STAYING VIGILANT AMID INVESTOR COMPLACENCY.
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.”
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.”