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 by combining an index-plus replication approach and low fees in an elegant, efficient and effective ETF.
I’m joined as always by Andrew Beer – co-Founder of Dynamic Beta Investments, and co-Portfolio Manager. He’ll be touching on April performance – which saw a short-term rebound, even though we always try to keep focus on the strategic long-term case for managed futures – and DBMF specifically as an optimal low-cost index plus solution – in portfolios.
Other topics we’ll hit today include some macro commentary, themes playing out right now and potentially going forward, current positioning in the strategy, comments on correlation … and more!
Let’s get to it Andrew, I hand it off to you.
We recovered a little bit in April, up around 1% on both a price and NAV basis. Both the SocGen CTA index of hedge funds and the Morningstar US Trend Systematic index were up around 2% each. That kind of noise is to be expected. We do still trail both on a year to date basis, largely due to what we described in last month’s commentary: about 10% of the time, our more concentrated portfolio will “miss” quote-unquote some trades that generate additional alpha, and that happened in both January and February. Throughout the year, our correlation to the indices has remained high, and we have ample evidence that our models are working as expected given this particular market environment, which I’ll describe in a minute.
As shown in the same chart, since inception – so over nearly four years – we have delivered compounded annual returns of approximately 200 basis points per annum more than the hedge fund index, and over 350 bps per annum more than the mutual fund index. I’ll dig into this a bit more later.
Shift to the upper right, and let’s talk about the big macro themes. This is an incredibly confusing, contradictory, and highly charged macro environment. The controlled demolition of First Republic at month end showed that everyone is committed to avoid another GFC, but it’s doesn’t take a math genius to see that other regional banks have been smoked by the rise in rates – and it doesn’t help that there was a collective “ah ha” moment when people realized they could get triple the interest of their banks deposits in a decent money market fund …. with the literal push of a button. So now serious investors are worried that regional banks will cut lending – and that cannot be good for a slowing economy since, say, your local car dealership probably is not financing its inventory with JP Morgan, and nor is your local real estate developer rushing to them to buy that vacant lot. The Fed’s manic hiking of 2022 is largely over, but we all are bracing to see the full extent of the delayed impact on the economy. On top of that, we have this alarming game of chicken in Washington over the debt limit – essentially whether we blow up the credit markets over a big increase in the deficit or a slightly less big increase in the deficit. Looked at in isolation, the obvious conclusion is that we’re careening into a deep recession and we should all put on our crash helmets. And yet… the economy continues to defy its skeptics and inflation remains uncomfortably high. So, really confusing. If this continues, maybe we’re all going to be studying periods of stagflation over the next year. The end result is that everyone is staring at the Fed and this complicated mix of factors – with the bond markets still predicting monetary triage next year and equities, especially tech stocks, fairly nonplussed about it all.
Why does this matter for DBMF? Because the market consensus keeps flipping back and forth which is creating oscillations, rather than clear trends, in most asset classes. The timing of those oscillations, candidly, has felt “unlucky” quote unquote this year. For instance, in early March, as we talked about last month, it seems like our big trades were poised to work really, really well, only to hit the SVB propeller. If you look at the lower left, the impact has been losses spread across equities, rates and commodities. This market has felt like one step forwards and two steps back.
On the lower right, we show the major themes in the portfolio. A really interesting one is the long gold position – with the chaos described above, this feels like this could be an important position this year if people start to lose faith in the dollar – and I’m not sure why they wouldn’t with the inmates running the asylum and an election next year that most people seem to be dreading. We continue to be short Treasuries, albeit with less exposure to the back end – essentially, we think plenty of managed futures hedge funds derisked in March and early April, but longer term trend followers are still looking at a nearly 50% rise in short term rates over the past year and think there might be some gas left in the tank. We are long EAFE futures with a partial hedge in both the S&P 500 and MSCI Emerging Markets futures – picking up, I think, on the fundamental capital that is flowing into cheaper non-US developed markets in the belief that there will be a major valuation reset in the 2020s. I personally like the short S&P 500 position as a partial hedge in case US markets get really ugly in the next six months. We’re long the Euro with a partial hedge in the Yen – reflecting a macro trade that the ECB has some catching up to do, does not have the same banking issues as the US, and the fact that Japan seems hell bent on low rates for eternity. We have a very small short position in oil – and if you want a good example of what an oscillation looks like, pull up a six month or one year chart of crude oil.
A final observation: people tend to look at the positions in these portfolios on a one off basis – and that’s sort of the way our brains are wired. In fact, managed futures portfolios are built as an integrated whole – each position is viewed not just on its own, but also relative to others. This trend might look ok, but does it also look better than those other trends I could own today? This kind of thinking also impacts position sizing. What I see today in the portfolio is that there is one big trend near its end – the formally rock solid inflation trade that has been teetering since last Fall – but new ones developing – especially the gold trade, which counterintuitively was an afterthought during the great inflation scare of 2022. This simply underscores the dynamic nature of the portfolios and that, however this crazy macro environment plays out, the funds will be looking for the best ways to capitalize on it.
Since I went way over my allotted time on this page, I am going to fly through the next several slides. They’re a bit more self-explanatory.
Next slide, please.
Here we show DBMF versus the S&P 500 and Bloomberg Agg since inception in 2019. The punch line is that we have had negative correlation to both stocks and bonds since inception and delivered measurable alpha. Clearly, both stocks and bonds are moving in tandem these days, which means a diversifier with zero or negative correlation to both has more potential “diversification bang-for-the-buck” quote unquote than private equity, private credit, infrastructure, REITS, and commodities. Hence, my constant refrain that managed futures should be a 5-10% allocation in every wealth management portfolio.
Next slide, please.
To underscore the point, here are the four big stats on the SocGen CTA Hedge Fund index from 2000 through April against, on the left, the S&P 500 and, in the middle, the Bloomberg Agg. Basically, the index of hedge funds has delivered returns between stocks and bonds, with roughly zero correlation to each, had tended to perform best during prolonged market crises, and has a shallower max drawdown than either stocks or bonds. Focus for a second on the compounded returns on the upper left: Yes, of course, stocks have done better, but you’ve had to endure two 50% drops and two 20% drops to get there. Bonds returned an impossibly steady 5% per annum during the great bull market of the 2000s and 2010s, but have suffered in the past two years. In that context, managed futures hedge funds – even after all fees and expenses – have delivered something of value to their clients, and it’s why sophisticated allocators around the world have entrusted hundreds of billions of dollars to these guys. I’ll come back to this chart in a minute, so just hold it in your mind.
Of course, staring at hedge fund index returns is a largely theoretical exercise if you are not a pension plan or large family office. This index simply consists of the average performance of the twenty largest managed futures hedge funds going back to 2000. It gives you a clear read on the potential return and risk characteristics of the strategy overall, and therefore is great if you’re building an asset allocation model and trying to figure out if you want this hedge fund bucket in the first place. But doesn’t give you a roadmap on how to get exposure to it, especially if you run a wealth management business. This was our quandry back in 2015.
Next slide, please.
So we asked a simple question. When we looked at the returns of the strategy, it was reported after all fees and expenses. And those fees and expenses are … drumroll … a lot. Maybe 500 basis points a year on average. So we first asked, “how can we deliver the strategy efficiently” but with low fees and daily liquidity? We later decided to roll the strategy into the ETF structure, as you well know.
After studying the space – quantitatively and qualitatively – for months, we concluded that our best option was to use one of our factor models to try to figure out the most important trades each week – just like we described above – of all the biggest funds in the space and implement them directly. We believed, and believe, that we can do this efficiently with around ten core factors, which keeps our trading costs as low as possible. It also means that our portfolios hopefully are easier to understand and explain, and that we are happy for the world to see them every day when iMGP posts the funds positions.
Next slide, please.
So the question, clearly, is how well this works and has worked over time. Here is performance of DBMF since inception against both the hedge fund and mutual fund indices. Just looking at DBMF since inception, and as we touched upon at the beginning, DBMF has outperformed both the hedge fund and mutual fund indices by a fairly wide margin. Over nearly four years, this adds up: DBMF has outperformed the average mutual fund peer by nearly double on a cumulative basis. A key stat is correlation just below: the correlation to each index is around 0.9. This is the idea of “index-plus” – get “index-like” diversification by targeting the average positions of lots of funds, and get the “-plus” from reducing fees and expenses.
Note that our volatility is expected to be a bit higher than that of the hedge fund index. The simple reason is performance fees. When they go up eight, they really went up ten but took two in fees. We try to get all ten, so we’ll always look a quarter more volatile. An interesting question is why the mutual funds, which almost never have performance fees unless hidden in swaps, have a comparable volatility to the hedge fund index. The reason appears to be that mutual fund constraints limit risk taking by some funds, so the 40 act versions have been less volatile but also underperformed at times, such as last year when they rose only around 15% while the hedge funds, before fees, were up an estimated 25%. Either way, while it makes sense to compare our performance to hedge funds, that comparison neglects to account for the fact that DBMF is offered in an ETF with daily liquidity and no minimums; from that angle, a more realistic comparison is the mutual fund index.
Next slide, please.
Here’s our standard chart on volatility adjusted positioning. We do this because notional amounts don’t account for the fact that, say, a dollar of exposure to crude oil is a lot more volatile than a dollar of exposure to the yen. The columns reflect current positioning and the red dot from three months ago. I think it’s pretty self-explanatory – for instance, you can see how the short in 10 and 30 year Treasuries was dialed back. If you have any questions or want any more narrative color from a guy who stares at this stuff every day, please do not hesitate to reach out through Mike and co.
With that, I’ll hand the baton back to Mike.
Wrapping up here is our regular slide showcasing the long term since inception performance of DBMF versus both the SocGen CTA Index and the Morningstar category average.
Andrew touched on this earlier, but to be more specific in terms of the numbers, we’re talking about over 175 basis points of outperformance versus the index and over 370 basis points of outperformance versus the Morningstar category average.
These are compelling numbers that could make a difference in maximizing the benefits of adding managed futures to portfolios. Index-plus with low fees can be a powerful combination.
So 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: email@example.com
Until next time – from DBi and from iMGP – thanks for spending time with us.
During January and February, the markets fiercely debated whether the Fed would need to keep hiking rates – not just to further tamp down inflation but to restore its credibility. We believe this uncertainty will benefit hedge funds. MORE
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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.
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.