Monthly performance across risk markets was mixed through the quarter, with early gains diminished somewhat by weakness in September. As noted in the prior update, reflation / reopening themes continued to cool and our economic cycle model ended the quarter with substantial probability weighted toward a decelerating economic growth phase. Interest rates were volatile and equity markets continued to exhibit substantial rotation in themes and factor- (i.e. “style-”) driven returns. This is common as markets grapple with normal mid-cycle slowdowns. Our multi-strategy portfolio construction framework continues to offer diversification benefits during these times of transition in market themes.
Picton Mahoney Fortified Multi-Asset Fund
The Picton Mahoney Fortified Multi-Asset Fund (Class F) (the “Multi-Asset Fund”) produced a return of 0.74% during the third quarter of 2021, on pace with its blended benchmark1 return of 0.77%. As was the case in the prior quarter, the Fund’s core equity component (Picton Mahoney Fortified Equity Fund) drove the bulk of performance, in both directions, during the period in review.
As equity markets succumbed to volatility toward the end of the quarter, the Fund’s diversification and internal hedging strategies helped to narrow a year-to-date performance gap relative to a standard 60/40 portfolio benchmark. It is the manager’s view that increased pressure on equities to deliver total return is a risk many balanced investors are taking on, perhaps unwittingly. Therefore, a diversified return stream, which seeks to redistribute the risk inherent in equities, is more likely to afford the balanced investor opportunities beyond merely attempting to time the depth and duration of equity market drawdowns.
On the whole, the strategy is poised to participate in equity-driven gains, but we remain conscious that as the global economy slows from a torrid pace of recovery, there will likely be better opportunities to deploy a risk budget in the months ahead. As such, the manager remains comfortable with a net (long minus short) equity position below the standard 60/40 balanced benchmark. Further, as equity markets offer more dispersion (i.e. more clearly separating out- and under-performers), stock-picking skill will gain importance over beta / allocation decisions.
Beyond equities, diversification into other asset classes has helped the Fund gain from inflation impulses to date, but commodity exposures have been trimmed at the margin through the quarter. Beyond asset allocation decisions, risk budget afforded to strategies that have less correlation to traditional markets continue to offer the portfolio the opportunity for return without compounding the risk of additional capital deployed. We believe that within the construct of a traditional mutual fund, the strategy has a robust toolkit to both manage risk and exploit opportunities for diversified returns.
Picton Mahoney Fortified Multi-Strategy Alternative Fund
The Picton Mahoney Fortified Multi-Strategy Alternative Fund (Class F) (the “Multi-Strategy Fund”) returned 0.59% during the third quarter of 2021. Diversification proved once again to be an effective tool. The largest contributions to portfolio performance were attributed to strategies, consisting of the allocation to PMAM active strategies and PMAM proprietary factor risk premia. Allocations to assets were a negative contributor to portfolio performance.
Q3 was bifurcated with the upward movement in global equity markets in July and August followed by a reversal through September. The confluence of a cautious outlook of active investors, poor seasonality, uncertainty over US Federal Reserve tapering and US political noise related to the looming US debt ceiling and infrastructure packages was too much of a worry for the equity markets. The upward trend in global equity markets experienced in July and August was a repeat of the longer term bull market with narrow leadership and outperformance of large cap growth stocks. Diversification across asset classes, which we believe is the best long-term approach, was not rewarded in the first two months of the quarter, but did help during the market decline of September.
Given the uncertain outlook heading into Q3, we decided to reduce our overweight tactical asset allocation exposure. In conjunction, we increased exposure to uncorrelated strategies believing that to be a better opportunity set. This turned out to be a good tactical adjustment to the portfolios and we remain cautious in the near term.
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 and the Picton Mahoney Fortified Income Alternative Fund. Diversification of styles and approaches reduces the impact of the poor performance within a specific style or asset class. The uncorrelated strategies (and specifically the Market Neutral strategy) provided 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 and become more uncertain. 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 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.
Outlook
As noted, markets have evolved after digesting an environment of peak growth rates / peak stimulus and have moved on to ongoing supply chain disruptions, prolonged ‘transitory’ inflation and in the short term, concerns over the US debt ceiling. We remain constructive on risk assets, in general, but believe market leadership and themes will continue to rotate in the months ahead. Indeed, our proprietary economic cycle model is now firmly pointing to decelerating economic growth stage. Decelerating economic growth along with inflation risk that is more prolonged than “transitory” in nature is pointing toward the potential for a stagflationary environment in the short term and as such, risk-budgeting will remain prudent in seeking diversification.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on October 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 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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