Video
iMGP DBi Managed Futures Strategy ETF Update with Andrew Beer | Year-End 2023
In this new video update, Andrew Beer covers topics including 2023 Year-End performance, portfolio rotations, macro themes and more! MORE
Interviewee: Andrew Beer (DBi)
Interviewer: Mike Pacitto
Date: February 15, 2024
Mike:
Slide 1-3:
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.
After a great 2022 and a tough ‘23, we’re off to a strong start for ‘24. And while we continue to champion the narrative that managed futures should be a long-term strategic allocation for traditional stock/bond portfolios, specifically via the efficient low-cost index-plus DBMF ETF, we also know that investors want to know about the current positioning of the portfolio, alongside the trends and thinking that it represents.
So as we do each month, let’s do that – Andrew, onto your commentary.
Andrew:
Slide 4:
Thank you, Mike. And thanks to everyone for listening in.
We got off to a good start in January – up around 2% net, ahead of both the SocGen CTA Index (hereinafter the “Hedge Fund Index”) and the Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”). This felt a bit like “Back to the Future” for replication – similar to how we outperformed in 2016, 2017. 2018, 2019, matched in 2020 then outperformed again in 2021 and 2022. As you know from prior updates, we were disappointed with our performance last year but are cautiously optimistic that things are back to normal.
On the macro front, as predicted last month, there was a bit of a reversal of the yearend melt up. Essentially, the Fed threw cold water on the idea of a 1Q pivot, in part because the economy refuses to roll over and play dead. A few interesting themes out there. One, growth continues to outperform value – which is a bit counterintuitive if you think rates will remain higher. As an aside, I do have a theory on why this relationship between higher rates and value stocks fell apart last year – it dates to my years as a PM at Baupost –and if you want to discuss it one on one, please reach out to me directly and we’ll hop on a call. Related to this, there’s a sense of optimism about the US economy that is driving up the dollar and outperformance of US stocks versus emerging markets. Believe it or not, some hedge funds think it reflects a growing likelihood of a second, and very pro-business, Trump presidency. We shall see.
On the positioning front, it’s been interesting. After two years of being in what I termed “crash protection mode,” the portfolio has been shifting to more risk on. We have been adding long exposure to US and international equities, with a short position in emerging markets, a partial hedge that reflects pessimism about the ongoing economic quagmire in China. We are long the US dollar against both the Euro and Yen – what I call the King Dollar trade on the slide. As noted last month, the big bet on higher rates is behind us, and we are net long duration in a flattener trade. And finally, we have a slight long gold position, but overall not much going on in commodities. The data is on a later slide.
With that, next slide please.
Slide 5:
Here’s our chart pithily titled Stocks, Bonds and DBMF. Since inception nearly five years ago, DBMF has returned 7.7% per annum net with a negative correlation to both stocks and bonds and 860 basis points of annualized alpha to equities. Our drumbeat is basically that we are in a Brave New World of asset allocation where stocks and bonds are once again highly correlated, and that the first priority for allocators today should be to find investments with low correlations to both. Let’s dig into that theme again.
Next slide please.
Slide 6:
But first, I want to repeat a slide we used last month. In the euphoric Sea of Green in 2023, it was easy to forget that most asset classes were – and some are still – climbing out of a big drawdown hole. So we show cumulative performance here for DBMF for 2022 and 2023 combined – what is likely to be viewed as the duration of the shock hiking cycle. DBMF was up 11-12%, while equities – including the Nasdaq, which soared 55% last year – just climbed back into green in December. Some equity categories – small caps and emerging markets – dropped and never recovered. Bonds suffered losses that will take years to recoup. REITS were terrible. You know, after the GFC, people would always ask about hedge funds: “how’d they do during the crisis?” This showed that the strategy had been battle tested. Our belief is that allocators in three years will ask the same question: “yeah, but how did they do during the hiking cycle?” And this is how managed futures – in part — gains broader mainstream adoption.
Next slide please.
Slide 7:
Now back to my drumbeat. Here’s a jaw dropper we showed last month about the correlations of major asset classes to the S&P 500 in 2023. As I mentioned, we expect equity markets to have correlations to each other of 80% plus over time. But, seriously. Bonds? The Bloomberg Agg had a correlation of 0.88. REITS and liquid alts, to go to diversifiers of many advisors, were around 0.9. DBMF and managed futures were negative. To state the obvious, diversification means adding things to a portfolio that march to the beat of a different drum, and hence we believe that the value of managed futures – not just due to the performance figures in the last slide – is quite obvious after the past few years.
Next slide please.
Slide 8:
But maybe the last few years were an aberration? We all grew up in this business assuming that bonds were the obvious hedge to stocks. Plenty of serious market historians think the 2000s and 2010s might have been the outlier – the inverse correlation of stocks and bonds was a gift to allocators. So let’s look at the correlations of stocks and bonds over a longer window. Here’s the rolling correlation of the S&P 500 and Bloomberg Agg back to the late 1970s – sure enough, stocks and bonds were positively correlated. Some of those market historians think these flips in correlation persist for a few decades and believe that we entered into a new regime in 2022. The practical implication for anyone building a model portfolio is that they may need to reconsider whether correlation assumptions need to change, which starts to raise tricky questions, like whether bonds will actually drive down the efficient frontier when you add them to stocks. If this persists, the typical model portfolio in ten years might look very different from those today.
One more slide on this topic:
Slide 9:
By the way, the other problem for allocators is that the volatility regime may have changed – and not in a good way. We’re used to stock volatility spiking during crises, but during the 2000s and 2010s, bond vols remained really low. Maybe this quite literally was the Fed Put at work – hard to say, precisely. However, if you peek at the lower right, bond vols have doubled recently. Again, for a model allocators building capital markets assumptions, think about how profound this is: my anchor diversifier not only does not really hedge my core capital accumulation asset (equities, obviously) but is now statistically twice as risky as a few years ago. Again, if this persists, the typical model portfolio will look far more interesting in five years than today.
On to the next slide.
Slide 10:
Finally, here’s our standard chart on volatility adjusted positioning. I covered the main points at the beginning, but I would just emphasize that the portfolio has been adding equity beta, is now out of the rate hike trade and is bullish the US – eg the return of the King Dollar trade. These rotations are a good thing, what we hope to see: when an alpha generating trade opportunity is behind us, the model will hunt – dispassionately, coldly even – for the next opportunity. We are excited to see how this plays out over the coming months.
With that, I’ll hand the baton back to Mike.
Mike:
Slide 11-13:
Thanks Andrew.
Our case for DBMF is that it, representing the managed futures asset class, provides true and powerful diversification to traditional stock/bond portfolios – and as such should be a strategic long-term allocation. And we also 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.
So let’s wrap here with a simple long-term performance update. In terms of annualized results DBMF continues to outperform versus both the SocGen CTA Index and the Morningstar category, beating the former by over 170 basis points annualized and the latter by over 350 basis points annualized. Upon request, we can also provide performance numbers prior to the ETF, utilizing historical performance from the SMA version of the strategy.
In closing, 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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