The iMGP Alternative Strategies Fund (Institutional Share Class) gained 3.09% in the first quarter of 2024. During the same period, the Bloomberg US Aggregate Bond Index (the Agg) benchmark was down 0.78%, the Morningstar Multistrategy Category was up 4.66% and the ICE BofA 3-Month Treasury Bill Index was up 1.29%.
Performance quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less that their original cost. Current performance of the fund may be lower or higher than the performance quoted. The Advisor has contractually agreed to waive a portion of the management fee through April 30, 2024. Performance data current to the most recent month end may be obtained by visiting www.imgpfunds.com.
For standardized performance click here: https://imgpfunds.com/alternative-strategies-fund/
Quarterly Review
The Alternative Strategies Fund produced good absolute returns in the first quarter of the year, following up on solid, if unspectacular, performance in 2023. In a somewhat unusual occurrence, all six subadvisors were up during the quarter, although with very wide variance in those gains. Last quarter the Fund also displayed good absolute performance but trailed the huge “Everything Rally” that characterized the last two months of the year. That rally was in response to the Fed’s dovish turn in discussing the potential for rate cuts, which the market priced in jubilantly. The party continued in the first quarter, at least in terms of equities, and to a much lesser extent in credit, with the S&P 500 up over 10% and high yield (represented by the ICE BofAML U.S. High Yield Index]) up about 1.5%. Duration was another story, as rate cut expectations fell back to arguably more realistic levels, causing TLT, the long-duration iShares 20+ Year Treasury ETF, to fall 3.7%. The Agg, which is investment grade and has a duration over 6, was down almost 80 bps. Since many investors use the Fund at least in part as a complement to core fixed income, we feel pretty good about outperforming the Agg by almost 4 percentage points in the first three months of the year.
The Fund’s long-biased fixed income-oriented, DoubleLine and Loomis Sayles, both outperformed the Agg significantly. Despite that outperformance, they still have very attractive return potential on an absolute basis and obviously relative to the Agg. Between them, there’s a blended yield-to-maturity of 9% at quarter end with a duration of under 5. We’ve written previously about the portfolio’s high yields and relatively low duration, but it’s also worth noting that having more duration at this point, with the 10-year Treasury yielding well over 4% at quarter end and rate cuts still likely at some point later this year, is very different than having a lot of duration when the 10-year was yielding under 1.5% with high inflation around the corner like we had in 2021.
We may have buried the lead a bit, but we want to note DBi’s strong performance during the quarter, since it has been a detractor overall after we added it a year and a half ago. Last year was a rollercoaster for the strategy, given the market’s gyrating expectations of interest rate moves, and it ultimately ended the year down about 4%. But what a difference a quarter makes. The portfolio was up over 9% in the first quarter, driven by long positioning in equities and the U.S. dollar. It was great to see this portfolio perform well at the same time as more traditional assets. It should have almost no correlation to equities or bonds long-term, and can perform well in different environments, in addition to the tendency to do well in extended market drawdowns. And despite ending the quarter with significant long equity exposure, the strategy has held up nicely in April’s reversal, as currency and commodity gains have offset losses in equities.
Looking at the big picture, we still have almost 60% of the portfolio in “hard catalyst” type exposures with a healthy yield (fixed income portfolios) or high annualized deal spread (Water Island). That’s complemented by the smaller, opportunistic, go-anywhere portfolio FPA manages, and the very lowly correlated Blackstone Credit and DBi strategies, both of which can continue to do well in a strong market but should also hedge losses in an extended downturn (and potentially generate positive returns). Based on all of that, we think there’s still a long runway for strong performance, and we remain very excited about the fund’s future prospects.
iMGP Alternative Strategies Fund Risk/Return Statistics 3/31/2024
| MASFX | Bloomberg Barclays Agg | Morningstar Multistrategy Category | Russell 1000 | ||
| Annualized Return | 3.83 | 1.64 | 3.33 | 15.5 | |
| Total Cumulative Return | 60.02 | 22.57 | 50.65 | 483.49 | |
| Annualized Std. Deviation | 4.73 | 4.43 | 4.21 | 14.72 | |
| Sharpe Ratio (Annualized) | 0.57 | 0.12 | 0.51 | 0.96 | |
| Beta (to Russell 1000) | 0.27 | 0.09 | 0.25 | 1.00 | |
| Correlation of MASFX to… | 1.00 | 0.37 | 0.90 | 0.83 | |
| Worst 12-Month Return | -10.04 | -15.68 | -5.71 | -19.13 | |
| % Positive 12-Month Periods | 0.77 | 0.65 | 0.75 | 0.87 | |
| Upside Capture (vs. Russell 1000) | 26.20 | 10.14 | 24.86 | 100.00 | |
| Downside Capture (vs. Russell 1000) | 26.75 | 9.15 | 27.68 | 100.00 | |
| Upside Capture (vs. AGG) | 73.98 | 100.00 | 61.48 | 227.86 | |
| Downside Capture (vs. AGG) | 19.02 | 100.00 | 12.89 | 1.67 | |
| Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested into directly. | | As of 3/31/2024 Since inception (9/30/11) | |||
Quarterly Portfolio Commentary
Performance of Managers
For the quarter, all six sub-advisors produced positive returns, ranging from nearly double digits to just barely positive. DBi’s Enhanced Trend strategy was the biggest gainer, up 9.18%, followed by FPA’s Contrarian Opportunity strategy, at +5.18%. The DoubleLine Opportunistic Income strategy returned 2.52%, the Loomis Sayles Absolute Return strategy increased by 1.59%, the Blackstone Credit Systematic Group’s Long-Short Credit strategy was up 1.48%, and Water Island’s Arbitrage and Event-Driven strategy gained 0.07%. (All returns are net of the management fee charged to the fund.)
Key performance drivers and positioning by strategy
Blackstone Credit Systematic Group (DCI):
The Long-Short Systematic Credit portfolio returned approximately 1.5% in the quarter. Markets over the quarter were buffeted by the cross-currents of tighter credit spreads and wider government bond yields as investors digested surprisingly resilient economic news and lingering inflation concerns. The 5-year treasury sold off, with yields rising by about 36 bps, as persistent inflation data and a patient Fed dampened market expectations for a first-half of 2024 rate cut. With a solid economic and profits backdrop, and a supportive demand technical, high yield spreads narrowed by about 24 bps over the quarter to drive returns, with the ICE BofAML U.S. High YieldIndex spread ending March at around 300 bps. The portfolio is systematically constructed to be well-diversified and to be broadly neutral over time to the beta exposure of the index and to rates. Strategy returns therefore are mostly due to the credit selection in the portfolio.
Over the quarter, credit selection was strong and the portfolio delivered steady alpha performance. Excess returns were delivered in both the bond sleeve and in the CDS sleeve, with the hedging performing about in line. The CDS strategy delivered positive performance led by long financials and transports, with negative contributions from hospitals and energy names. The bond sleeve saw strong returns from consumer goods, mining names, REITS, and technology. Retail and investment vehicles were detractors. The portfolio has been thematically underweight CCC-rated names, preferring lower-spread, higher-quality names, and even long BBB. This “tilt” delivered volatility over the quarter as CCC names soared in February on a junk rally before falling back in March on renewed concerns about leverage in the high-yield telecom sector. However, overall, it has been a positive contributor as BBB has delivered steady risk-adjusted returns. On a single name basis, contributions were generally well balanced. Portfolio positioning has rotated somewhat, reducing rate-sensitive consumer durable and technology sectors (which are no longer net overweight) and increasing energy, retail, and financials. Underweight positioning in high spread CCC names has remained, as the model continues to see a benefit from avoiding deteriorating names, especially in telecom. The differentiation between credit winners and losers looks set to continue well into 2024 as an economic inflection point still looms, likely creating opportunities for active management and credit selection over coming quarters.
DBi:
Well, hedge funds are no longer bearish.
In last June’s letter, we described the (rational, we argued) defensive positioning of hedge funds as follows:
Since last Fall, the markets have been like a drunk stumbling across a highway. You watch an eighteen-wheeler barrel down and clench your eyes shut — only to open them seconds later and find that he’s still standing. Then it happens again. And again. And, to your utter surprise, you soon see that he’s standing on the other side. Here we are in mid-2023 and we have been grazed, not flattened, by a long list of economic eighteen wheelers: most recently, a potential regional or global banking crisis, US debt default, profits collapse, and even “recession by June.”
Now by early 2024, the economic world looks downright sunny. The Fed says their shock hiking cycle is over. Economic growth is accelerating. Corporate profits are rising. Governments show few signs of pulling the fiscal reins. Even disturbing social, political, and geopolitical trends – while certainly not abating – have settled into a stable if somewhat depressing equilibrium.
All this has been good for stocks and, as forecasts for rate cuts dwindle, decidedly mixed for bonds. Hedge funds have been adding equity risk because — to borrow from Keynes – when the facts change, they change their minds. As a result, many hedge funds have been participating in this year’s “risk on” market more than during the episodic relief rallies that began in late 2022.
Of course, there is a tricky relationship between good news and the markets. Right now, good news is good news, but too much of a good thing, and the cursed inflation genie might try to escape the bottle. Perhaps because of this, and as discussed below, we see fundamental hedge funds as only back at “normal” risk levels, while more nimble trend followers are decidedly all in.
The portfolio rose approximately 9% net during the first quarter. Equity gains were broad based, buoyed by expectations of rate cuts by the major central banks. Net equity exposure in the replication portfolio rose steadily throughout the quarter, with most of the increase in EAFE, and shorts in EM equity being reduced. The portfolio also ramped up positioning in the King Dollar trade (i.e., long the US dollar) while also maintaining a hedge in a yield curve steepener – arguably hedges against a resurgence of inflation in the US. Positioning in rates is relatively hedged and generated essentially flat performance in the quarter. Within commodities, gold was accretive to performance while an initial short position in crude oil at the start of the year, which has since been flipped, partially detracted.
DoubleLine:
The Opportunistic Income portfolio’s 2.5% gain significantly outperformed the Agg’s 0.8% loss during the first quarter. U.S. Treasury yields rose over the period due to stronger than expected economic data and reduced expectations of future rate cuts. The 2-year, 10-year, and 30-year U.S. Treasury yields increased 37, 32, and 31 basis points, respectively, due to hawkish central bank rhetoric and persistently elevated inflation. The portfolio’s strong outperformance was driven by both asset allocation and security selection, as its overweight positioning towards credit, as well as security selection within various credit market sectors were both accretive to performance. Nearly every sector in the portfolio generated positive returns, with the top-performing sectors consisting of Commercial Mortgage-Backed Securities (CMBS), Collateralized Loan Obligations (CLOs), and non-Agency Residential MBS. Floating rate assets with higher interest income and lower interest rate sensitivity broadly outperformed over the period. Corporate credit and securitized credit experienced spread tightening over the period due to accommodating financial conditions and risk-on investor sentiment. Many bank loans and high yield issuers repriced and refinanced existing debt at significantly lower costs over the quarter, helping performance. The only sector that detracted from portfolio performance was Agency MBS, which, due to its rate sensitivity, experienced price declines due to the increase in US Treasury rates. The portfolio ended the quarter with a duration of 5.7 and yield of 9.7%.
FPA:
The Contrarian Opportunity portfolio was up over 5% during the quarter, continuing a run of strong performance. The top contributors for the quarter were again a mixture of tech/growth companies (e.g., Meta Platforms Inc. (0.8%) and Alphabet (0.3%)), and more classic value names like Citigroup Inc. (0.5%) and cement company Holcim Ltd (0.4%). The most significant detractors included a repeat appearance from multiple securities in the post-reorganization capital structure of oil services company McDermott International (-0.7% collectively) and cable/internet provider Charter Communications (-0.3%), which fell due to disappointing revenue and a surprise loss in broadband subscribers. New positions throughout the quarter included a long equity position in Kobayashi Pharmaceutical, which lost about one-quarter of its market value suddenly due on a voluntary recall of a nutritional supplement, an equity pair trade in two life sciences companies, and a Delivery Hero convertible bond. Longtime equity holdings AIG and Heidelberg Cement were sold on strong price performance. There were no significant additions or partial reductions in existing positions. Gross and net equity exposure is approximately 51%, down significantly over the last two quarters as equity markets have rallied dramatically. Credit exposure is almost 10%, up from a year ago, but growing much more slowly recently as credit markets have been strong. Cash is approximately 36.7%, the highest in some time, with dry powder earning a decent return while maintaining the optionality to go on offense when dislocations inevitably occur.
Loomis Sayles:
The Absolute Return strategy was up 1.7% during the quarter, generating positive returns while core bonds suffered mild losses (with the Agg down approximately 0.8%). The portfolio’s allocation to securitized credit positively contributed to performance, generating the portfolio’s largest gains, at approximately 1.2%. CMBS and ABS were particularly additive. The securitized credit allocation is approximately one-third of the portfolio, and within that, almost a third is made up of a diversified portfolio of ABS, while non-Agency RMBS makes up over 40%, and non-Agency CMBS accounts for almost 25%. The portfolio’s (relatively minor) equity allocation positively impacted performance during the quarter, with select exposure to capital goods, energy and consumer non-cyclical names contributing most. Convertibles also generated positive return during the quarter, with communications, consumer cyclical, and transportation driving gains. Convertible bonds and equity together accounted for less than nine percent of the portfolio at quarter end, but contributed almost 60bps of performance. High yield bonds were a very slight detractor from performance during the quarter, driven by the industrials, consumer cyclical and transportation sectors. High-yield exposure has come down significantly over the last few quarters on both a gross long and net basis, ending the quarter at approximately 16% net long. The portfolio ended the quarter with a duration of 3.4 and yield of 7.6%.
Water Island:
The Water Island Arbitrage and Event-Driven portfolio generated a very small (<0.1%) positive net performance during the quarter, with slight positive contributions from both merger arbitrage and special situations.
Deal Highlights
The top contributor in the portfolio for the quarter was a position in Silicon Motion Technology. Silicon Motion Technology is a Taiwan-based fabless semiconductor company that designs and develops high-performance, low-power semiconductor solutions for the multimedia consumer electronics market. In May 2022, the company agreed to be acquired by MaxLinear – a US-based provider of radio-frequency analog and mixed-signal semiconductor solutions for broadband communications applications – for $4.0 billion in cash and stock. The deal received all required shareholder and regulatory approvals, including in China, where the transaction had undergone a protracted review and whose approval was the final hurdle to close the deal. However, in a surprising move mere hours after China approval had been received, MaxLinear terminated the merger agreement, claiming a material adverse effect had occurred in Silicon Motion’s business. It appeared unlikely that this was simply a tactic for MaxLinear to seek a price cut, and Silicon Motion seemed disinclined to take MaxLinear to court in an attempt to force the company to close the deal. In response, Silicon Motion rejected MaxLinear’s claim, stating MaxLinear breached its own obligations under the merger agreement, and filed a notice of arbitration in Singapore for the wrongful termination seeking termination fees and additional monetary damages. Water Island maintained exposure to Silicon Motion post deal termination due largely to the potential for a positive arbitration outcome for the company. In the meantime, the company’s improving fundamentals and the continuing equity market rally helped bolster the share price during the January to March period, leading to gains for the fund. Other top contributors included positions in the $2.7 billion all-cash acquisition of Sovos Brands by Campbell Soup Company and the $10.7 billion all-cash acquisition of ImmunoGen by AbbVie, both of which successfully closed during the quarter.
Conversely, the top detractor for the quarter was a position in the acquisition of United States Steel (“US Steel”) by Nippon Steel. In December 2023, US Steel – a US-based steel producer – reached a definitive agreement to be acquired by Nippon Steel of Japan for $13.4 billion in cash. The transaction has been met with stiff pushback from steelworkers and politicians based primarily on concerns about its potential impact to jobs and national security, including from President Biden, who has expressed a desire for US Steel to remain a domestically owned American firm. Nippon Steel, for its part, has emphasized its deep roots in the US and said its purchase of US Steel would strengthen the U.S.’s supply chains and economic defenses against China. While the deal appears to have been caught up in the fray of election year politics, on its merits, we believe it meets all regulatory requirements and the companies continue to guide toward expected completion in the second half of 2024. We continue to maintain our exposure as we monitor this situation closely. Other top detractors for the period included positions in the $3.1 billion all-cash acquisition of Olink Holding by Thermo Fisher Scientific and the $10.3 billion all-cash acquisition of Capri Holdings by Tapestry, both of which are undergoing extensive regulatory reviews after having received second requests from antitrust authorities, leading to volatility in the deal spreads.
Water Island Market Commentary
After one of the slowest years for mergers and acquisitions (“M&A”) activity in the past two decades, in early 2024 a deal rebound has begun – albeit in fits and starts.
January started strong, with more definitive merger arbitrage opportunities in deals valued at $1 billion or greater than in any January since 2006, according to Morgan Stanley research. Over the full quarter, the total value of M&A activity surpassed $750 billion, climbing 30% compared to the year-ago period, according to Dealogic data. Although consolidation in the Asia-Pacific region slowed, activity in the US and Europe surged 59% and 64%, respectively. The primary drivers of first quarter activity were the energy, information technology, and financial sectors. The resurgence of technology consolidation is particularly noteworthy, as this sector has recently experienced a slowdown in M&A after undergoing significant scrutiny from antitrust regulators.
Despite the breadth of activity during January, deal announcements in smaller and mid-sized deals slowed dramatically in March, and the composition of overall deal flow in the first quarter was tilted toward the larger end of the market cap spectrum. The number of takeovers valued at $10 billion or more spiked, with the 14 transactions announced in Q1 2024 nearly tripling the five deals announced during the year-ago quarter. We believe this is indicative of the increasing amount of comfort dealmakers are gaining with the prevailing regulatory environment around the globe, as we now have multiple instances of established precedent in court cases and settlements related to actions brought by current antitrust regimes. While companies are testing the waters once again with mega-deals, we remain prudent in our approach to participating in such opportunities, as they still come with heightened risks. Dealmakers who are increasingly willing to fight regulatory objections in court must also be willing to endure longer deal timelines. These transactions may eventually succeed, but the relative risk/reward doesn’t always warrant the participation of arbitrageurs in the early innings, especially when attractive spreads may be available elsewhere.
The return of larger M&A transactions – which are typically approached more cautiously by corporate boards and management teams – often intimates improving health for the overall M&A market, and we see several factors that would support a swift resumption in consolidation activity across all deal sizes. Although boardroom confidence appears to be returning and share prices have rallied, economic growth – though positive – has been tepid. CEOs are driven to grow their companies over time, and inorganic growth has always been an important lever to pull when options for organic growth are limited. Strategic buyers are flush with cash, as corporations outside the financial sector have more than $5.6 trillion in dry powder on their balance sheets according to Morgan Stanley research. With plentiful cash and markets receptive to investment grade credit issuance, we expect strategics to put money to work in pursuit of growth via acquisition, and that they will find funding transactions with cash and debt will remain more attractive than equity. Financial or private equity (“PE”) buyers also have ample cash balances, with $2.5 trillion in dry powder on the books. While PE activity slowed when interest rates rose last year, as rates continue to stabilize and we edge closer to potential rate cuts by the Federal Reserve – which could begin as soon as mid-year – we anticipate PE activity will accelerate. We have also seen a meaningful uptick in attractive credit-based merger arbitrage opportunities this year, as private markets have been open to M&A. We expect this to persist as the backers of non-listed companies seek to exit or monetize their stakes before valuations see a downturn.
Three months into the new year, across the sector spectrum, M&A is getting done – deals are being announced, and deals are closing – and we do not expect the pace of activity over the remainder of the year to subside. Yet despite our optimism for the months ahead, we remain aware of widespread market risks amidst the unpredictability of election-year politics, geopolitical strife, and the U.S. economy’s tenuous hold on a potential “soft landing.” As always, we appreciate the importance of non-correlated investment strategies such as ours, and we continue to seek to deliver consistent returns sourced from the outcomes of idiosyncratic corporate events regardless of overall market direction.
Strategy Allocations
The current allocations, reflecting the DoubleLine tactical overweight are 27% to DoubleLine, 17% each to DBi and Water Island, 15% to Loomis Sayles, 13% to Blackstone Credit Systematic Group, and 11% to FPA. (The Fund’s strategic targets are: 20% each to DBi and DoubleLine, 18% to Water Island, 15% each to Blackstone Credit Systematic Group and Loomis Sayles, and 12% to FPA.) We use the Fund’s daily cash flows to bring the manager allocations toward their targets when differences in shorter-term relative performance cause divergences.
Sub-Advisor Portfolio Composition as of March 31, 2024
Blackstone Credit Systematic Group (DCI) Long-Short Credit Strategy
| Bond Portfolio Top Five Sector Exposures | |
| Consumer Discretionary | 14.6% |
| High Tech | 13.7% |
| Energy | 10.3% |
| General | 7.3% |
| Investment Vehicles/REITs | 5.5% |
| CDS Portfolio Statistics | ||
| Long | Short | |
| Number of Issuers | 70 | 66 |
| Average Credit Duration | 4.6 | 4.6 |
| Spread | 111 bps | 114 bps |
| DBi Enhanced Trend Strategy | |
| Asset Class Exposures (Notional) | |
| Commodities | 15.4% |
| Currencies | -88.3% |
| Equities | 69.5% |
| Rates | -44.8% |
| DoubleLine Opportunistic Income Strategy | |
| Sector Exposures | |
| Cash | -4.7% |
| Government | 1.9% |
| Agency Inverse Interest-Only | 12.9% |
| Agency CMO | 0.5% |
| Agency PO | 0.5% |
| Collateralized Loan Obligations | 19.5% |
| Commercial MBS | 16.8% |
| ABS | 5.9% |
| Bank Loan | 4.5% |
| Emerging Markets | 6.5% |
| Non-Agency Residential MBS | 34.4% |
| HY/ Other | 1.2% |
| TOTAL | 100.0% |
| FPA Contrarian Opportunity Strategy | |
| Asset Class Exposures | |
| U.S. Stocks | 33.9% |
| Foreign Stocks | 17.3% |
| Bonds | 9.9% |
| Limited Partnerships | 1.8% |
| Other Asset Backed | 0.6% |
| Short Sales | -0.2% |
| Cash | 36.7% |
| TOTAL | 100.0% |
Loomis Sayles Absolute Return Strategy
Strategy Exposures
| Long Total | Short Total | Net Exposure | |
| Securitized | 31.4% | 0.0% | 33.4% |
| High-Yield Corporate | 17.8% | -2.1% | 15.7% |
| Investment-Grade Corp. | 17.4% | 0.0% | 17.4% |
| Global Sovereign | 7.6% | 0.0% | 7.6% |
| Convertibles | 5.3% | 0.0% | 5.3% |
| Bank Loans | 3.7% | -0.6% | 3.1% |
| Dividend Equity | 3.3% | -0.1% | 3.1% |
| Emerging Market | 2.7% | 0.0% | 2.7% |
| Currency | 1.8% | 0.0% | 1.8% |
| Subtotal | 92.8% | -2.8% | 90.0% |
| Cash & Equivalents | 8.9% | 0.0% | 8.9%% |
Water Island Arbitrage and Event-Driven Strategy
Sub-Strategy Exposures
| Long | Short | Net | |
| Merger Arbitrage – Equity | 74.4% | -17.8% | 56.6% |
| Merger Arbitrage – Credit | 9.2% | -0.3% | 9.0% |
| Total Merger-Related | 83.7% | -18.0% | 65.6% |
| Special Situations – Equity | 0.8% | 0.0% | 0.8% |
| Special Situations – Credit | 6.5% | 0.0% | 6.5% |
| Total Special Situations | 7.3% | 0.0% | 7.3% |
| Total | 90.9% | -18.0% | 72.8% |