The Picton Mahoney Fortified Multi-Asset Fund Class F (“the Fund”) decline 1.21% in the third quarter of 2023.
Developed Market equity exposures were the primary source of drawdown and most of this came in the last month of the quarter. Despite the fact that the Fund has maintained exposures in the traditional primary asset classes well below a standard “60/40” portfolio construction model, it was not immune to the march higher in interest rates and the impact this has finally had on equity valuations / risk appetite in the marketplace.
Following on from the prior quarter, portfolio risk as measured by standard deviation of returns, has continued to be at the lower end of our anticipated long-term range. The Fund performed well relative to a traditional 60/40 benchmark in Q3, despite capturing downside roughly inline in September. We highlight the Fund has a long history of mitigating downside capture, which has driven excellent risk-adjusted return metrics, as well as consistently high percentile performance rankings in its peer group. We believe, quite simply, that outperforming over longer standard investor horizons is all about mitigating downside risk and doing so as consistently as possible. To that end, we regard the month of September as an outlier and remain focused on continuing to achieve consistent risk-adjusted returns.
Portfolio hedges paid off in the month of September, but on the whole, were a cost in the quarter, as we would expect in a generally positive return environment.
Our proprietary economic cycle model continues to point to signs of a recovery and we are inclined to let the evidence continue to bear out before making more decisive asset allocation calls with the intent of embracing risk. As noted above, our process remains surely focused on mitigating downside capture, so as not to be compelled to achieve all (or greater) upside capture when traditional risk asset markets are in gear.
The Picton Mahoney Fortified Multi-Strategy Fund Class F (“the Fund”) increased by 0.19% in the third quarter of 2023.
The portfolio’s return exceeded the negative returns of the benchmark as well as traditional 60/40 portfolio which were negative in Q3. While the multi-strategy portfolio had trailed traditional 60/40 portfolio with larger exposures to US large cap equities in Q1 and Q2 of 2023, the portfolio benefited from a return to more diversified behavior in Q3. This improvement in diversification occurred while equity markets became increasingly fragile.
There was dispersion across global asset classes in Q3 with positive portfolio contributions from Energy and Industrial Metals, otherwise most asset classes declined or had small or negative contributions to the portfolio.
Through Q3 and especially near the end of the quarter, markets were becoming increasingly sensitive to the relentless rise in global government bond yields.
In previous quarterly commentaries we mentioned somewhat strange dynamics across Deflationary asset classes and Growth & Inflation sensitive asset classes and as we suspected, these dynamics abated to a more typical dynamic in asset markets. This reinforces our forward-looking view of a more normal asset class dynamics 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 continue to tactically hedge this exposure.
It remains to be seen if these increases in yields trigger a systemic risk event. We believe maintaining exposure to tail risk hedging is prudent at the current time. Hedges added value in September while carry and a more benign asset class environment resulted in a net cost of hedging activity in July and August.
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.
The largest contributor to positive performance in Q3 outside of Energy commodities was the Alpha strategies.
We increased exposure to the uncorrelated active strategies we manage here at Picton Mahoney Asset Management, namely the Picton Mahoney Fortified Market Neutral Alternative Fund, the Picton Mahoney Fortified Income Alternative Fund and Picton Mahoney Fortified Arbitrage Plus 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.
All three active strategies as well as our quantitative equity factor risk premia provided positive returns in Q3.
The portfolio outperformed the benchmark in Q3 2023. Part of this outperformance was due to the diversification across asset classes as well as the abatement of the narrow leadership and outperformance of large cap US technology stocks. 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 continues to point to signs of a recovery and we are inclined to let the evidence continue to bear out before making more decisive asset allocation calls with the intent of embracing risk. As noted above, our process remains squarely focused on mitigating downside capture, so as not to be compelled to achieve all (or greater) upside capture when traditional risk asset markets are in gear.
While in the near term we expect ongoing sensitivity of markets to bond yields, we 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.