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

Interviewee: Andrew Beer, Dynamic Beta investments (DBi)
Interviewer: Mike Pacitto
Date: July 11, 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 and providing definitive diversification to traditional stock and bond portfolios, DBMF combines an index-plus replication approach with low fees delivering to allocators an elegant, efficient and effective ETF.

I’m joined as always by Andrew Beer – co-Founder of Dynamic Beta Investments, and co-Portfolio Manager. As usual we’ll be touching on recent performance, macro commentary and current positioning of the strategy … and this month we’re happy to report that performance has had a very nice positive absolute and relative turn. While we believe DBMF should be a long-term strategic allocation, this short- term turn to green is welcome after a stint of underperformance.

Let’s get to it Andrew, I hand it off to you.

Andrew Beer:

Thanks, Mike.

Well, I’m pleased to report that, after a difficult and frustrating first quarter of this year, things appear to be back to normal. We were up over 3% net in June on both a price and NAV basis, well ahead of both the both the SocGen CTA Index (hereinafter the “Hedge Fund Index”) and Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”). This meant we made up almost all the lost ground from April and May and have roughly matched performance in the second quarter. Our correlations remain high and our broad positioning is consistent with what we see among actual hedge funds. We still trail year to date – and we’re not happy about that — but would remind everyone about material outperformance last year – on an NAV basis, around 300 bps ahead of the Hedge Fund Index and 850 bps ahead of the Morningstar Category. Consequently, we are cautiously optimistic that we are back to our prior pattern of potentially outperforming through fee disintermediation with high correlation to both the Hedge Fund Index and Morningstar Category. I think we’ll look back on the end of last year and 1Q as an example of how, although unlikely, you can flip coins several times in a row, but – importantly — that this doesn’t mean the coin is broken.

On the macro front, we cannot shake the image that the markets have been like a drunk stumbling across a highway. You sit there and watch an eighteen wheeler barrel down on this guy and clench your eyes shut– only to open them seconds later, watch the dust settle and find that he’s still standing. Then he stumbles into the next lane and it happens again. And again. So here we are in mid-2023 and, over the past year, we have avoided impact from a long list of economic eighteen wheelers: remember crude oil at $250 a barrel and gas rationing in Germany? What happened to the great regional — or even global — banking crisis? Ok, the threat of a US debt default was sort of a clownish sideshow, but weren’t wesupposed to be in a deep recession by June? So the news has actually been quite positive, if relative to really scary predictions.

What this has meant is that the economy has proven more resilient than expected, inflation is stickier, the Fed isn’t cutting rates anytime soon – and so equities (unexpectedly and driven by AI frenzy) are having a great year, while bonds have disappointed somewhat due to the headwind of higher rates. The tricky part is where we go from here. Hedge fund luminaries, in general, are sticking to the view that we’re in for a series of rolling crises – we may have dodged these eighteen wheelers, but they’ll keep coming over the horizon. If one hits, watch out. So they’ve tended to remain conservatively positioned.

All this means two things in managed futures land: the markets have been volatile, which has led to some meaningful rotations, and some of the positions, like the markets, are pointing in different directions. If you look on the lower right, you’ll see that a big position for us is to short the Japanese yen – the same trade that was our biggest moneymaker last year – based on the view that the dollar will rise as the Fed

hikes and Japan won’t. We now are long the S&P 500 versus EAFE (non US developed markets equities) and emerging markets – arguably a growth vs value bet, which lines up with the AI frenzy but not necessarily with higher rates, which tend to benefit value stocks. We still have a modest bet on higher rates, although a lot of the gas came out of this trade after the chaos in March. We remain long gold – perhaps a hedge if inflation surprises on the upside again – and short crude oil, which is more likely a recession hedge. So a very interesting portfolio with these idiosyncratic bets on various market trends.

Since I blew through my allotted time, let’s jump to the next slide:

Here’s our usual 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 960 basis points per annum of alpha relative to the S&P 500, even though the S&P is up between 60% and 70%. We’ve delivered meaningful alpha relative to bonds.

At the risk of sounding like a broken record, our constant refrain is that managed futures should be a strategic allocation in every diversified portfolio – the evidence over decades is really compelling. The challenge for broader adoption really is a messaging issue, and you’ll be hearing a lot more about that from us over the coming months.

One interesting observation: if you look at that chart, what you see is that from 2019 through 2021, DBMF rose when equities soared – at one point, up 70%. Then we were in crash protection mode – when equities went down, we went up and vice versa. Over the second quarter, we once again were making money in a good period for equities – not, obviously, by just being long equities. The point is that I think many investors fear that managed futures will perform poorly when equities rise – that clearly is not necessarily the case.

Next slide, please.

So here’s our usual slide with performance since inception against both the Hedge Fund index and Morningstar Category. I think this is pretty clear illustration of what’s been going on. You can see the consistent outperformance to each through the end of 2021 – then when returns took off last year, DBMF materially outperformed each through the third quarter. In the case of the Hedge Fund Index, it was a result of similar pre-fee risk level but lower fees – those performance fees will be greatest when the funds are up a lot. In the case of the Morningstar Category, it was more about risk level commensurate with actual hedge funds, not the watered-down mutual fund equivalents. Then when the markets reversed, we gave back more than we would have liked – still, though, we ended the year about 300 bps ahead of hedge funds and 850 bps ahead of mutual funds. Then had a frustrating first quarter, which we’ve discussed at

length, but now have been back to business as usual in the second quarter. As noted in the beginning, we are cautiously optimistic that the first quarter in particular will stand out as a highly atypical period – the equivalent of flipping tails several times in a row – very unlikely, but it happens.

Next slide, please.

Here is a repeat of that slide we showed you last month. On the left, you can see the monthly returns of DBMF versus the Hedge Fund Index over the past year. The gold dots are from last year and black ones from this year. Again, we clearly are pointing in the same direction – when they go up, we go up; and vice versa. In fact, if you look at that little formula, the correlation is comfortably over 90%. And if you look at the new black dot that’s just underneath the formula, that is June. So, as expected, we are seeing noise – replication is an approximation, not a perfect copy, for obvious reasons – but the pattern in the past has been that it cancels out over time. Combined with the tailwind of lower fees, our goal is to potentially outperform over time through lower fees and expenses.

On the right, you see a histogram of rolling six month returns. Last month, we showed you that we were tucked all the way on the left tail. One month later, we’ve started to shift back to the right. We hope that in a few months we’ll be back in our comfort zone at or slightly above zero.

Next slide, please.

Here’s our standard chart on volatility adjusted positioning. We’re showing this today relative to three months ago so you can see how much the portfolio has shifted in the wake of the mini-banking crisis. Starting from the left, we’ve added to the short in crude oil, ramped up currency positions as the pivot thesis faded, flipped from short to long the 10 year Treasury, and exited the EAFE long and pivoted to long the S&P.

We often get questions about current positioning. The answers can be very helpful in having a feel for what’s driving performance – for instance, I can look a few major markets and will know whether we’re up or down. But over the long term, and this is incredibly important, the key is that the positions will change over time. We want the funds to hunt for new opportunities. I personally think the great competitive advantage of managed futures is that they will coldly exit positions when they stop working. For a variety of reasons, most allocators move slowly – which actually works fine most of the time; however, when the world shifts faster, it can be a disadvantage. And that’s why managed futures were so successful in 2022 – inflation came back too fast for most allocators to adapt. So I view managed futures as a hedge against a world that keeps changing fast – and that certainly seems to describe the world today.

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 180bps annualized since inception. Outperformance against the Morningstar average has been over 380bps 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: [email protected]

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

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