Q3 was a story of two halves with the first half consisting of a rebound across most risk assets. While the second half was a resumption of the 2022 theme of declining and volatile financial markets due to higher-than-expected inflation data and subsequent hawkish central banks. An element of systemic risk finally appeared in the UK with a poorly received proposed mini-budget causing a meltdown in the British Pound and UK Gilt market which reverberated across most risk assets. This market turmoil caused margin calls within the UK pension industry and required an intervention of the Bank of England to prevent market dysfunction. Recession fears caused the second half sell-off in equity and fixed income markets to spill over into other growth-related assets and inflation hedges.
Year to date, depending on the specific measure, 2022 represents one of the worst performances in Fixed Income indices ever measured. The implication of the terrible Fixed Income markets along with declining equity markets has generally resulted in very poor performance in traditional 60/40 style portfolios.
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund (F-class) was down 0.54% in the calendar third quarter, outperforming its blended benchmark which was down 1.13% in the same period. The outperformance was earned substantially in the month of September, when most asset classes suffered losses. In the asset class opportunity set, though equities endured the most pain, the perceived relative safety of government bonds would have been a continued frustration to investors in a traditional “balanced” framework, as interest rates remained volatile and generally biased higher.
Speaking in the context of our Fortified Portfolio Construction framework, we were pleased to see the positive contribution from uncorrelated Strategies, to help offset losses in Assets. With ongoing higher levels of implied volatility, portfolio hedges were challenged through the quarter, yet added value when needed most in the month of September.
For most of the 2022, the Fund maintained a relative “underweight” to equity exposure and though our process is not based upon market-timing, we effected some modest tactical shifts to nudge equity exposure higher toward the end of the quarter. These shifts involved mostly rotating out of our allocation to Picton Mahoney Fortified Market Neutral Fund into the Picton Mahoney Fortified Equity Fund. We similarly shaved exposure to Picton Mahoney Fortified Income Fund as it has been positioned very conservatively and has deftly navigated a difficult environment for credit and rates markets.
We believe that seeking tactical opportunities should not necessarily involve larger-scale capital reallocations, but rather dialing exposure to risk as risk-reward dynamics become more compelling. We have been able to demonstrate the advantages of 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 is delivering on its objective of a differentiated outcome relative to traditional “balanced” funds. Over time, we will continue to strive toward enhanced portfolio construction imperatives like risk diversification, lower correlation and quality of returns.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
While our multi-strategy portfolio construction framework continues to rely on diversification benefits, like Q2, these benefits were less evident in Q3 as recession fears along with hawkish central banks has an impact on virtually all asset classes. One of the ongoing benefits achieved in the portfolio management process was a decrease in overall risk level/position size as well as an underweight in Government bond exposure. Portfolio hedges offset some of the asset class declines.
A welcome component of portfolio diversification was the positive contribution from Strategies to offset some of the losses in Assets. Within Strategies, our PMAM proprietary Factor Risk Premia were relatively unchanged through Q3 while active strategies were the largest contributor to positive performance. Diversification served the portfolio well through the first quarter of 2022 and we expect a return to this type of market environment later in the year.
In Q3, like most of 2022, we continued with the underweight exposure to our Tactical Asset Allocation model and Strategic Asset Allocation. This has generally helped the portfolio in an environment of negative asset class performance. We continue to believe that decreasing portfolio risk is warranted. We maintain our exposure to uncorrelated strategies and as a result, as mentioned above, Strategies were the largest positive contributor to portfolio returns in Q3.
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 the poor performance within a specific style or asset class.
The Multi-Strategy Fund outperformed its blended benchmarks in Q3. 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. We believe 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 has resulted in the ongoing depressed sentiment levels for both investors and consumers. At some point, a moderation in inflation expectations could create an upside surprise with reasonable probability and risk/return consideration. While the economic outlook is still cloudy, slight moderations in data could be sufficient to move markets to the upside.
Therefore, we continue our belief that the near-term environment is challenging and continue to look further out, perhaps the 4th quarter, 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 October 12, 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.
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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