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Multi-Asset Strategies Commentary: As at March 31, 2022

Source: Michael White, CFA | Neil Simons
Publish Date: Apr 20, 2022
Read Time: 9 minutes
Increased hawkishness across global central banks along with the war in Ukraine caused a significant amount of volatility in markets in the quarter. Most asset classes lost value other than commodities and precious metals.  Our economic cycle model still holds a significant probability weight in a decelerating economic growth phase and global bond markets have tended to agree, with the yield curve flattening aggressively during the period.  The war in Ukraine may continue to give some pause to the potential for aggressive / continued rate hikes and uncomfortable inflation continues to hold, exacerbated in many ways by the situation in Ukraine and assertive sanctions placed on Russia. 

Picton Mahoney Fortified Multi-Asset Fund
Picton Mahoney Fortified Multi-Asset Fund Cl. F icon  Fund profile icon

During the quarter, the Picton Mahoney Fortified Multi-Asset Fund (Class F) declined 2.91%, bettering its blended benchmark return of -3.71%.
The majority of the decline is attributable to developed market equity exposure in January.  This was offset through the quarter by exposures in direct commodity asset classes like energy, industrial metals and grains, and precious metals, respectively.  The Fund also experienced some drag from exposure to the rates (government bonds) asset class, but we note that sensitivity to this risk remains significantly below that of traditional balanced mandates.
As has been noted previously, though not as a rule, the Fund has maintained a lower net equity exposure to a traditional 60/40 benchmark.  Recently, challenging stock selection (as market themes evolve violently) has begun to resolve as our active equity strategies pivot away from both cyclical themes and secular growth stocks, toward “quality” metrics which are more defensible in the current macroeconomic regime.  Our active fixed income strategy held up very well in the quarter and added value relative to traditional “balanced” approaches.
Allocations remain fairly intact given the ongoing stasis in our economic cycle model, but we have subtly dialed back equity beta by rotating our alternative strategies allocation toward market neutral strategies.  We believe maximizing the alternatives allocation to the allowed 10% provides investors with sources of return that are significantly less dependent on the direction of traditional markets.  As such, we uphold the diversification benefits within the strategy and within investor portfolios in turn. 

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

The Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) (the “Multi-Strategy Fund”) returned 2.73% during the first quarter of 2022. Diversification proved once again to be an effective tool. Both Assets and Strategies were positive contributors to portfolio performance. Across Assets, the Strategic Asset Allocation was slightly positive while the Tactical Asset Allocation was a larger positive contributor due to an environment of wide dispersion across asset classes. Energy, Industrial Metals and Precious Metals were the largest positive contributors while Rates and Developed and Emerging Equities the largest negative contributors. These asset allocation contributions are not surprising given financial markets in Q1 2022. Within Strategies, both our  proprietary Factor Risk Premia and PMAM alpha strategies were positive contributors. And given market volatility, the hedges also provided a positive performance during the quarter.
Global central bank hawkishness through Q1 caused significant repricing across interest rate markets to reflect higher short term and longer-term yields. The change in interest rate expectations caused a repricing of equity markets and especially the longer duration more speculative corners of the equity market. These effects were impacting markets before the additional risk-off sentiment caused by the war in Ukraine. Traditional 60/40 style portfolio models rely on equity and fixed income markets as sources of return. Any portfolio approach that seeks diversification to asset classes and strategies outside of long only stocks and bonds was rewarded relative to a traditional approach in this quarter.
Diversification across asset classes worked well in Q1 2022 and we continue to believe it is the best long-term approach and is expected to be rewarded over longer time horizons.
In Q1, we continued with the underweight to our Tactical Asset Allocation model and decreased weight to our Strategic Asset Allocation through the month of March. We believe that decreasing portfolio risk was warranted due to increased volatility in financial markets and uncertainty of the progression of the war. We maintain our exposure to uncorrelated strategies believing that represents a good opportunity set and are pleased with the ongoing positive performance in our proprietary Factor Risk Premia.
Since this strategy aims to redistribute equity risk, we highlight the uncorrelated strategies we manage here at Picton Mahoney Asset Management, namely the Picton Mahoney Fortified Market Neutral Alternative Fund, Picton Mahoney Fortified Income Alternative Fund, Picton Mahoney Fortified Special Situations Alternative Fund and Picton Mahoney Fortified Arbitrage Plus Alternative Fund. Diversification of styles and approaches can reduce the impact of the poor performance within a specific style or asset class. The uncorrelated strategies (and specifically the Market Neutral strategy) contributed to positive returns during the quarter. Diversification continues to form the basis of our portfolio framework.
Overall, we are pleased with the behavior of the Multi-Strategy Fund as the current market environment continues to evolve. Our approach allows for returns to be sourced from both directional (asset classes) and non-directional (uncorrelated strategies) means. While investors reference equity benchmark returns (which are generally not very diversified within respective benchmarks), the performance attribution of the Multi-Strategy Fund has an important context vis-à-vis portfolio construction imperatives such as risk diversification, lower correlation and quality of returns.
The ongoing environment of slowing economic growth and increased attention to global central bank activity tends to suggest a higher level of tail risk hedging is appropriate in the near-term.  At some point, growth expectations could diminish to a point where upside surprise becomes a reasonable probability and risk/return consideration. 
Coincidentally, inflation expectations could also soften.  Some leading indicators of inflation (such as World Container Index for global freight rates and delivery times) are declining.  So long as this is an indication of easing supply constraints, rather than reduced ongoing demand, the uncomfortably high near-term inflation (and interest rate outlook) could soften and also bolster risk appetite. 
We still believe the near-term environment is challenging and look further out, to perhaps the back half of the year, 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 delivering diversification benefits in portfolios.

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

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