Video
iMGP DBi Managed Futures Strategy ETF Update with Andrew Beer | October 2023
In this new video update, Andrew Beer covers topics including September performance, portfolio rotations, macro themes and more! MORE
Interviewee: Andrew Beer, Dynamic Beta investments (DBi)
Interviewer: Mike Pacitto
Date: November 7, 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.
As always, I’m joined by Co-Founder of DBi and Co-Portfolio Manager of DBMF, Andrew Beer.
Before I hand it off to you Andrew for your comments on performance, positioning, markets and some really good stuff on 60/40, I want to encourage everyone listening to check out Andrew’s recent appearance on The Compound – that’s the video/podcast hosted by Josh Brown and Michael Batnick. Josh wasn’t there, but Jan Van Eck was, and it was a great episode. Personally my favorite financial show out there right now. You can find it easily on YouTube.
Okay Andrew, let’s get started. Over to you.
Andrew:
Thanks, Mike.
We were down slightly in October, but still ahead of both the SocGen CTA Index (hereinafter the “Hedge Fund Index”) and the Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”). Broadly, stocks and bonds were both down again – the S&P was down a little over 2%, bonds were down about the same, but some equity markets, like small caps, were hit much harder.
On the macro front, there’s a raging debate among economists and strategists about what we call the Big Paradox: the US economy, spending and unemployment still look great, yet inflation has been moderating. That’s really not supposed to happen, and a lot of smart people at the Fed are scratching their heads about whether their older economic models are broken. When you drop on top of this the very reasonable concern that our trusty US government really has no plan for how to control a runaway budget deficit, it’s not surprising that long dated Treasury yields rose last month. So I think the most reasonable conclusion today is that the world really did change about two years ago: we all got used to this world with rock bottom inflation and ridiculously low interest rates, and now we need to build a game plan for a different world. I’ll show you two slides on this in a minute.
But first, positioning. We still are short Treasuries, and hence keep making money when many investors bond portfolios keep dropping. We have flipped to short equities – not surprising, given that many equity markets are in correction territory. We’re still long oil, but have cut the position in half, and short gold, which was drifting lower until the recent pop last month as anxiety about the US deficit hit the news. We’re still short the yen, which despite some macro investors calling for a reversal, managed to breach 150 at month end.
On to the next slide.
We have two slides this month that highlight problems facing model allocators. This first one shows the risk, or standard deviation, of a traditional 60/40 portfolio – represented by the S&P 500 and Bloomberg Agg – on a rolling basis. Basically, that iron horse of a portfolio has double the risk today that it had five years ago – remarkably, similar to what it was during the GFC, when the financial world almost fell apart. The reasons are a bit complicated, but you can summarize it up as follows: the Fed crushed stock and bond volatility during the 2010s, and stocks and bonds tend to hedge each other when rates are low. So in the 2010s, the vol got down to 6%. This made diversification look really easy, and naturally a lot of people – robos, Vanguard, etc. — assumed it would continue. It hasn’t, so clients sold on a smooth ride are in for a bumpier ride. We call this the Great 60/40 Head Fake, and you can see ask Mike for more information.
Now to be clear, we are big advocates of model portfolios, and clearly the expected returns of the bond side are a lot higher today. Rather, it’s become clear that most risk reduction in models came from that very powerful inverse correlation of stocks and bonds and, as we highlighted a few months ago, that it’s far more common, especially when inflation is above around 2.5%, for correlations to flip positive. This upends a cornerstone of model portfolios and, we think, building a game plan around this should be priority one for advisors and allocators.
Next slide, please.
To follow this point, here are two charts on the correlation of various asset classes to both stocks and bonds. The chart on the left shows it over roughly two decades. What you see is that most diversifiers – REITs, hedge funds, private equity, private credit, etc. – are highly correlated to either stocks or bonds. That blob in the upper left is highly correlated to equities; the blob on the lower right is for bonds. So we think the game plan of diversification during the past two decades has been more about bolstering – or reinforcing – or enhancing — the two legs of the traditional asset allocation stool.
The problem is that, with this flip in correlations, everything is moving up and down together. That’s been our drumbeat about a “sea of red” in markets, where it feels like everything is going down together. So what you see on the lower right is that, over the past two years, we’ve moved from a two-legged stool to a one legged stool. It’s a visual and visceral way of explaining why even more diversified portfolios among advisors are undulating up and down more than they used to.
Now, the astute observer will note that we did not include managed futures. The short answer, as you’ve heard from us, is that managed futures might be especially valuable – in a portfolio context – over the coming decade or decades because it tends to have zero – and recently negative – correlations to both stocks and bonds. As mentioned, check with Mike for more detailed slides, the last one shows this same chart with the Hedge Fund Index. It’s eye opening.
Next slide please.
So now that we’re talking about the diversification benefits relative to a 60/40 portfolio, here’s our usual slide on performance of DBMF since inception versus the S&P 500 and Bloomberg
Agg. We used to call this “The Third Leg of the Stool,” but pithily changed the title, as you can see….
Since launch in 2019, DBMF is up nearly as much as the S&P 500, but with negative correlation and 10% per annum in alpha. Relative to bonds DBMF has outperformed by 56% cumulatively, also with negative correlation.
So what does that mean in practice?
Next slide please.
Here is a traditional example of a 60/40 portfolio compared to an illustrative 50/30/20 portfolio of the S&P 500, Bloomberg Agg and DBMF since we launched in 2019. Through October, the latter portfolio would have outperformed 60/40 with less risk and a lower drawdown. To get a little more nuanced, what I like on this page is that the two portfolios were moving very closely together during the good period through the end of 2021, but then the real diversification value kicked in when inflation hit in early 2022. The second stat that I like, which isn’t on here, is the correlation between the two portfolios is 0.97. Since we all live in a benchmark heavy world, I think there’s real value in a diversifier that can help to deliver a smoother ride for clients yet without straying too far from the pack.
Now, as you all know, we generally don’t recommend an allocation as high as 20% because you all have access to many other diversifiers. But in a world where you have just three choices, we think 20% is statistically and economically rational.
Next slide, please.
Which leads us to our next chart: our performance versus the Hedge Fund Index and Morningstar Category. Since inception, DBMF has outperformed both with a correlation of around 0.9. As many of you know, our models struggled a bit earlier in the year, but we’ve now outperformed five months in a row. If you head to iMGP’s YouTube page, you can see a running list of the monthly videos where we talked about what caused underperformance earlier in the year and why we – believe correctly – did not change our approach.
In case you missed it, if you want to read a pretty short explanation of why we think replication works so well with managed futures, we published in Institutional Investor several weeks ago titled “Why Managed Futures Fund Are Ripe for Replication?” And as always, feel free to reach out with any questions about all this.
Next slide, please.
Finally, here’s our standard chart on volatility adjusted positioning. As a reminder, we show it this way since it can be confusing when looking a notional position sizes – what looks like a big position in something like the two-year Treasury might be less risky than a small position in crude oil, so this helps to make the exposures more apples to apples. This month we’re showing it relative to June 30 to highlight the shifts since the summer.
To start from the left, we flipped from short to long crude oil, and from long to short gold. We’ve shifted from a convincing long euro position to a slight short while also, cutting back the short in the yen. We’re short across the Treasury curve, whereas after the SVB unwinds we had flipped for a period to long the 10-year. And lastly, we’re short equities.
With that, I’ll hand the baton back to Mike.
Mike:
Thanks Andrew.
It’s clear that we believe managed futures deserve a meaningful allocation in portfolios, but we also believe that we’ve developed a smart asset allocation solution to the managed futures space – here’s a refresh on the quick executive summary: index-plus replication approach, low relative fees alongside efficient underlying construction that reduces much of the expense drag we all know is high within this space, mitigation of single manager risk that causes uncertainty of returns and lastly, the ETF’s efficiency making liquidity and access issues very simple for implementation.
So let’s wrap with our standard comparative slide, where we showcase the since inception performance of DBMF versus the index and the Morningstar® universe.
Long-term outperformance, which is what we focus on as strategic allocators and investors, against the index has broadened since our last update – DBMF now beating the SocGen CTA Index by 248 bps annualized since inception. Outperformance against the Morningstar average has also expanded, over 434 bps annualized since inception.
We hope you find these results both convincing and compelling.
Closing here 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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