STAY­ING VIG­I­LANT AMID IN­VESTOR COM­PLA­CENCY.

National Post (Latest Edition) - - FINANCIAL POST - Jonathan Rat­ner Fi­nan­cial Post

The myth that di­ver­si­fi­ca­tion can be achieved by col­lect­ing a bunch of dif­fer­ent as­sets in var­i­ous classes and sec­tors was de­bunked for many in­vestors in 2008, as the fi­nan­cial cri­sis caused dra­matic sell­offs in ar­eas of the mar­ket that had pre­vi­ously been t hought to be i nsu­lated from trou­bles in the world of bank­ing.

For Michael White, port­fo­lio man­ager of Multi As­set Strate­gies at Pic­ton Ma­honey As­set Man­age­ment, un­der­stand­ing the risk driv­ers of as­sets be­came a fo­cal point then, and it’s just as im­por­tant now.

“This mar­ket has been con­stantly climb­ing a wall of worry, and it’s al­most Pavlo­vian that peo­ple are con­di­tioned to be­lieve that we’ll get through it,” he said. “The eco­nomic cy­cle is good, growth is there, mone­tary pol­icy is swing­ing from eas­ing to tight­en­ing, and the world is start­ing to feel nor­mal again in a lot of ways, but at some point some of th­ese macro risks are go­ing to cause a flare-up.”

Given the be­nign en­vi­ron­ment in­vestors are liv­ing in to­day, White thinks it has con­di­tioned a lot of peo­ple into bad be­hav­iour. He high­lighted the de­sire for low volatil­ity and in­come — and the many prod­ucts that in­tend to solve those problems — but be­lieves a lot of the un­der­ly­ing risks are be­ing masked.

“We’re l ook­ing for the un­in­tended risks that are in the typ­i­cal in­vestor port­fo­lio, and are try­ing to mit­i­gate those risks,” White said. “Hedge means mit­i­gat­ing risk, as op­posed to em­brac­ing risk.”

Toronto-based Pic­ton Ma­honey pro­vides hedge funds and port­fo­lio construction so­lu­tions for a Cana­dian client base with more than $6 bil­lion in as­sets.

While many Cana­dian in­vestors have their money with port­fo­lio man­agers fo­cused on value or core strate­gies, White be­lieves Pic­ton Ma­honey of­fers a valu­able di­ver­si­fi­ca­tion ben­e­fit through its ap­proach fo­cused on growth, mo­men­tum and pos­i­tive change.

The firm i ncor­po­rates tools such as op­tions strate­gies and short­ing into its man­dates, which in­clude the Pic­ton Ma­honey Mar­ket Neu­tral Eq­uity Fund, the Pic­ton Ma­honey Long Short Eq­uity Fund, as well as in­sti- tu­tional man­dates and those fo­cused on re­sources, emerg­ing mar­kets and tac­ti­cal in­come, among oth­ers.

“We like to catch stocks that are ex­hibit­ing mo­men­tum — a pos­i­tive rate of change,” White said. “That could be earn­ings mo­men­tum, or share price mo­men­tum, which is a con­fir­ma­tion of earn­ings and fun­da­men­tal mo­men­tum.”

While Pic­ton Ma­honey doesn’t shy away from cycli­cal themes, White noted that some of the firm’s best ideas come from sec­u­lar themes that play out over a long pe­riod of time — cap­tur­ing stocks that are in the early stages of a mul­ti­ple- year theme, and own them for a long time.

The death of the re­tail mall is one such theme that is cre­at­ing both win­ners and losers.

“Tra­di­tional re­tail and big box stores are struc­turally chal­lenged,” White said, high­light­ing t he i mpact Ama­zon.com Inc. is hav­ing.

That pres­sure won’t abate any­time soon, as chang­ing c on­sumer habits dri v e peo­ple away from malls and to­ward more on­line shop­ping. Macy’s, Sears and many other tra­di­tional re­tail­ers have been forced to close stores be­cause they are sim­ply not eco­nom­i­cal, but as White points out, those stores are of­ten an­chor ten­ants in malls.

“A lot of other ten­ants have agree­ments that if the an­chor leaves, they can ei­ther ter­mi­nate their lease, or rene­go­ti­ate on bet­ter terms,” he said. “We see that as a struc­tural force that takes years to play out, and there are lots of op­por­tu­ni­ties.”

This sce­nario has prompted Pic­ton Ma­honey to take short po­si­tions in some U. S. re­tail mall REITs.

On the flip side, White high­lighted some long po­si­tions that aim to cap­i­tal­ize on emerg­ing trends in ecom­merce. Gam­ing com­pa­nies like Take Two In­ter­ac­tive Soft­ware Inc. and Elec­tronic Arts Inc. have made their ti­tles avail­able via dig­i­tal down­load, which has re­duced the need for gamers to visit their lo­cal GameS­top Corp. store.

“You’ve got a sec­u­lar force in that gam­ing is be­com­ing a cul­tural phe­nom­e­non, with a large es­tab­lished and ad­dicted user base,” he said. “At the same time, a lot of th­ese com­pa­nies can con­tinue to sell con­tent through the game. Users are in­cen­tivized to buy more con­tent to en­hance the game. Since that de­liv­ery is vir­tu­ally free, it is a very high mar­gin busi­ness.”

A lot of stocks are not per­fectly paired against one an­other, like bet­ting on Coke ver­sus Pepsi would be.

But the firm gen­er­ally finds some­thing on the other side, and tries to in­cor­po­rate pair trades the­mat­i­cally, rather than try­ing to hedge out in­dus­try-spe­cific risk.

“Within our ap­proach to mar­ket neu­tral, we see the mar­ket as a source of beta,” White said.

“We want to in­cor­po­rate themes that hedge against each other, and that re­duces the over­all beta of the port­fo­lio.”

PETER J THOMP­SON / NA­TIONAL POST

Pic­ton Ma­honey port­fo­lio man­ager Michael White says the cur­rent mar­ket “has been con­stantly climb­ing a wall of worry and it’s al­most Pavlo­vian that peo­ple are con­di­tioned to be­lieve that we’ll get through it.”

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