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: June 14, 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 ETF Strategy – ticker: DBMF.
We’ve titled this monthly update “50/30/20 – What Goes in the 20?” as the industry and portfolios are seeing a continued shift towards an evolution of the traditional 60/40 model — and this of course begs the question, what should go into the twenty percent allocation? Assumedly this alternatives allocation includes ingredients that are uncorrelated with stocks and bonds, but also may deliver alpha, risk mitigation, diversification characteristics and absolute long-term performance.
Slide 2:
Of course we believe a critical building block for that twenty – and one of the truest of alternatives — is managed futures, and we believe DBMF is an optimal solution for that asset class.
Slide 3:
Going forward we’re going to be touching on this 50/30/20 asset allocation topic more and more – especially the 20 part — in our research and messaging, and Andrew will touch on it briefly today – alongside our regular update on performance, attribution and positioning with some color points along the way.
So Andrew, over to you –
Andrew:
Slide 4:
Thank you, Mike. And, as always, thanks to everyone for listening in.
In May, DBMF declined around 1% net and remains up 15.7% net (on a price basis) year to date as May 31, 2024. As noted in the second bullet, we got some favorable inflation data which caused a burst of “risk on” enthusiasm, and hence both stocks and bonds once again bounced in tandem. By month end, the S&P 500 was up 11.2% year to date while the Bloomberg US Aggregate Bond index remains down a disappointing -1.6% year to date.
Probably the most important statistic (not on this page) is that, through the first five months of this year, DBMF is approximately 600 bps ahead of the SocGen CTA Index (hereinafter the “Hedge Fund Index”) and over 700 bps ahead of the Morningstar US Trend Systematic Category (hereinafter the “Morningstar Category”). This is within expectations. As we talked about last year, there is noise in replication that generally cancels out over time; when it does, fee and expense savings drive outperformance relative to hedge funds. Last year, we had a few things go against us in the same year – what I called flipping tails several times in a row – unusual, but it can happen. This year, our outperformance is attributable to both fees savings and the hedge funds flipping tails a few times in a row. Next month, we’ll talk about this in some detail, but it’s worth noting that predictions last year that pre-fee replication had somehow stopped working were … shall we say … simply wrong.
On the contribution front, May was like the flip side of April: modest losses in currencies, commodities and rates were not quite offset by the gains in equities. On the positioning front, after putting on some aggressive trades in the first quarter – which generally worked – we have seen a dialing back of risk as the second quarter has evolved. This is to be expected: we want the portfolios to be dynamic, to hunt for new opportunities, hold them when the trades are working, and pivot out as market conditions change. The world looked very different in April than it did in March.
Next slide, please.
Slide 5:
Here’s the same chart we introduced last month on Stocks, Bonds and DBMF, except with year to date and not inception to date performance. That one is next. DBMF, of course, is the top line: we had a great first quarter and April, and gave back a little in May.
The drumbeat here at DBi has been, and will continue to be, that managed futures potentially is a diversifier to stocks and bonds – not just in difficult years like 2022, but across a market cycle. From my perch, it’s – shall we say — heart-warming to see to strategy outperforming equities and bonds in a year that has been risk on. Periods like this hopefully will put an end to some myths about the space, such as that you should only own it if you think we are on the cusp of another crisis.
Next slide, please.
Slide 6:
Which of course brings us to 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. To put that in perspective, according to data that we pulled from Bloomberg, most liquid alternative funds have delivered zero or negative alpha to the S&P 500 over that time period – with roughly double the fees.
As we and others have discussed, 60/40 is going through a grinding transition to 50/30/20. The challenge is what to put in the 20. The two obvious questions allocators are asking are: (a) what strategy has a low correlation to both stocks and bonds now that stocks and bonds are moving in tandem, and (b) what helped the most in 2022? The answer beats a path to managed futures. Given far better products than a decade ago, plus growing sophistication among allocators (such as how to avoid the big landmines in the space), our guess is that managed futures will be 3-5% of that 20. We’re doing work on what others think will fill that bucket and will be happy to share research when available.
Next slide please.
Slide 7:
Here’s our slide on volatility-adjusted positioning. The red dots are from the end of 1Q, and the green bars are today. The big theme has been a dialing back of risk after trades started to reverse in April – most notable a drop in long equity exposure, the Euro short and crude oil long. From here, current positioning looks pretty balanced: modest long equity exposure to participate in risk on markets, coupled with positions that could benefit for an unexpected resurgence of inflation: long crude long and gold, long the USD versus the yen, and short Treasuries. That combination has resulted in 3-4% gains at the portfolio level this quarter while sidestepping the extreme ups and downs of equities, as we saw a few charts ago. Let’s hope it continues.
Which brings us to the next slide.
Slide 8:
Here is contribution by factor. As noted last month, the winners and losers will change month to month. Through the first five months of the year, the clear and consistent winner has been the Japanese yen. In early May, there was a bit of a panic as the Bank of Japan intervened in the market – yet by month end the yen was back down to roughly where it started the month. To me, this highlights a strength of medium to long term trend following: in any long term move, there will be all sorts of head fakes along the way. I’ve described those head fakes as like turbulence on a plane – a 100 foot drop feels like 1000 feet when you’re living through it. Human traders are prone to panic, and shorter term models can look a little bit like human traders. So after a few bad days early in the month, we held the yen position, it resumed its decline and we recovered losses. The next biggest category of gains this year has been in equities, where we dialed up equity exposure and captured much of the gains in 1Q. Gold and Treasuries have helped as well.
And, with that, I’ll pass the baton back to Mike.
Mike:
Slide 9:
Thanks Andrew — let’s wrap here as we always do with our long-term performance comps.
Year to date 2024 through May, DBMF – despite a slightly negative month – expanded its outperformance against its two key benchmarks a bit as those two benchmarks fared worse – DBMF now ahead of the Soc Gen CTA index by over 245 basis points annualized, and ahead of the Morningstar Systematic Trend Average by over 440 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.
Slide 10:
In closing, thanks as always to our clients and to our prospective clients for your confidence and interest in DBMF
Slide 11:
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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