Video
iMGP DBi Managed Futures Strategy ETF Update with Andrew Beer | January 2024
In this new video update, Andrew Beer covers topics including current positioning of the portfolio, alongside the trends and more! MORE
Interviewee: Andrew Beer (DBi)
Interviewer: Mike Pacitto
Date: March 14, 2024
Mike:
Slide 2:
Hi everyone, I’m Mike Pacitto with iM Global Partner, joined by Co-Founder of DBi and Co-Portfolio Manager, Andrew Beer. Thanks for joining our monthly update on the iM Global Partner DBi Managed Futures ETF Strategy – ticker: DBMF.
We’re in the midst of moving our monthly update videos to a “2.0” version that’s shorter and more interactive, integrating questions and observations we get from allocators and advisors. We’ll definitely keep positioning and performance as key parts of the 2.0, so stay tuned over the next month or two as we move to this refresh.
Slide 3:
Meantime, this update looks like it’s going to be our shortest one to date – but I think you’ll still find it really interesting – so without further delay as we do each month Andrew, onto your commentary.
Andrew:
Slide 4:
Thank you, Mike. And thanks to everyone for listening in.
We’ve had a very strong start to the year – up about 6%, in line with both the SocGen CTA Index (hereinafter the “Hedge Fund Index”) and the Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”). Since inception we’ve handily outperformed both. Perhaps more importantly to the model portfolio world, the S&P 500 has returned around 7% this year, but the Bloomberg Agg is down close to 2%.
The big news on the macro and positioning front is that hedge funds overall are finally buying this equity rally. The Fed will pivot, they say, it’s just a question of when; AI seems unstoppable; we sidestepped the scariest landmines of the past two years; and the prospect of a Trump second term (while deeply disconcerting to half this country) could make capitalism cool again. Higher rates now are more about strong growth, not inflation. And so, as noted above, stocks are soaring while bonds are struggling – a big shift from 2022 and 2023 when everything seemed to move together.
On the positioning front, we’re also risk on. We’ve dialed up equity exposure, are back in the King Dollar trade, commodity longs are creeping up, and we have a yield curve flattener. The gold and flattener look to me like hedges against the long equity exposure.
Slide 5:
With that, next slide please.
Here’s our chart on Stocks, Bonds and DBMF. Note the move so far this year: like in 2021, we’re going up with equities. That’s a big shift from 2022 and 2023, when we were largely in crash protection mode. So it’s important to understand that managed futures funds will be long and short at different times, but that the correlation should be around zero over a market cycle. For those who like statistical calculations, the correlation to the S&P 500 has been negative -0.26 since inception nearly five years ago, with annualized alpha of over 900 bps. If you build model portfolios, stats like that are very hard to come by in a hedge fund, and even harder to find in a mutual fund. Hence the whole point of DBMF is to seek to deliver this “diversification bang-for-the-buck” and show that we can do it in a client-friendly ETF. We’re still 0.01% of the ETF world and are working very hard to change that.
Slide 6:
Next slide please.
Replication is not perfect, but it’s the best way we’ve found to seek to deliver “index-plus” performance relative to hedge funds. One criticism we’ve heard that makes no sense is that ten instruments are unable to capture the nuances of a more complicated portfolio. That false assumption is grounded in this idea that you have dozens and dozens of truly independent – or to use fancy statistical jargon, orthogonal – risks out there. That’s nuts. Take junk bonds – they’re obviously a combination of rates and equities. So here’s a chart titled “How Simple Can Replicate Complex”. My brilliant partner, Mathias, built this research graphic which you can play with to your hearts content on our website, www.dbi.co. What it shows is that most instruments we do not trade can be viewed as combinations of the ten big factors we do trade. Some, clearly, really do march to the beat of their own drum – take a look at those seven futures tucked away in the left and right margins – but the vast majority do not. For anyone who read our article in Institutional Investor last Fall about four factor replications, this is another brick in the quote-unquote “replication works” wall.
Slide 7:
Next slide please.
As you all know, I think the asset allocation world changed a lot over the past several years – but given how slowly this world moves, those changes will play out over the next several years. So in the (what I consider to be) jaw dropper category, take a look that these two charts. Many allocators build capital markets assumptions off twenty-year trailing returns. The graphic on the left is the S&P 500 vs Bloomberg Agg from 2000 to 2020. So imagine your building a model in early 2021. Bonds had beaten equities for almost eighteen years! Now look at the stats on the bottom. Bonds returned 3% more than cash, with a Sharpe ratio of 0.9 and a max drawdown of -3.8% — with a slightly negative correlation. Absolutely unbeatable as a diversifier. Take 40% of a stock portfolio and put it in bonds (ie 60/40), and your max drawdown drops 40%, your vol by a similar amount and your Sharpe ratio jumps 50%. Bubbles make people look like geniuses.
Now hit the right chart. All we’ve done is shift this forward by four years. The returns over cash have dropped in half, the Sharpe ratio is down nearly 60%, the max drawdown is 4-5x deeper – and correlations have flipped to positive.
So the point is it seems very unlikely we will ever return to the halcyon days of 60/40 because no allocator can erase the bond-tastrophe that has played out in the 2020s. And no, I do not think allocators will abandon bonds, but rather that I think it will be obvious in a few years that advisors need better arrows in their quivers, and will see that managed futures should have a permanent, strategic role in diversified portfolios. Of course, we think our investors may look very prescient for seeing this years before their peers.
Slide 8:
Next slide please.
Finally, here’s our standard chart on volatility adjusted positioning. The columns are current volatility adjusted positioning, and the dots are from the end of December. This is what I meant by a pivot into some big trades: look at the increase in the EAFE long, the dialing back of the EM short, and how the portfolio is now very short both the yen and Euro. From a risk perspective, that’s where the real action is. We’ve seen periods like this before: when the world goes strongly risk on, managed futures will follow. Now please, it’s important to remember that the strategy is very dynamic – the positioning has worked very well for us year to date, but if we see a reversal and give back some gains, the underlying hedge funds, and hence the replication, will pivot out accordingly. This tactical dynamism and potential alpha generation is why managed futures, and hence DBMF, can work well as a complement to slow moving models.
With that, I’ll hand the baton back to Mike.
Mike:
Slide 9:
Thanks Andrew — let’s wrap here with our long-term performance comp.
Rising tides for managed futures have lifted all boats so far this year, for DBMF and for its benchmarks – but DBMF continues to outperform since inception – ahead of the Soc Gen CTA index by 145 basis points annualized, and ahead of the Morningstar Systematic Trend Average by over 330 basis points annualized. Upon request, we can also provide performance numbers prior to the inception of the ETF, utilizing historical performance from the SMA version of the strategy.
Slide 10:
Our case for DBMF is two-fold – first in efficiently and effectively representing the managed futures asset class, providing true and potent alpha-generating diversification to traditional stock/bond portfolios – and as such we believe it should be a strategic long-term allocation.
And competitively we believe in DBMF we have a superior mousetrap in the managed futures space. The strategy seeks to deliver highly-correlated outperformance versus the index – which we have done historically – while keeping fees low and single-manager risk mitigated via our disciplined replication approach. All in a liquid, easy to implement ETF.
Slide 11:
So 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]
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