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Video iMGP DBi Managed Futures Strategy ETF Update with Andrew Beer | June 2024

Interviewee: Andrew Beer (DBi)
Interviewer: Mike Pacitto
Date: July 15, 2024

Mike:

Slide 1:

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 Strategy ETF– ticker: DBMF.

We’ve titled this monthly update “5 years – 5 stars” for two obvious reasons. The first is that DBMF launched in May of 2019, and the ETF has received a five-star rating from Morningstar as of the end of Q2 this year.

Slide 2:

It’s worth noting though that the strategy actually has a live track record going back further, as it started in 2016 as a separately managed account – which was converted to the ETF vehicle in 2019. We’re happy to provide that data upon request to clients and prospective clients. 

Slide 3:

It was a strong month in June, on top of what’s been a strong year and a strong history for this strategy, which we believe is a must-have within the alternatives allocation of portfolios – Andrew will touch on positioning, attribution, etc., in this update as usual alongside further thoughts and color on macro, drivers of outperformance and how we look to deliver that with consistency over the long-term.

And with that Andrew, over to you –

Andrew:

Slide 4:

Thank you, Mike.  And, as always, thanks to everyone for listening in.

In June, DBMF gained around 2.3% net and is up 18.3% net (on a price basis) for the first half of 2024.  On the left, you can see that we are outperforming the SocGen CTA Index (hereinafter the “Hedge Fund Index”) by approximately 1000 bps and the Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”) by slightly more.  As noted in the second bullet, this year has been a case study in the idea that, “Sometimes simpler works better.”  As we’ll show on the next slide, noncore positions – the kinds we don’t trade – have meaningfully detracted from performance of actual hedge funds and their mutual fund kin.  So replication is working as expected, or maybe even better than expected, by picking up on the core exposures while sidestepping idiosyncratic losses.

As noted on the left, since inception of DBMF just over five years ago, we have outperformed the target hedge funds by over 300 bps per annum and doubled the annual performance of the mutual fund equivalents – all by simply aiming to replicate pre-fee returns and charging less.  More stats on this in a few slides.

On the macro front, the markets do feel a bit fragile.  The economy appears to be slowing, but inflation remains sticky.  The macroeconomic and sociopolitical backdrop is alarming, but the AI train keeps marching on nonetheless.  So equities had a stellar first half, or rather, I should say, a handful of stocks had a ridiculously stellar first half, but bonds are still down for the year and underperforming cash.  The truly concerning thing for allocators, as we’ve discussed at length, is that bonds stopped functioning as an effective hedge against equities a few years ago.  It’s slowly dawning on people that the world has indeed changed, and this is rippling through asset allocation models.  Clearly, this is part of the DBi drumbeat, where we think DBMF can fill some of that diversification gap.

But first, let’s talk about year-to-date outperformance.

[next slide] 5

This slide shows year to date performance of DBMF versus the SGCTA and Morningstar category.  The first observation is the replication has maintained high correlation all year long.  The second is that the performance gap widened in May and, especially, June.  What explains the gap?  As noted, it’s primarily due to avoiding a number of positions – the Mexican peso, some commodities, a few European equity markets, etc. – that have been whipsawed due to idiosyncratic factors.  To take a step back, most of the time there will be some winners and losers among these “noncore” positions, and hence replication tends to outperform due to fee and expense disintermediation.  Rarely, a high percentage of noncore positions work at the same time and replication will underperform by a bit – January and February 2023 were great examples and we talked about this extensively in our performance updates back then.  Other times, a high percentage are getting whipsawed and replication will outperform by more than simply fees.  We’ve seen this many times before, and given the high correlation to the target funds this years, we chalk up the outperformance this year to a combination of fee and expense savings, avoiding losing positions, and noise.  Because of this, we also conclude that there’s also no reason to believe the outperformance will somehow “revert.”

And by the way, here’s a fascinating validation of what we’re talking about.  Driven in part by the success of DBMF, some of our competitors from the mutual fund space have launched quote-unquote “simpler” strategies in ETFs.  In both cases, the “simpler” ETF is outperforming the more complicated mutual fund.  These performance comparisons will hopefully foster a healthy debate about when complexity aids performance and whether it justifies higher fees over time.

Next slide, please. 6

To build on this, we hit a huge milestone in May:  the five year anniversary of the launch of DBMF.  I thought it appropriate to at least add a slide on comparative performance versus the target hedge funds and mutual fund/ETF peer group.  The short answer is that DBMF has outperformed the target hedge funds by over 300 bps per annum with a correlation of 0.9.  DBMF has outperformed the mutual fund/ETF peer group by over 500 bps per annum, which explains the Five Stars on Morningstar.  Granted, our volatility is modestly higher – which is to be expected when you’re trying to replicate hedge fund returns before incentive fees – as is our max drawdown, which was due to a combination of giving back outperformance from the peak in 2022 followed by a period of underperformance last year.  But all in all, if there’s a better way to get something that looks like “index-plus” exposure to this space, we haven’t found it.

Next slide, please. 7

But the real reason people invest in DBMF is for diversification.  And hence here is our regular chart on Stocks, Bonds and DBMF.  Since inception, DBMF has returned around 10% (on a price basis) per annum with a negative correlation to both stocks and bonds and over 1000 basis points of annualized alpha to equities.  When we looked at this stat relative to the broader liquid alts space in Bloomberg, it looks like DBMF ranks among the top 1-2% of liquid alternative products since inception, and that does not include all the funds that were closed since launch in 2019.  And by the way, many of the funds with highest alpha generation are in fact managed futures mutual funds.  Which makes us increasingly confident that, in a few years, the question will not be whether to add managed futures as a diversifier, but how much.  Our goal is for DBMF to become the straightforward, default allocation to this space – an access point for investors who seek index-plus exposure.

Next slide please: 8

Here’s our slide on volatility-adjusted positioning.  The red dots are from the end of May, and the green bars are the end of June.  Starting on the left, we’ve maintained long exposure to both crude oil and gold.  In currencies, we’ve kept our short position in the Japanese yen, which has been the gift that keeps on giving for trend followers.  But note that we flipped to a long position in the Euro.  On the rates front, we are now more confidently short across the curve – a position that I like given the elephant in the room that we have two political parties that seems to have forgotten any sense of fiscal prudence, which begs for a bond market tantrum at some point.  Lastly, we continued to dial back long equity exposure after ramping it up in the first quarter.  Overall, I see our portfolio as well positioned for any upward surprises on the inflation front, with an interesting bias for a rebound in Europe.

Which brings us to the next slide. 9

Here is contribution by factor.  The first thing to note is that we’ve made money in three of four asset classes – commodities, currencies and equities – and have been flattish in rates.  Clearly, the yen stands out as a spectacular winner and I believe is a case study in alpha generation by trend followers.  The competitive advantage of trend following is that the models do not have the heuristic biases that can trip up even the best investors.  How many macro investors took profits before the recent move to 160?  How many were shaken out by the periodic jawboning around intervention?  How many were anchored to prices closer to 110, which was where it traded for years?  So the yen trade is an example of alpha generation outside of a crisis period – simply an idiosyncratic, contrarian trade that has generated outsized profits.  Of course, at some point the opportunity will end, and managed futures funds will dial back their exposure.  But when something is working, they don’t overthink it.  That can be a real strength. 

To move to the rest of the portfolio, on the right you can see the gains on equities.  As noted, CTAs dialed up exposure quickly in the first quarter, then started to dial back once markets got rocky in April, and today are flattish equities overall.  So whereas the yen is an example of pressing a bet on an open position, CTAs made money in equities this year, market conditions changed and they took profits.  Then add gains in commodities and we are having a great year.

And, with that, I’ll pass the baton back to Mike.

Mike:

Slide 10

Thanks Andrew — let’s wrap here as we always do with our long-term performance comps an a side note on expenses in the category.

Year to date 2024 through June, DBMF expanded its outperformance against its two key benchmarks quite a bit – DBMF is now ahead of the Soc Gen CTA index by over 330 basis points annualized, and ahead of the Morningstar Systematic Trend Average by over 500 basis points annualized.

And of course our expenses, which are less than half that of our Morningstar® peer group, represent another compelling differentiating factor for DBMF and one of the key components that help deliver on-going outperformance – in fact, the average expense ratio for the Morningstar® category went up by two basis points this quarter over last. As we like to say, fee reduction is the purest form of alpha.

Slide 11:

In closing, thanks as always to 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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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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The iMGP DBi Managed Futures Strategy ETF is distributed by ALPS Distributors, Inc. iMGP, DBi and ALPS are unaffiliated.

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