Webinar Replay
iMGP DBi Managed Futures Strategy ETF Update with Andrew Beer | March 2023
In this new video update, Andrew Beer covers topics including February performance, current positioning, macro commentary, and more. MORE
Interviewee: Andrew Beer, Dynamic Beta investments (DBi)
Interviewer: Mike Pacitto
Date: April 12, 2023
Mike:
Hi everyone, I’m Mike Pacitto with iM Global Partner. Thanks for joining our monthly update on the iM Global Partner DBi Managed Futures ETF Strategy – ticker: DBMF.
We believe with DBMF we have designed for investors, advisors and allocators the ideal solution for accessing the managed futures category by combining an index-plus replication approach and low fees in an elegant, efficient and effective ETF.
I’m joined as always by Andrew Beer – co-Founder of Dynamic Beta Investments and co-Portfolio Manager of DBMF. He’ll be touching on March performance – which was admittedly tough – current positioning – and not surprisingly when experiencing challenging short-term performance, a strong case for always remembering to zoom out to a long view and the strategic long-term case for this asset class.
Let’s get to it Andrew, I hand it off to you.
Andrew:
Thanks, Mike, and greetings everyone. There’s a lot to cover today and we are trying to keep these voiceovers to ten minutes or less, so let’s jump right in.
To start on the macro front, the various legs of the inflation trade were upended on March 9, when Silicon Valley Bank suddenly collapsed and kicked off a run on regional banks which, a week or two later, led to the collapse and forced merger of Credit Suisse. Treasuries staged a historic rally – I’ve heard the move in two year Treasuries described as a thirteen standard deviation event. Overnight, the narrative shifted from the likelihood of a 50 bps hike and peak Fed Funds of 6% to a possible global banking crisis and imminent recession. For a week or so, bonds were rising while stocks were falling. Then by monthend, to the surprise of many, the banking crisis seemed contained and stocks also finished the month up. A key theme we’ll cover in a few slides is how traditional assets have been moving in tandem, clearly a problem for most investors and part of the logic of a strategic allocation to managed futures.
Not surprisingly, the hard reversal of the inflation trade meant March led to a very rough month for the managed futures space. As we’ll show you in a few slides, managed futures hedge funds overall were down around 7% last month, as was DBMF. Year to date, though, DBMF is down more than the hedge funds — 9.3% net on an NAV basis — about four hundred bps behind the SocGen CTA Hedge Fund index. This clearly is a reversal from last year, when DBMF rose 23.5% net on an NAV basis and outperformed the same hedge funds by around 350 bps. We will discuss the reasons for the divergence, both up and down, in a few slides.
On the lower left, you can see the contribution. In 2022, the strategy realized broad based gains in three of four asset classes; so far this year, the opposite is true. In some ways, this is to expected when many markets are being driven by a single underlying force – today, inflation and the Fed’s reaction to it. Still, it can be frustrating. As I mentioned in the mid month webinar, both hedge funds and long only investors were tilted into several trades around the inflation theme: not just short Treasuries, but also long the euro vs the yen (a hoped for repeat of the dollar-yen trade of 2022) and long non-US developed stocks over US stocks. This meant that positions that ordinarily look diversified moved together in March – ironically, similar to the experience of long investors watching stocks and bonds rise and fall in tandem.
If you shift to the lower right, given the magnitude of the recent market moves, we see a rotation in underlying positions, including a reduction in long-dated Treasury risk, flipping from short gold to long, the opposite for crude oil, and jettisoning spread trades in non-US developed stocks and the bet that the EUR would rise relative to the yen (a hoped for repeat of the dollar trade last year). We expect this to continue as models readjust and hunt for new opportunities.
Next slide, please.
Here’s performance since inception. Clearly, we have given back a good portion of our gains from the first three quarters of 2022. What’s striking, though, is how inversely correlated DBMF has been to both stocks and bonds over the past year. Correlation since inception to both stocks and bonds is negative and alpha remains very high, if not quite as spectacularly so as a few months ago. As discussed in a minute, while the recent drawdowns are frustrating, they are somewhat understandable given the sharp recovery in risk assets since last Fall.
I want to spend more time today touching on three key questions that I think are going through the minds of investors these days.
Next slide please.
The first question is, do recent drawdowns undermine the long-term investment thesis for managed futures? This page shows four key statistics for the managed futures hedge fund space – as represented by the SocGen CTA index – since 2000 and through March. The strategy – even after hundreds of bps of hedge fund fees – has delivered around 70% of the returns of stocks and 110% of the return of bonds, with no correlation to either, a tendency to perform best during prolonged bear markets, and a max drawdown of only 14%. I’m just not aware of a strategy with more “diversification bang-for-the-buck” relative to stocks and bonds – which clearly is more valuable today with stocks and bonds moving in tandem. This is why we encourage investors to think about managed futures as a long-term, strategy allocation and a complement to stocks and bonds.
Next slide please.
The next question is where the recent drawdowns stand in the context of historical moves. This chart shows the drawdowns of the SocGen CTA index compared with those of the S&P 500 and Bloomberg Agg since 2000. The current drawdown of the managed futures space is around 10%, and in fact, I count seven other periods like this since 2000. By comparison, what’s striking to me is that to get the S&P 500 return we just showed you – 6.5% per annum over 23 years – investors endured a 50% drawdown, a 40% drawdown and two drops of around 20%. On the other hand, bond investors experienced minimal drawdowns during the great bond bull market, until the last year or so when they gave up a decade of returns. The reason drawdowns in managed futures are relatively controlled is that, by design, managed futures funds tend to get out of positions when they reverse – maybe not immediately, but we like to say that no one designs a trend following model with a white-knuckle grip. And we’ve already seen a lot of derisking across the space. So, while the past several months have certainly been a frustrating experience, we caution investors to expect periods like this as the flip side of what the strategy achieved in 2022.
Next slide please.
The third question, I think, is how well DBMF’s portfolio construction is holding up during the extreme volatility. The chart on the top shows performance versus the index over the past twelve months. Essentially, we outperformed materially during the strong period and have given back that outperformance since the peak. Part of this is due to incentive fees – when hedge funds rise 10%, they only report up 8% but we hope to be up all 10%. Sometimes we hope to be up even more by trying to minimize trading costs. The flip side is that are likely to underperform on the way down after a high return period. The key is that, over the past year, our performance is in line with the index with high correlation. To put some historical perspective on it, we hope to outperform the index – fully loaded for hedge fund fees – about 90% of the time on a rolling one year basis. Put another way, we believe that 90% of the time, 10% of positions will explain most performance and we’ll have the potential to outperform through lower fees and expenses. The other 10% of the time, the hedge funds will find enough other trades to add enough value to compensate for the fee difference.
The bottom chart shows just March. If this isn’t a stress test, I don’t know what is. Even through this extraordinary period, with vicious market moves and unwinds, DBMF closely follows the daily returns of the index. Our answer to the question then is that, yes, DBMF is doing what it’s supposed to do.
Next slide please.
We threw in this slide just to demonstrate how crazy this market is. It shows a range of stock, bond and other indices with performance in January, February and March. The inescapable conclusion is that virtually all indices are moving together, which raises serious questions about whether traditional portfolios are sufficiently diversified today. Of course, one exception is that in March both small cap stocks and real estate dropped – a function of the instant banking crisis.
While we’re obviously not thrilled with being down this year, we do always try to position DBMF as a diversifier to 60/40 portfolios, and note that it is better to have some investments that are inversely correlated to other positions even during drawdowns. Arguably, this is the cost of insurance for portfolios the really need it today.
Next slide please.
This page shows the volatility adjusted positioning. The gold bars are current positions, and the red dots are where we were at the end of Q4 2022. What you see is meaningful readjustments across the portfolio – a natural response to the sharp moves in markets during March. One observation: most managed futures funds have maintained bets on rising rates. The reason is that a very long, persistent trend over a year is viewed as more “durable” quote unquote than more recent trends. Hence, while some managers have various features built in to derisk during a volatile market, others will let the positions ride. We’re seeing a balance across the space today.
I realize that I raced through some of these slides at breakneck speed, but I am trying to keep these voiceovers short and highlight key points. As always, our door is open to jump on a zoom or call to dig deeper.
With that, Mike, your ball.
Thanks Andrew.
While March was challenging, the case for DBMF hasn’t changed as evidenced by these simple bar charts. Annualized performance remains well ahead of both the comparative benchmark as represented by the SocGen CTA index – and even more ahead of the live strategies available for investment via the Morningstar universe.
We believe DBMF is an excellent solution to the problem of single manager risk in the space – but we also recognize the simple fact that fees matter a lot – especially in the managed futures category. And we’re happy to offer this ETF at less than half the expense ratio of the average offering in our competitive universe. This simple notion is one of the mottos of Dynamic Beta – that fee reduction is the purest form of alpha – and it’s a key characteristic of what makes DBMF unique and compelling.
I’ll close here with this by saying thanks to all of our clients and to our prospective clients for your confidence and interest in DBMF. If you have more questions about the strategy, would like further information or a call with us please don’t hesitate to reach out – just send us an email at: [email protected]
Until next time – from DBi and from iMGP – thanks for spending time with us.
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