David Picton: We work very hard to build a reputation, but it can be lost very quickly
Dave Picton, president and CEO of Picton Mahoney Asset Management, says everything his firm does revolves around its belief in positive fundamental change.
“We've done a lot of quantitative research that focuses on best performance through time and factors that stand out as consistent strong performers over time,” he says. “In the Canadian landscape it is factors around changes – changes in earnings, changes in revenues, changes in earnings forecasts, and positive surprises around earnings. Those things make us think about a company differently.”
Picton Mahoney has a team of independent fundamental analysts and independent quantitative researchers. “They both look for this positive fundamental change in their day-to-day jobs, and they come at it from two different perspectives.
“The quantitative researchers use significant amounts of data. They build models that scour the market, looking at these positive change metrics. Then we get them to build their own independent portfolios that are optimized to give us as much positive change for the dollar as they can.
“Meanwhile, we have an independent team of fundamental researchers who meet with companies, go to site visits, go to conferences, build their own models, and, again, their focus is also on positive fundamental change. Maybe it's a new management team that comes in, maybe it's a new product that's being developed, or maybe it's a new way of optimizing business processes. We’re looking for something that causes a real change in the trajectory of the earnings of a company, both on the positive side and on the negative side because we also do shorting along the way.”
Looking for overlaps
“It is our jobs as portfolio managers at our firm to look at the overlaps between the independent signals from the quantitative teams and the independent signals from the fundamental teams. We measure them to see if they're strong contributors over time to our investment process.
“We believe that if they overlap, we should have higher conviction in their output.”
Picton says the firm is also “very much cognizant that companies that are changing positive metrics (such as DEI and ESG) for the better tend to do better as well.”
Picton Mahoney Asset Management was founded in 2004 by a team of five investment management professionals led by David Picton. It soon gained some institutional clients and, as it began to generate some cash flow, it moved into alternatives and ran hedge funds.
Twenty years later, Picton is “extremely active in the business on two fronts. I oversee our entire investment team I’m the keeper of the investment philosophy. It is our belief to use risk control to maximize returns per unit of risk.” Today, the firm has a team of approximately 40 investment professionals.
Picton is passionate about investing and says there is a massive opportunity for almost all investors to improve their portfolio construction.
Construction of a modern portfolio
“Our firm built its own research process on understanding portfolio theory and how modern portfolios are constructed,” he says. In fact, the firm has published a white paper on the topic and also offers a portfolio construction service to help investors optimize their portfolios.
“When we look through individual investor and even many pension plan portfolios, we notice an alarming amount of interest rate sensitivity that exists in them. Although many massive and sophisticated pension plans in Canada have dealt with this issue, as you move down the scale towards individual investors, this interest rate sensitivity increases.
“We've just had two years where rates went up significantly because of inflation in 2022, and it hurt both the stock and bond portfolios. And, in fact, the combined 60:40 portfolio had one of its worst experiences in decades as a result of that.
“Similarly, although inversely related in 2023, as inflation came off and interest rates came down, stocks and bonds again acted in the same way, this time to the upside. As a result, the 60:40 portfolio had one of its best performances in decades.
“The point is that for the last 40 years, we've been using bonds as a diversifier to stocks and portfolios. They've acted significantly differently from each other and here we are now coming off two years where they have acted very much the same as each other. The diversification benefit has disappeared, and our belief is that inflation is coming down, but the underlying causes of it haven't really gone away. The supply issues and issues around housing, employment, and commodities are simply lying dormant, waiting for the next upcycle. And when this next cycle takes off, inflation expectations again are going to grow in our opinion, which means that this 60:40 portfolio would get potentially hit again.
“So, portfolio construction that deemphasizes interest rate sensitivity and adds in diversification or inflation protection is one of the most important things to focus on as we go through this year. We've staked a lot of our firm’s collateral around education on this topic, trying to democratize this understanding of portfolio construction so that everybody can gain access to it.”
A believer in continuous improvement
Picton says he is a “massive believer in continuous improvement.
“You may have an investment process that makes you differentiated, but that doesn't mean you just stop working on it,” he says. “You have to be continually improving your inputs in the way you build your portfolios.”
He also believes in positive energy. “We go through ups and downs in this business, but it is important to have a positive mental framework and try to be positive in the way you interact with people.”
When Picton took the portfolio management program at the University of British Columbia, he learned you only get one reputation, and it can be lost very quickly.
“We try to implement that as best as we can across our organization. We have very strong controls around ethics and values. Our reputation has been hard earned over time, including in countless numbers of meetings with individual advisors where we just try to provide our best. We try to give clear and concise information and build a reputation on trust.”
