Dear Advisor Partners,

After 37 years in the business and 21 years running PICTON Investments, I find that at least one truth remains: markets will always find new ways to remind us that certainty is borrowed, not owned. This year has been no different. The AI boom became both a “can’t miss” revolution and then a financing riddle. Inflation seemed to be cooling until it wasn’t. The Fed stayed disciplined and then seemingly gave in to external pressure. Meanwhile global markets rallied to new highs as some investors started to question the risk reward opportunity of many stocks leading the AI revolution. What passed for long-term opportunity often became just shorter-term momentum.

Through it all, one conviction has guided our work at PICTON Investments: thoughtful preparation matters more than confident prediction. By “Building from the Bear Up” we strive to bring greater certainty to investors. This mission reflects our belief that portfolio resilience should always be of paramount consideration when building portfolios for investors. We honour our commitment to resilience every year, regardless of the market backdrop. We stick to our disciplined investment process, actively managing risk while continuing to look for opportunity. This is how we’ve built the firm, and how we will continue to build it into 2026 and beyond.

What follows are some reflections on our journey: how our business advanced, how our industry evolved, and where we see opportunity ahead.

The building bubble and increased speculation

At the start of the year, we warned that U.S. large-cap technology valuations were entering bubble territory. A brief correction in February faded as quickly as it arrived, replaced by another leg of AI-driven enthusiasm that sent markets to new highs by mid-year. The same handful of “hyperscalers” remained in a capex arms race, building infrastructure for an AI future while driving an increasingly narrow portion of total market returns. What began as innovation has become concentration, and with it, fragility.

Valuations are not a timing measure, but can be a measure of risk, and the current valuation environment suggests we are in a period of higher risk. Long-term historical metrics are flashing warnings only rivaled by the 1999 bubble. The Shiller Cyclically Adjusted P/E (CAPE) has soared to 42[i], surpassing the 2021 peak. Meanwhile, the U.S. stock market’s capitalization as a percentage of Nominal GDP has reached an unprecedented high of around 200%[ii]. Even after removing the "Magnificent 7" tech stocks from benchmarks, the remaining S&P 493 have an Equity Risk Premium that hovers near zero, offering little compensation for taking the risk of holding stocks over safe government bonds (unless those AI related gains create new levels of broad productivity gains that drive earnings growth much higher than currently expected).

The spectacular rise in equity prices since the pandemic lows has created a powerful wealth effect, boosting the equity portion of U.S. household net worth to over $60 trillion[iii] and fueling consumer spending for those fortunate enough to own assets such as their home and/or a sizeable investment portfolio. However, this also makes the economy more sensitive to a setback in the AI trade and/or an increase in long-term interest rates that negatively impacted housing prices (which are already under pressure in some recently popular sunny destinations). This systemic danger is more amplified since U.S. households have never been more exposed to equity market swings given nearly 50% of their financial assets are tied up in stocks (which is double the long-term average)[iv].

But U.S. markets have not been the only game in town as many other countries’ stock markets have actually outperformed U.S. benchmarks year to date. The Canadian market has surprised this year with the S&P/TSX Composite Index quietly outpacing the S&P 500 Index while keeping pace with the mighty Nasdaq. This is against a backdrop where sudden tariff changes combined with lackluster productivity measures have made Canadian fundamentals mixed at best in the near term. Perhaps a simple lesson could be that when too much attention and soaring valuations converge too tightly in one market, it can pay to look elsewhere. Europe, Japan, and many emerging markets delivered meaningful returns for those willing to look beyond the glow of the U.S. AI narrative.

Mixed Signals Abound

As we enter a new phase of the global economic cycle, we face a marketplace with emerging tailwinds from monetary and fiscal stimulus, but contradicting signals seem to exist everywhere and that should call into question the sustainability of these tailwinds. Signals that would normally move in alignment now point in sharply different directions. Inflation is cooling yet remains vulnerable. Growth engines are reawakening, even as structural pressures mount. Technological progress is accelerating, but the financial burden of that progress may exceed the capacity of private markets. And central banks, particularly the U.S. Federal Reserve (Fed), confront a policy landscape where the risks of acting and not acting appear equally consequential. In such an environment, our responsibility as stewards of capital is not merely to interpret these opposing forces, but to recognize their coexistence and prepare for a wide range of outcomes. This year’s letter outlines the most important dimensions of these mixed signals and how they may shape the investment landscape ahead.

1. The U.S. Inflation Outlook: Disinflation in Motion, Risks Still Alive

From an inflation standpoint, the United States is delivering genuinely encouraging data. Goods prices have normalized after years of volatility, supply chains are fully repaired, and real-time rental market indicators strongly suggest that there should be continued declines in shelter inflation, a critical factor in upcoming CPI prints. The labor market is cooling in a controlled manner, with job openings, wage growth, and quits returning to pre-pandemic levels. These forces together support the view that inflation is gradually grinding down toward the Fed’s target.

Yet, our optimism must be tempered by the risks that remain. Core services inflation continues to display stubborn resilience, wage growth still runs ahead of productivity, and the U.S. housing market has shown early signs of reacceleration. Combine this with highly expansionary fiscal policy and the lingering lessons of the 1970s, and it becomes clear that inflation is not yet “solved.” The risk of a reacceleration remains very real. Investors must remain attentive to the delicate balance between disinflationary progress and potentially inflationary undercurrents.

2. Geopolitical Tension: Tactical Calm Amid Strategic Fragmentation

On the geopolitical front, we are witnessing a world that is simultaneously stabilizing and fragmenting. Encouragingly, major powers such as the U.S. and China have reopened military, diplomatic, and economic communication channels, reducing the risk of accidental escalation. Key regional conflicts, while dangerous, have remained contained rather than metastasizing into broader wars. And despite political noise, global interdependence continues to exert a stabilizing influence.

However, beneath this tactical calm lies a deeper structural shift toward long-term, systemic rivalry. U.S.–China technological and military competition is intensifying. The South China Sea, Taiwan Strait, Eastern Europe, and Middle East remain volatile flashpoints. Global governance institutions are weakening, supply chains are being reshaped around national security priorities, and economic nationalism is replacing globalization. The world is becoming more multipolar, more contested, and more unpredictable. For investors, this means resilience and diversification matter more than ever.

3. The Global Economy in 2026: A Potential Upswing, But Not Guaranteed

There are reasons to believe the global economy should enter a more “constructive phase” in 2026. Major central banks are well into their easing cycles, enabling credit expansion after years of tight financial conditions. Large-scale public investments in clean energy, semiconductor manufacturing, infrastructure, and global supply-chain modernization will still be flowing through the system. Emerging markets with demographic strength, especially in South and Southeast Asia, are positioned to contribute meaningfully to global growth. If these forces align with improving real incomes and sustained momentum in technological innovation, the world could experience a synchronized growth rebound.

But this optimism is balanced by real vulnerabilities. Geopolitical shock risks remain elevated, global debt burdens are substantial, and several countries face challenging refinancing cycles in the 2026–2027 window. Demographic headwinds and structurally slower productivity growth constrain long-term potential output. At the same time, governments have less fiscal flexibility than in prior cycles. The global economy should improve in 2026, but that improvement could be less resilient then in prior recovery periods.

4. The U.S. Outlook in 2026: A Path to Strength, with Fragility Underneath

The U.S. economy faces the same duality as global markets. By 2026, monetary policy will likely be more accommodative, corporate balance sheets remain fundamentally strong, and transformative public investment programs such as CHIPS, IRA, and infrastructure modernization will still be powering manufacturing, energy, and technology growth. Higher income consumers, supported by gradually improving real wages, should continue to anchor economic resilience. And if AI and automation drive even moderate productivity gains, the U.S. could experience meaningful tailwinds in 2026.

Yet, the risks are just as material. Years of high interest rates are creating a wall of refinancing needs across commercial real estate, credit-sensitive corporates, and households. Fiscal deficits are large and growing, limiting the government’s ability to respond to future downturns. Productivity gains from AI are still speculative, not yet guaranteed. Political uncertainty around the 2026–2027 policy landscape could also dampen business confidence. The U.S. economy has a credible path to renewed strength, but pitfalls remain.

5. AI and Technology Investment: The Promise—and the Financing Challenge

Nowhere are today’s mixed signals more vivid than in artificial intelligence. The upside case is extraordinary: faster enterprise adoption, new AI-native applications, efficiency breakthroughs, and massive public- and private-sector investment. This could trigger a multi-year infrastructure super-cycle involving data centers, chips, networking, and power generation. If realized, the economic impact would be profound.

Yet, the challenges of financing this future are equally extraordinary. AI infrastructure is so capital-intensive that industry leaders have recently acknowledged the limits of private capital to fund it all. OpenAI’s leadership has publicly stated that the next generation of frontier models may require investments measured in trillions, a scale that may only be feasible with government support or public-private partnerships. Add in power-grid constraints, regulatory uncertainty, and the possibility that AI productivity gains materialize more slowly than hoped, and it becomes clear the AI boom carries significant risk as well as opportunity. At the very least, we expect winners and losers to soon start emerging in the race for investment dollars and AI dominance.

6. The Fed’s Dilemma: Cut Now or Wait?

Finally, the U.S. Federal Reserve faces one of its most complex decision sets in decades. On one side, inflation is cooling, real rates are restrictive, and the economy risks overcooling given the long lags of monetary policy still working through the system. On the other side, services inflation remains sticky, wage growth is still elevated, and premature interest rate cuts carry the risk of reigniting inflation at a time of renewed housing strength and excessive fiscal stimulus. The Fed is balancing the risk of staying tight for too long against the risk of easing aggressively too soon. Either direction carries meaningful consequences for growth, credit markets, and asset valuations.

Dealing with uncertainty through better portfolio construction

In the face of this uncertainty, the goal of the advisor shouldn’t be to make predictions of how markets will play out. Advisors need to stay focused on what they can control: how they can enhance the client experience and where they can add value to help investors better reach their goals. We believe that the best way to accomplish this in any environment, let alone an uncertain environment, is through better portfolio construction. A resilient portfolio is one that can help investors reach their financial goals with greater certainty. And a resilient portfolio needs to take advantage of what Henry Markowitz is generally credited with saying, “proper diversification is the only free lunch in finance”. While the concept of diversification is quite straight forward, it requires a willingness to explore new ideas and to think about portfolios as collections of return streams as opposed to traditional asset classes.

In our pursuit of helping others create better portfolio outcomes, we have spent the last decade trying to better understand how big pools of money allocate capital. Understanding how major institutions and endowments invest helped inform us about how we should design our product line up to better serve them. One key insight we garnered was that while returns matter, the way those returns interact with the rest of the portfolio matters more. This is the foundation of the Total Portfolio Approach that informs our investment strategies today.

Instead of focusing on rigid asset class silos and benchmarks, the Total Portfolio Approach tries to look at a portfolio holistically where every investment must compete for allocation based on its marginal contribution to the portfolio’s goal. It requires a unified risk framework that is applied across all asset class and a dynamic approach that can adjust to changing market conditions. Capital efficiency is an important contributor to the process. Simply put, any asset that you invest in should simply be viewed as a return stream, and how all a portfolio’s return streams interact is critical to the resilience and long-term success of the portfolio in reaching an investor’s goals.

The key principles that underpin the Total Portfolio Approach have driven the way we have invested in our own business to this point. To get here required investing in our team and developing our own sophisticated analytics and risk systems. Our belief in continuous improvement has contributed to our progress thus far and informs what we will do as markets evolve in the future.

We also believe this process has created better alignment and understanding of our clients’ goals which is the most important outcome.

The New Value Proposition: Portfolios Built for All Markets

For much of the past decade, innovation usually meant another new fund or another wrapper. These products were essentially variations of a basic market exposure that investors probably already had. Useful, perhaps, but rarely transformative. The past few years have felt different. Advisors leading the evolution of our industry accelerated innovation where we think it matters most: in the design of portfolios to better meet their client’s goals. This evolution values portfolio architecture over product proliferation, and disciplined risk allocation and durability of outcomes over the pursuit of short-term performance.

Diversification is no longer viewed as a defensive exercise, but as an essential element of design. Advisors are borrowing the best ideas from institutional investing and translating them into portfolios that work for everyday investors. Many advisors are beginning to embed alternative return drivers alongside traditional exposures to help create portfolios that are more balanced, adaptive, and built to endure both up and down markets. They are using alternatives to design more diversified portfolios that combine traditional market exposures with long/short equity, arbitrage, long/short credit, and multi-strategy approaches that help compound returns steadily through uncertainty. Many are going a step further and integrating alternative exposures with low-cost passive market exposures. This more thoughtful approach integrates fee budgeting best practices that give investors the best bang for their fee buck. This evolution is changing how we as an industry define value. The innovation isn’t in the next fund; it’s in how advisors combine tools across the spectrum of liquidity, cost, correlation and conviction to engineer better outcomes.

The data underscores this shift. In Canada, flows into alternative strategies are up nearly 60% year-over-year[v], even amidst a buoyant equity market. This is not reactionary behavior, it’s preparation. More advisors today are embedding alternatives as part of their core architecture, not as optional hedges. They want smoother paths, steadier income, and portfolios that behave well in volatility, not only during calmer bull market phases. Previous periods of growth for alternative strategies came after corrections or bear markets when investors and advisors were looking to mitigate risk often after they had already suffered significant losses. It’s encouraging to see more advisors adopting a mindset rooted in engineering better outcomes for their clients regardless of the current backdrop for markets.

CRM3: A New Era of Transparency and Opportunity for Advisors

Over the past several years, our industry has experienced a steady evolution toward greater transparency and accountability. The introduction of CRM3 (total cost reporting) represents the next meaningful step in that journey. In a CRM3 world, fee transparency is absolute and shifts percentage-based disclosures to clear, dollar-based reporting. This should translate investment costs into language that clients can more easily understand.

This clarity should amplify the value of advice. When clients see the real cost of their investment experience, they should begin to ask more thoughtful questions: What am I paying for? Why is one product more expensive than another? How can more expensive products actually lead to better outcomes? Etc. Questions like these can open the door to deeper conversations about process, discipline, portfolio construction, and the ongoing guidance advisors deliver. This is where your value as an advisor becomes most visible.

CRM3 also encourages a structural shift in the nature of the client conversation. Rather than focusing on individual product costs, advisors have an opportunity to lead with a more holistic narrative centered on goals, risk budgets, fee budgets and portfolio construction. When clients understand how their fees align with the different components of their portfolio—low-cost beta exposures, specialized alternative strategies, and the planning and oversight that ties everything together—they gain a clearer picture of the value they are receiving: they don’t just own random investments, but a professionally engineered path to more dependable outcomes.

This year we’ve helped advisors embrace this regulatory change by showing the value of implementing fee budgeting into their practice. Implementing this core competency allows the best advisors to distinguish themselves by explaining how they deliberately allocate fees, deploying more fee budget to differentiated, diversifying strategies that add genuine value, and less to market replication strategies where costs are very low. We believe this change presents an opportunity for advisors to deepen trust, strengthen relationships, and reinforce their role as a long-term steward of their clients’ wealth.

Our Firm: Momentum Built on Purpose and Partnership

This year marked an important chapter for our firm, not just a milestone in time, but in trajectory.

As we celebrated our 20th year as an independent, Canadian, 100% employee-owned business. This October we surpassed $16 billion[vi] in assets under management, doubling our size in just a few years. That growth was built in partnership and with the trust of advisors. Today, six of our flagship strategies exceed $1 billion in assets, each built around the same principle: that risk managed well compounds better than risk ignored or misunderstood.

Performance and Recognition

Our disciplined investment process combined with cutting edge risk control served has served us well over time and 2025 was no exception. PICTON Investments received 12 Canadian Hedge Fund Awards across many of our flagship strategies. Many of the strategies recognized this year were launched nearly twenty years ago, a reminder that discipline combined with evolution and longevity are a recipe for investment success.

Track Record and Adaptation

This year also marked the tenth anniversary of our PICTON Income, PICTON Balanced, and PICTON Global Equity Mutual Funds, each delivering strong performance within their respective categories. When we launched them a decade ago, alternatives were not yet part of the retail landscape. Their success underscores our ability to adapt institutional strategies into accessible vehicles without compromising process, rigor or results. We continued to broaden access to our capabilities through new formats including a USD class of our PICTON Multi-Strategy Alpha Fund and an ETF class of the PICTON Income Fund, ensuring that advisors and investors can access our portfolios in ways that fit their needs, without diluting how they are managed.

Partnering with advisors to build Fortified Portfolios

2ND ENGINE by PICTON has become one of the most effective portfolio design platforms available to Canadian advisors. There are now over 1500 advisors using the platform with over 3600 portfolios analyzed to date. This system has been built to help advisors construct more fortified portfolios that focus on preparation over prediction. This year, 2ND ENGINE supported thousands of consultations, branch presentations, and diagnostic analyses nationwide. Each engagement had a single objective: to strengthen portfolio resilience by putting institutional-quality portfolio construction tools into the hands of retail advisors.

Evolving Our Brand and Culture

This was also the year we stepped fully into our identity as a firm with a different mission or purpose: to “Build from the Bear Up”. We unveiled our Resilient Bear statue at The Well in Toronto, rang the Opening Bell at the Toronto Stock Exchange, and launched a national campaign that reframed the much-maligned bear not as something to fear, but as a mindset to adopt, one rooted in preparation and strength.

We continued to invest in people and culture, expanding our leadership team in our sales, marketing, and technology groups to better harness the amazing creative power of our 200 plus employees. We were again recognized as one of the Best Workplace™ in Canada 2025, a reflection of the ownership mentality that drives our teams to think boldly and execute with accountability.

The Future: Building from the Bear Up

As we look to 2026, the risks and opportunities ahead remain deeply intertwined. We live in a moment where optimism and caution must coexist. Disinflation is progressing, but not securely anchored. Growth is possible, but so are shocks. AI is transformative, but its economics remain unsettled. The Fed is easing but its next steps are uncertain. These mixed signals require discipline, diversification, and a commitment to long-term strategy over short-term prediction.

We’re entering a watershed period where alternatives can demonstrate their value, not as a reaction to volatility, but as a structural advancement in how portfolios are built. The convergence of elevated inflation, tighter liquidity, and shifting policy regimes has made the case clear: resilient portfolio construction cannot be ignored.

As capital flows into the alternative investment universe, competition is intensifying. Yet differentiation will come not from product innovation alone, but from process: how managers construct, hedge, and deliver outcomes that align with investor goals. At PICTON Investments, we continue to invest in our people, research, and technology to ensure we remain at the forefront of that evolution.

For advisors, the environment is equally demanding. Regulation, rising transparency, and a proliferation of products have raised the stakes. Your role has never been more important, not just as portfolio builders, but as interpreters of risk and translators of uncertainty into clarity.

In the year ahead, our focus will be clear and disciplined:

Continue driving alternatives as an important component in the structural core of investor portfolios, not as peripheral diversifiers, but as essential drivers of resilience and outcome engineering.

Deepen advisor partnerships through education, analytics, and consulting that bring the Total Portfolio Approach to life.

Advance 2ND ENGINE by PICTON as the digital backbone of modern portfolio construction, expanding its capabilities and integration into advisor workflows.

Innovate with new alternative strategies designed for a world where risk, inflation, liquidity and tax implications matter as much as growth.

Maintain discipline through valuation extremes, policy shifts, and whatever form uncertainty takes next.

Continue to invest in talent, technology, and research bringing smart minds to PICTON Investments, while building a firm that can serve as both a thought leader and a trusted partner to advisors nationwide.

Closing Reflections

As we head into 2026, markets continue to defy simple narratives. Inflation has cooled but remains stubbornly above target. Policy is easing, yet fiscal pressure keeps tightening in the background. Valuations have expanded again, but so has fragility, especially in areas where liquidity and confidence are still being mistaken for stability.

Today the most important questions for advisors aren’t about direction, but about design:

What assumptions are still embedded in your portfolios that no longer hold true?

Where are you being paid to take risk and where are you simply exposed to it?

Are your clients diversified by assets, or by outcomes?

If liquidity becomes scarce again, which parts of your portfolio will surprise you most and not in a good way?

And perhaps most importantly, if the next five years look nothing like the last five, will your portfolios still hold their shape?

The answers to these questions will define the next cycle, more than any forecast. As stewards of your capital, we will continue to navigate this complexity with rigor and humility, identifying opportunity where it exists and managing risk where it is unavoidable.

Preparation is a critical edge and diversification is an important part of preparation.

With gratitude and conviction,

David Picton
President & CEO, PICTON Investments