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Video iMGP DBi Managed Futures Strategy ETF Update with Andrew Beer | August 2023

Interviewee: Andrew Beer, Dynamic Beta investments (DBi)
Interviewer: Mike Pacitto
Date: August 8, 2023

Mike Pacitto:

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 the ideal solution for accessing the managed futures category, delivering meaningful diversification and overall alpha-generation to traditional stock and bond portfolios. DBMF combines an index-plus replication approach with low fees, providing investors an elegant, efficient and effective ETF. In doing so, DBMF applies long-term strategic allocation benefit to asset allocators.

I’m joined as always by Andrew Beer – co-Founder of Dynamic Beta Investments, and co-Portfolio Manager of DBMF. We’ll be touching on performance, some recent interesting rotations related to current positioning of the strategy, macro commentary and a bit more color and a few more tidbits along the way. This update should clock in at around 10 minutes; we appreciate your time and hope you find it well-spent.

So with that let’s get to it Andrew, I hand it off to you.

Andrew Beer:

Thanks, Mike.

So here’s the quick summary.  DBMF was down slightly in July, on both a price and NAV basis, marginally ahead of both the SocGen CTA Index (hereinafter the “Hedge Fund Index”) and Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”).  As we talked about last month, I’m pleased to report that, after a frustrating first quarter of this year, the strategy is back to doing what we hope it can do over time:  potentially outperform both hedge funds and mutual funds with high correlations to the respective indices – in essence, provide a way for investors to get something that looks like “index-plus” performance over time.  That’s essentially what DBMF was able to achieve since launch in 2019:  outperform meaningfully in 2019, perform in line in 2020, and then outperform by a decent margin in both 2021 and 2022.  For professional investors, please feel free to reach out to Mike and he can show you related performance back to mid 2016.  In any case, we are cautiously optimistic that our investors will look back three years from now and see more of this much more satisfying pattern of results.

On the macro front, we’ve taken to calling this the Impossible Market – not of the fake burger variety, but rather because things that most strategists and investors assumed were extremely unlikely have come to pass.  We cite a few examples on the upper right.  For instance, I just haven’t found anyone who predicted the Fed could hike 500 bps in eighteen months and not cause a recession, or that unemployment would remain this low and yet inflation would recede by this much, or that the taper bet would be flat out wrong yet growth stocks would absolutely crush value.  Or if you remember late March, where the media breathlessly reported that a massively inverted yield curve was a foolproof indicator of impending recession – “by June”, no less – and yet the economy seems just fine four months later.  Last month we talked at some length about all the macro “near misses” using the metaphor of a drunk stumbling across the highway.  To make matters even more irritating to the smart money crowd, if you got the macro call right (eg persistent inflation), figuring out how the markets would react has been something of a wildcard (eg growth kills value).  A lot of playbooks have been torn to pieces.  Given how, as the physicist Niels Bohr said, “it’s difficult to make predictions, especially about the future,” we think the name of the game today is to diversify across asset classes and strategies, especially into strategies like managed futures that can be nimble and have the ability to adapt to these big shifts in the macro landscape.

And speaking of nimble, on the positioning side, we do see meaningful, dynamic rotations in the portfolio.  We’ll highlight some of the big moves in a few slides.  But for now, our current positions are that the Euro will rise and yen will fall – essentially, a bet that Europe has some catching to do on the rates side while Japan will sit on its hands.  Unlike many fundamental hedge funds, we’re long the S&P 500 against EAFE (non-US developed markets) – essentially a bet on growth over value and US market supremacy.  We’re short Treasuries, a position that should benefit from any upside surprises on the inflation front, yet have abandoned our long gold position, perhaps underscoring how gold has worked better as an inflation hedge in theory than in practice.  Lastly, we have basically flattened the crude oil short, which may reflect a lower probability of recession.

So, to keep this moving, let’s jump to the next slide:

Once again, here’s our regular slide since inception versus the S&P 500 and Bloomberg Agg titled

“portfolio diversification bang-for-the-buck” quote unquote.  Since launch in 2019, we’ve delivered nearly 1000 basis points per annum of alpha relative to the S&P 500.  To make a slightly more nuanced statistical argument, approximately every dollar that DBMF has generated since inception – 44% over a little more than four years – has been alpha.  Compare that to a stockpicker who is a hero for delivering 100 bps of alpha a year, net of fees.  Or to compare DBMF to bonds:  a dollar in bonds since launch is still worth about a dollar today, even including interest, while you have a dollar forty-four in DBMF.  This math means that allocators with a 10% allocation to DBMF since inception (alongside stocks and bonds) could have preserved returns while materially reducing drawdowns – essentially a big step toward the goal, I think, of all financial advisors of helping clients to retire with as much money as possible with the least amount of stress along the way.

One follow up point to the macro discussion:  the performance of bonds this year has been really disappointing.  In January, many were calling this the Year of the Bond.  This was really based on the taper thesis – that falling rates would provide a nice tailwind.  And yet, Treasuries are down for the year and credit, while up slightly, is underperforming cash.  To harp on a theme, a rational and self-aware allocator will acknowledge that it’s very difficult to know where we go from here, so the question really is not whether to diversify, but how best to achieve it.  And I challenge anyone to find a strategy available in an ETF or mutual fund that can deliver the kind of alpha described above, especially through a crisis like last year.  So if you want to talk about strategies for allocating to the space so that clients understand why it’s in their portfolio, what they should expect, and how to make it a successful long-term allocation, please reach out and let’s have a discussion about it.

Next slide, please.

And … here’s our usual slide with performance since inception against both the Hedge Fund Index and Morningstar Category.  Just to take a step back, and to remind everyone, when we got into the managed futures space seven or eight years ago, we wanted to create an “index-plus” product – we basically didn’t want to take a flyer on last year’s star or build our own trend following models, which can vary widely depending on how you turn the dials.  Replication was the best thing we came up with – we don’t think it’s perfect, but we think it gets closer to that objective than the other options:  essentially, one or a few single manager funds or one of a handful of multi-manager products.  Plus, it’s a relatively inexpensive way to invest and we’re happy for everyone to see our positions every day, which means it can work well in an ETF.  So the punchline of this slide is that, over the four plus years of live performance, we think the strategy is doing what it’s supposed to be doing – delivering a high correlation to both the hedge fund and mutual fund indices, while outperforming through lower fees and trading costs.  So our pitch is that the strategy overall is a great diversifier, and we think we’ve build a simple and elegant way to get exposure to the space, with the transparency and efficiency of an ETF.  If five years from now we can point to a 90% correlation and consistent alpha generation, we think DBMF can serve as the “default” allocation for many advisors and model allocators.

Next slide, please.

Here’s our standard chart on volatility adjusted positioning.  As a reminder, we show volatility adjusted positioning 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 also showing it relative to one month ago to underscore how dynamic the portfolio has been recently. 

To start from the left, we’ve gone from very short crude oil – which we interpreted as a recession hedge – to close to flat, while flipping from long gold – in theory a good inflation hedge – to short.  Both shifts make sense in the context of a market less concerned about either recession or runaway inflation.  On the currency side, our core position of long the Euro and short the Yen remains intact, albeit with a sharp reduction in the Yen position as the Bank of Japan has made noises about a shift in policy.  On the rates side, we’re now short Treasuries across the board, whereas after the mini-banking crisis we flipped to long the 10 year but kept the shorter and longer duration shorts in place.  And on the equities side, managed futures funds have increased long exposure to S&P 500, which makes sense given the persistent upward trend since last Fall, while shorting EAFE and flipping from a small short position in Emerging Markets to long.  I’m going to be really interested to see how this one plays out, because several months ago “long EAFE vs the S&P 500” was a big trade among fundamentally driven hedge funds – the thesis was that higher rates would benefit value stocks, and there are more of those outside the US these days, while the extreme outperformance of US markets in the 2010s would reverse in the 2020s.  That trade has not been going well recently for those hedge funds, and it looks like managed futures funds rotated out pretty quickly and have been on the other side of the trade recently.  Time will tell who is right here.

With that, I’ll hand the baton back to Mike.

Mike Pacitto:

Thanks Andrew.

As mentioned in our open, we view DBMF as a long-term allocation – we also believe that we’ve designed a superior solution to accessing the managed futures asset class – and finally, we believe that there are few if any more compelling diversifiers to traditional stock and bond portfolios than managed futures.

Our closing slide tells the story of how successful this strategy has been very simply, showcasing the since inception performance of DBMF versus the index, which we seek to replicate “plus” by eliminating most of the fee drag. It also contrasts DBMF’s performance against the category average as defined by Morningstar.

Outperformance against the index has been over XXXbps annualized since inception. Outperformance against the Morningstar average has been over XXXbps annualized since inception.

We believe these results are convincing and we hope you do too. The combination of effective index-plus replication, with fee reduction being the purest form of alpha, are the key characteristics of what makes DBMF unique and compelling. 

So 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: team@imgpfunds.com 

Until next time – from DBi and from iMGP – thanks for spending time with us.

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The Fund’s investment objectives, risks, charges, and expenses must be considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the investment company, and it may be obtained by calling 800-960-0188 or visiting www.partnerselectfunds.com. Read it carefully before investing.

iMGP DBi Managed Futures Strategy ETF Risks: Investing involves risk. Principal loss is possible. The Fund is “non-diversified,” so it may invest a greater percentage of its assets in the securities of a single issuer. As a result, a decline in the value of an investment in a single issuer could cause the Fund’s overall value to decline to a greater degree than if the Fund held a more diversified portfolio.

The Fund should be considered highly leveraged and is suitable only for investors with high tolerance for investment risk. Futures contracts and forward contracts can be highly volatile, illiquid and difficult to value, and changes in the value of such instruments held directly or indirectly by the Fund may not correlate with the underlying instrument or reference assets, or the Fund’s other investments. Derivative instruments and futures contracts are subject to occasional rapid and substantial fluctuations. Taking a short position on a derivative instrument or security involves the risk of a theoretically unlimited increase in the value of the underlying instrument. Exposure to the commodities markets may subject the Fund to greater volatility than investments in traditional securities. Exposure to foreign currencies subjects the Fund to the risk that those currencies will change in value relative to the U.S. Dollar. By investing in the

Subsidiary, the Fund is indirectly exposed to the risks associated with the Subsidiary’s investments. Fixed income securities, or derivatives based on fixed income securities, are subject to credit risk and interest rate risk.

Diversification does not assure a profit nor protect against loss in a declining market.

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iM Global Partner Fund Management, LLC has ultimate responsibility for the performance of the iMGP Funds due to its responsibility to oversee the funds’ investment managers and recommend their hiring, termination, and replacement.

The iMGP DBi Managed Futures Strategy ETF is distributed by ALPS Distributors, Inc. iMGP, DBi and ALPS are unaffiliated.

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