes in addition to Growth & Inflation sensitive asset classes is indicative of a temporary dynamic in asset markets that is unlikely to continue. And is one reason for our forward looking view of a more normal asset class markets in future months.

Through Q2 2023, we maintained exposure to our Tactical Asset Allocation model and Strategic Asset Allocation. We remain underweight Government Bonds relative to our model weight. The largest exposure from a risk-adjusted perspective (despite the tactical adjustments) is exposure to Government bonds. We believe this exposure will payoff in the event of a recession and are also tactically hedging this exposure.

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 have 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 the poor performance within a specific style or asset class.

Due to the ongoing narrowly defined performance of large cap US indices, the portfolio underperformed the benchmark in Q2 2023. We believe the ongoing narrow performance in capital markets will normalize and the benefits of more diversified approaches to portfolio construction will reemerge. As the current market environment continues to evolve, our approach to source returns both directional (asset classes) and non-directional (uncorrelated strategies) will likely result in improved portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.


Our proprietary economic cycle model still holds recession as its highest probability cycle phase on a 3-6 month forward-looking view.  However, the model also incorporates some market-based data, which has been evidently constructive in real-time.  While conflicting to some degree, we can foresee that the cycle model may become more constructive on its pending update.  Largely on base effects (higher last year), we expect inflation data will continue to slow, aided by weaker energy prices of late.  Yet, central bank hawkishness is still a feature for allocators.  Plenty of cross-currents will require ample monitoring of near-term data points and we anticipate some shifts in allocations will be in order between now and our next quarterly update.

While the near-term environment is challenging below the surface of narrow (i.e. high growth tech) equity leadership, we continue to believe our Fortified Portfolio Construction process offers an objective and repeatable allocation process that is evidence-based and progressive in nature.  Maintaining smoother transitions through economic cycle phases and market regimes is critical in delivering target returns with lower risk than traditional “balanced” / “diversified” portfolio construction models.

Picton Mahoney Fortified Multi-Asset Fund Cl. F, Picton Mahoney Fortified Multi-Strategy Alternative Fund Cl. F, and blended benchmark performance table as at June 2023
This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 20, 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.

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