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Webinar Replay Replay: DBMF Webinar (October 2023)

Interviewee: Andrew Beer, DBi
Interviewer: Mike Pacitto
Date: October 13, 2023

MP:    How am I coming through, Andrew?

AB:     You sound good!

MP:    Okay.  So do you.  All right.  I think we can get started.

          Hi, everyone.  I’m Mike Pacitto, with IM Global Partner.  Thanks for joining us, today.

          I don’t know if I could think of a better day to do this – or a worse day – in terms of just what’s been going on in the market.  But I’m very happy that you’re taking the time to join us.  I think you’re going to find it to be time very well-spent.

          I’m here with Andrew Beer.  Andrew Beer is the co-portfolio manager and co-founder of DBI.  He also, as I mentioned, is co-portfolio manager of DBMF, which is the ticker for the IMGP DBI Managed Futures Strategy ETF.

          It’s a really elegant, simple, inexpensive way to get true alternatives into a portfolio.  I think you’re going to find the storyline behind not just managed futures, which I’m betting that everyone on this call – or most of you – are pretty familiar with.  But also, solving for the problem of managed futures, historically.  Also, solving for the problem of alternatives.

          I think if you look at the alternatives space – historically – maybe 10 years or so or maybe more now after the GFC in 2009.  The industry put out a bunch of alternatives into the market.  Most of them were really expensive.  Most of them didn’t really work for portfolios, very well.

          [DBI and DBMF] have really sought to solve for that problem.  I think you’re going to find that they’ve solved for it really compellingly, and really effectively.

          With that quick introduction, let me just lay out kind of the way we’ll be doing our webinar, today. 

          The presentation is about 20-to-25 minutes.  Probably more like 25.  Andrew will be going through the four things that are on the screen, right in front of you.  The flow.

          A quick introduction to DBI.  Then kind of setting the table from a macro-perspective, and why we think managed futures should be a long-term allocation.

          If you look at DBMF, specifically – like if you’re in front of your Bloomberg or your ticker right now, and you punch it in – you’ll notice that it’s up, today.  That’s great.  That’s what an uncorrelated alternative asset is supposed to do.  But, long-term is really the most-compelling part of the storyline behind DBMF and managed futures. 

          So, we’ll be talking about the macro situation, and then why we think this should be a long-term allocation for your clients.  Challenges with investing in this space.   Then we’ll get into specifically why we believe that DBMF is the magic bullet in managed futures.  It really is a very effective way and an inexpensive way to get access to this asset class.

          In terms of q-and-a – after 25 minutes, we’ll take q-and-a – interactively.  You can punch your question into the Zoom interface.  I’ll also ask if you want to add anything to it on Zoom.  You can open up your screen and open up your mic, and ask any questions that you’d like, interactively.

          Feel free, as the presentation is going along.  Any of the questions that you might have that come to mind – punch them in, there.  Or in the chat.  We’ll get to them as they come. 

          That pretty much sums it up.

          Andrew, I don’t think that anyone wants to hear from me, anymore.  They want to hear from you – so, I’m going to hand the baton to you.

AB:     Thank you, Mike. 

          Greetings, everyone.  I’m actually on a roadshow in London.  But thank you very much for taking the time.  I know it’s been a chaotic day in the markets.  A chaotic couple of weeks, actually.

          For those of you who don’t know me – and don’t know our firm – our firm, DBI, basically specializes in one thing.  I’ve been in the hedge fund industry for about 30 years.  I started working for a very, very well-known PM – portfolio manager.  Then I went off and started my own hedge fund businesses.

          My partner and I, for the past 15 years, have focused on one thing.  That is, if you want the diversification benefits of a hedge fund strategy, can you get it with lower fees?  Daily liquidity and all these client-friendly characteristics.

00:10:00

          It’s called hedge-fund replication.  We like to tell people it’s simply the best way we’ve found to solve some of the problems on the portfolio-management side, as you’re thinking about investing in this space.

          The strategy we’ll talk about today is a strategy called “managed futures.”  As you’ll learn, we got into the managed-futures space back in 2015.  We were looking to build a portfolio where we were trying to figure out how to hedge days like this.  How do you hedge days when everything seems to be going down?

          Managed-futures was, in some ways, the most-compelling single-strategy that we’ve found, to be able to do that.  But, it has certain issues with investing.

          What I want to do today is just really kind of talk to you a lot about managed-futures.  The space.  Then, when you understand both the benefits of the space – plus the issues – then we’ll explain to you how we ended up approaching it.  And, ultimately, the ETF that we have – which is called DBMF, available at Morgan Stanley.  And why we think that’s an attractive option for you.

          With that, let’s see if we can hop forward.

          Let me start with the macro situations.

          I think we all have a common goal.  The common goal is we all have clients; whatever they look like.  The goal is to try to help grow our clients’ capital as much as we can, but also to do it with the least amount of stress and volatility.  We’re trying to maximize risk-adjusted returns.

          The macro-situation for that – for a traditional portfolio – has gotten much, much more complicated over the past two years.

          The first thing is, this shows you “diversification [uh-oh].”  This shows you, basically, that whatever that line – that’s the correlation of the weekly change in the S&P 500 to treasury yields – whenever it’s above the line, stocks and bonds are hedging each other.  When it drops below the line, they’re going up-and-down. 

          For today, in September, both stocks and bonds went down together.  Today, they’re both going down, together.  Last year, obviously, just the correlation of everything was going to 1.

          The concern that a lot of market-strategists have is that if we’re in a world where inflation stays higher, you tend to see stocks and bonds not offsetting each other, but rather, moving in tandem.  We’ve sort of entered this brave new world.

          If you have a 60/40 portfolio or a balanced portfolio for a client, without changing a thing, the risk of your portfolio has gone up by about 25%, over the course of the past year.  This is a huge issue that anybody that’s building wealth-management portfolios really, we think, has to come up with a strategy to address.  That’s Point Number 1.

          Point Number 2 is that the thesis this year – sorry – next slide please, Mike.

          The thesis all year long – really, starting in January – was that the Fed would raise rates.  It would be kind of a short-term phenomenon.  Then they’d get back to the taper, and we’d go back to the 2010s.  I think there’s a dawning realization that we may be in a world, where inflation just may be structurally higher for a long time.  That feeds back into the argument of stocks and bonds not offsetting each other.

          This is a chart that some economists like to put up.  This one was put up actually by Larry Summers, basically showing that the orange line there is what’s been happening over the past couple of years.  It actually doesn’t quite catch up to where we are, today – where it’s started to go back up.

          Basically, this is CPI.  The blue line is from the 1970s.

          People think that inflation is over.  We personally think inflation spending is very addictive.  Whether it’s for governments or for individuals.  It’s kind of hard to break the back of it.

          We think inflation could be around for a while, so that feeds into the diversification argument.  It actually ends up being important, when you think about this underlying strategy.

          Broad macro backdrop is the market’s gotten much more difficult for traditional portfolios of assets.

          Now we’ll get to managed-futures.  Why do we think managed-futures should be part of a long-term strategic allocation in your portfolio?

          Managed-futures is a strategy – and Morgan Stanley has a deep and rich history in this space – you guys have a lot of great funds who are both on the Focused or Approved List.  [Dan DeBonas] in NY is terrific.  He covers them on the research side.  [Michael Suchana] covers our ETF.

          You guys have had your own managed-futures business.  But for people who are not familiar with this space, managed-futures is a quantitative strategy that – in general – is trying to pick up on trends in the market.

          The way we describe is to basically say that they’ve got these “wave detectors,” and they’re pointing them across the market sea.  If they see that gold starts going up or gold starts going down, they’re trying to detect whether they think it’s going to keep going up or keep going down.

00:15:00

          The reason it’s called “managed-futures,” is because the portfolios are managed.  They change over time, and they’re investing in futures contracts.

          None of that is actually not terribly important, in terms of the ultimate reason why it should be in your portfolio.  But feel free to reach out.  We could talk more about the mechanics of how these guys actually invest.  The more-important thing is what it can do for your portfolio.

          The stats here – there are four really important stats about the managed-futures space.  This shows you the SocGen CTA Hedge Fund Index.  This is like the S&P 500 of the managed-futures space.  It consists of the largest hedge funds that do this for a living.  You can’t actually invest in it, but it’s a great representation of the long-term returns of this space.  This is data going back to 2000.

          You see that on the left there, that column is the S&P 500.  The next column is the Bloomberg Agg for bonds.  The next – the black – column is the managed-futures space.  You see that over a long period of time, managed-futures as a strategy has returns net-of-all-hedge-fund-fees and net of all fees-and-expenses – of between stocks and bonds.

          Critically, if you go to the upper right, it has zero correlation, over time, to both stocks and bonds.  From a diversification perspective – particularly when stocks and bonds are moving in-tandem – here’s something that doesn’t have correlation to either, which is very rare.

          If you go to the lower left, it tends to do the best during big shifts in the market, which often coincide with prolonged crises.

          Last year through the peak, at the end of September, the strategy was up 26%.  When both stocks and bonds were down more than 20%.  You go back to the GFC – it was up when equities were down a lot.  Bonds were flattish.  Go back to the dot-com crisis – it was up, again.

          People call this crisis-alpha.  To us, it’s very valuable to have a strategy that does the best when you need it the most.

          On the lower right – when people think about the strategy, they think of, “Futures contracts.  That’s got to be really risky.”  Futures contracts are the most-liquid instruments that you can invest in.  The way these guys build their models is, they don’t stick around and hold onto things with a white-knuckle grip.  When they stop working, they generally get out of their positions.  That’s what Warren Buffett would call, “Cutting your weeds; not your flowers.”

          The max draw-down of this strategy, over 23 years, is only 14%.  It’s actually had a lower max draw-down than bonds.  To get those returns on the upper left from stocks, you’ve had to endure a 47% draw-down, a 54% draw-down, 25% draw-down last year, et cetera.  Just from a statistical perspective, this is – we think – a uniquely beneficial strategy to add to a diversified portfolio of stocks and bonds.  What does it mean, in practice?

          Next slide, please.

          The idea, I think, that we’re all trying to do is to help our clients to grow their wealth more.  But help them sleep at night more, with less volatility.

          What this shows you is, basically, you start with a 60/40 allocation and then you add 5% — 10% — or 20% to this strategy.  What you see is that you actually preserve returns, but the more you add, the more your risk comes down.  Therefore, your risk-adjusted-returns go higher.   

          We sort of have this pithy joke that – “Okay, great.  You take your long-term Sharpe Ratio [for 0.5 / of 4.5] to 0.54.”  We don’t think clients come back and hug you after 23 years for doing that.  But it’s a very, very important thing in terms of demonstrating how you’re going to help clients have a smooth ride – essentially, over the next decade or two.

          The second goal is that I mentioned this strategy tends to do best during the worst periods of the market.  The left shows you the dot-com crisis.  The middle shows you the GFC.  Last was the tightening cycle in 2022.  The more you add – so, from zero to 5% to 10% to 20% — the more your draw-downs are curtailed, over those periods of time.

          This goes back toward the idea that we want to preserve capital through these periods.  We want to help clients stay invested, so they can accumulate their wealth, over time.

          The last is, I think in some ways, the most tangible.  We call it a beacon of green in a sea of red.  This shows you the 2022 performance.  On the left, it’s the SocGen CTA Index.  That’s the index of hedge funds that pursue this strategy.  Then you look at the next category – all of these various categories of equities.  If you went into value stocks, you still went down 8%.  If you stayed in tech stocks, you were down 32%.

          On the fixed-income side, even if you went into TIPS, you were down 12%.  If you were on the long-end of the curve, you were down much more.  High-yield also went down 11%.

          Commodities went up, but even gold – the great inflation hedge – was flattish, last year.  REITs — often thought of as a diversifier – were down nearly as much as the Nasdaq.

00:20:00

          The average hedge fund, in liquid form, was down 6%.

          The strategy is that it’s the idea that it does best when you need it most.  It’s not just about improving your statistical returns. It’s about the human experience of sitting across from a client, where you’ve got an allocation to something that’s working, when it feels like everything is just going down and down forever.

          Interestingly, if you go to the next slide, we’ve actually seen this again in September.  In September, this index of hedge funds was up 3.7%.  We were [actually at] [3.6%].  As we’ll talk about, our ETF was up a bit more – close to 5%.

          The same thing happened in September.  Every category of equities was down.  Every category of bonds was down.  Commodities were up, but gold was down a lot!  It was down almost 5%.  REITS were down 7.5%.  Hedge funds were down a little bit less-than 1%.

          This idea of having something in your portfolio that works well when you need it most – we think – is in some ways the most tangible benefit that advisors see from investing in this space.

          Here’s something that’s just a nuance.  When we’re talking about how these hedge funds have done – next slide, please – remember the chart where I showed you the S&P 500 did, “this,” over 23 years?  Bonds did, “that,” a little bit less.  Then you had this in-between when it was the managed-futures hedge funds.

          The S&P 500 is before-fees.  The bond index is before-fees.  Hedge funds are net-of-all fees-and-expenses.  They’ve got trading costs.  They’ve got incentive fees, management fees.  Those numbers you’re seeing could be after 500 bps of various forms of expenses.

          We asked a really simple question back in 2015, when we were looking at this space.  We said, “Just the broad diversification benefits of this space seem so powerful.  But can we do better?”

          The question that we asked is, “Is it possible to deliver the pre-fee performance of this strategy, and strip out as many trading costs as we can, but do it in a straight-forward and efficient manner?”  We’ll come back to that in a minute.

          First, I just want to talk about the basic question of, “How do you actually invest in this space?”  There are three big challenges.  Generally, you guys have different options.  You’ve got a number of funds that are focus-list funds – a number of funds that are mutual funds.  Those are all going to be mutual funds.  In general.

          Also, there are hedge fund options that you can invest in.  But in general, we’re talking about people that invest in mutual funds or ETFs.

          The first thing you do is try to pick one manager out there that you think is good.  There are sometimes very good reasons for that.  For reasons I’ll describe, we think that’s too risky, if you want to be invested in this space for a long period of time.  You can spread your bets and pick 2 to 4 individual managers.  That’s kind of what institutions do.  There’s a multi-manager fund called [Abbi] Capital, that’s in Morgan Stanley.  They do a great job of diversifying risk. 

          All three of those approaches can also be kind of expensive.  Generally, the fee-structure is going to be around somewhere between 150 and 200 bps.

          When we looked at this space, we said, “Look.  There are reasons to do each one of those, but we also think there are meaningful drawbacks.”  We came up with, really, a fourth way.  That’s basically to – as I’ll explain – try to copy or imitate what these guys do.  But to do it in the most s forward and efficient way.  In a sense, to sidestep all of the high fees and the risks of investing in this space.

          Why did we come to that answer?

          That black line there that you see in the middle – this is a reflective cycle called, “Single Manager Risk.”  The same way that stocks go in all sorts of different direction, the same thing happens with hedge funds.

          This is back in July of 2016, when we began to do this strategy that’s underneath the ETF.  That black line is the index that I described.  That’s when you say of the 20 guys in this space – the great guys – the legends in this space – how have they done over that period of time?

          All of those grey lines you see are the guys who are in that.  That’s like the S&P 500 constituents versus the S&P 500 as an index.

          What you see is, they’re all over the map.  Guys who did really well last year are just as likely to flame out this year.  That guy who went down 40% last is a well-known fund at Morgan Stanley.  As are the guys who shot up like a rocketship. 

          I mentioned that one of the things you can do is pick one fund to invest in.  Our conclusion was that it’s too risky.  We couldn’t find a way to figure out which one of these guys would do well.  If we knew who was going to be the best guy, it’d be easy.  But in this space, I think there’s no one on planet earth who’s really figured out which of those funds is going to do well.

          When they do worse, they tend to do a lot worse.  We wanted to try to get rid of that risk.

00:25:00

          The second is that when you take all of those lines I just showed you – which are actual hedge funds – hedge fund managers like to manage money in hedge funds, because it’s easier.  You have more flexibility.  You can invest in the positions that you want to invest in.  You can do things with more leverage.

          Often, when you’re taking what they’re doing – a great firm that does this in a hedge fund, and then you try to do it in a mutual fund – often you lose some performance along the way.  This shows you that black line on top – that index of actual hedge funds.  The gold line on the bottom are the mutual funds and – to a lesser extent – ETF versions of it.

          You see that sometimes people say, “I really like this space.  I like hedge funds.  But if I can only do it in mutual funds, I don’t get as much.”

          Last year, the hedge funds net-of-all-fees-and-expenses were up about 20%.  The mutual funds were up 14%.  Honestly, no one was complaining about being up 14%, last year.  But if you’re in this for the long-term, that kind of performance difference can really matter, over time.  We wanted to try to solve this issue, as well.

          Next slide, please.

          The last is, when you guys are looking at this space, if you’re looking at the list of single-managers, there’s one thing to keep in the back of your mind.  When funds are not working well in this space, they tend to shoot them and bury them.  Back when we started doing this in 2016, there were 49 mutual funds in ETFs, and only 19 around, today.  Guess what?  The 30 that are gone are the ones that aren’t doing well.  The 19 that are around tended to do better.

          You can get an unrealistic picture.  Same way, if you said, “I’m only going to look at stocks that went up last year,” you’re going to get an unrealistic picture of how the space does.  It’s called, “Survivorship bias.”  We just suggest that you be very careful about it.

          To come back to that question that we asked, what is it that we were really trying to do?

          Next slide, please.

          Going back to that question, we said, “All right.  How can we deliver the pre-fee performance to the strategy, but do it in an ETF with reasonable fees, daily liquidity and position-level transparency?”

          That was the genesis of after we launched this strategy.  Mike’s firm bought half of our business in 2018.  The first thing we did was said, “We have this great strategy that’s being used by a multi-billion-dollar family office.  But let’s put it into the right kind of vehicle for the future.”  As of today, it’s in an ETF, and it’s called, “DBMF.”

          The question is, “How do we do that?”

          Next slide, please.

          We do it in the simplest and most straight-forward way that we can.  It’s called, “replication.”  Let me explain to you, first, the concept of what we’re doing.  Then I’ll explain to you, mechanically, what we do.  For a lot of you, if you’ve spent any time looking at this space, it will feel shockingly simple.  That’s on-purpose. 

          We like, “simple.”  We like, “straight-forward.”

          The first thing –

          I mentioned that these guys are like wave-detectors.  A typical fund in this space might be looking at 70 different markets.  They’re trying to figure out if gold is going to keep going up or down.  They’ll do lots of different versions.  Is heating oil going to go up-and-down? What about natural gas?

          Over here, they might be looking at wheat.  They’ll look at different equity markets and different fixed-income markets. But it’s all generally going to be futures.  They’re betting on some things that will go up and they’ll bet other things that will go down.

          The thing about it, though, is that all of those 70 instruments or more are only doing one of three things.  They’re either going up, down, or not doing much at all.

          Replication is basically built around the idea that when all these over here are going up, they kind of go up-and-down together.  They’re not going in 70 different directions.  Same thing, when they’re going down.

          Replication is based upon the idea that these individual waves actually move in clusters.  If you want to get exposure to the clusters of waves, you don’t have to own each of the individual stocks.  If you want to get exposure to equities, you can buy the S&P 500.  You don’t need to buy each of the 500 stocks.

          What we do mechanically is, instead of trying to build our own wave-detectors, we look at what all the wave-detectors are doing.  Those 20 funds that you just saw – the great hedge funds in the space – [the MAN HLs], AQR, AlphaSimplex, Systematic, et cetera.  All these guys have their wave-detectors.

          But we look at that index of these guys, over the very recent periods.  About 20 days of data.  I mentioned before – if you go back one slide – Mike –

          I mentioned before that basically, when you’re seeing the returns of that index, it’s net-of-all-fees and expenses – well – we have pretty good visibility in terms of what the fees and expenses are.

00:30:00

          So, we add that back in.  We go from where that blk line stops up to the top of the white bar.  We’re looking at that – back to the investment-process slide, please –

          We basically look at 20 days of what are essentially the pre-fee pre-trading-cost returns.  We know that there are maybe 10 big markets where you can get a really good representation of those clusters.  If we want to be short medium-term interest rates, these guys might do it with five different contracts.  We might just do it with a 10-year treasury-futures contract. 

          Our model basically takes the returns of the overall space and maps it against a long-and-short portfolio of a much-simpler portfolio.  Every Monday, we do that.  Once a week, we look at the recent performance of the funds in the space, and we rebalance our portfolio.

          We will buy-and-sell futures contracts to match what we think are their estimated exposures.  It is designed to be super-simple.  It’s about 15 contracts, overall, but it’s 10 four-factors.  Because it’s an ETF, you can see it every day.  You’ll know exactly what we’re invested in, that morning.

          That’s the theory of replication.  For a lot of people in the space, it sounds really simple.  So, let’s talk about how well it actually works, in practice.

          Can you go down one more slide, please?

          This is since the ETF went live in May of 2019.  That black line there is what we’ve been talking about.  That’s the index of hedge funds.  The SocGen CTA Index – Hedge Fund.

          That black line there is the 20 largest managed-futures hedge funds running their actual hedge fund strategies net-of-fees.  The gold line beneath it is the mutual fund version of it.  The green line on top is the performance of this replication.

          With that, this is the live performance of the ETF.  It shows that in the beginning, we’re basically putting together a portfolio and then we’ll rebalance it a week later, and a week later, and a week later and a week later.  But, always aiming for that black line – before fees-and-expenses.

          You’ll see that since-inception of the fund – and you can take the data back to 2016, when we started, before the ETF was launched – we’ve been outperforming the actual hedge funds.  And meaningfully outperforming the actual mutual funds – with a correlation of about 0.9.

          We’re not trying to outsmart the best guys in this space.  We’re not trying to tell you which is the guy that’s going to do well next year.  We’re saying that the space, overall – the space that we talked about that can deliver those returns with no correlation to stocks and bonds – and do the best, when you need it most.  The best way to do that – or better – is to replicate the whole space, and then cut out fees-and-expenses.  That’s how you get to what we think is an index-plus approach for this space.

          If you go back one slide, please –

          The question is, “How valuable is this in your portfolio?” 

          We talked about this idea of offsetting stocks and bonds.  Well, since we went live, that line on the top is the S&P 500.  Very quickly, it goes down during covid, but then goes up like a rocketship.  Then we hit 2022 and it comes down.  Fourth quarter of last year, it comes roaring back.  Hugely volatile ride.  And it’s been up about 60% cumulatively, since we started.

          On the bottom, you have the Bloomberg Agg.  Again, it starts well in the early period.  Then it has just been frustrating, frustrating – whereas, now, it’s lost money, cumulatively.

          That blue line is the ETF.  You see that in the early days, stocks and bonds were going up.  In general. we were going up, with them.  In 2021, equities were going up; we were going up with it.  Then there was an inflection point.  Equities started to come down.  Bonds started to go down.  That’s when we really took off and went up.

          Cumulatively, since the ETF was launched, it’s up over 50%.  51.4%.  About a 10%-per-annum return.  Just a little bit behind equities.  But, with a negative correlation to the S&P 500.  It’s done 10.4% of annualized alpha, relative to the S&P 500 over that period of time.

          A negative correlation to the Bloomberg Agg, and it’s done 600 bps of alpha, relative to bonds.  That’s only because bonds have gone down.  So, your alpha is going to look like less.

          This is like millennium-level diversification benefits.  Except, this is an ETF with an 85-bps expense ratio; daily liquidity.  You can buy $100 of it; you can buy $50 million of it, with the same kind of efficiency.

00:35:00

          Going back to the point that we talked about at the beginning, where this is a world where you need something that functions independently of stocks and bonds.  We think there’s more portfolio-diversification bang for the buck in this, as a strategy.  Anybody who has a diversified portfolio of stocks and bonds should have this as a strategic allocation, alongside of it.  We think that in 2030, the guys who are going to look really smart were the ones who back in 2023 looked at this and said, “Okay.  I get it; the world has changed.  We need something like this in our portfolio for the next five or seven years.”

          Next slide, please.  One more?

          This is just a representation of – going back to 2016 – it actually isn’t quite updated.  But basically, it captures the period before the ETF went live.  You see, again, that the black line there is the index of hedge funds.  The green line on top is the replication, net-of-fees.  We think that if you like the black line, you should like the green line a lot more.

          Next slide, please.

          This is another way of representing it.  Again, we started this in 2016.  That black line.  The green line is the performance of the strategy.  The black line is the performance of that index of hedge funds.  The gold bar is the mutual fund space.

          It’s a very, very simple approach.  Just aiming for pre-fee returns, and cutting out – as much as we can– fees-and-expenses.  We outperformed in 2016, 2017, 2018, 2019.  We roughly matched in 2020.  We outperformed in 2021.  We outperformed in 2022.  We underperformed the first quarter of this year.  It happens.  There’s noise in it.  We matched in the second quarter.  Then when we update it, you’ll see that we outperformed meaningfully in the third quarter, as well.

          The idea here is to get the benefits of this space, but to do it as efficiently as we can.

          What you’ll basically get from us, if you decide to invest in the ETF, is we’ll give you a lot of information.  We’ll give you a lot of client reporting.  We’ll talk to you about what’s going on in the portfolio.  We’ll help you with positioning.

          We’re trying to make investing in this space a very, very user-and-client-friendly experience.  Understanding that you, as advisors, can have a dual task.  You’ve got to find a way to increase the risk-adjusted returns of your portfolios with your clients, over time.  But you’ve also got to have a language in terms of how to explain to them why this is part of their portfolio, and why it’s good for them.

          I think we’re sort of leading the industry effort to talk about how this strategy can help you guys in your portfolios, for the next 5, 10 or 20 years.

          In the 2020s, we think portfolios – more than ever – need diversifiers that have a low-correlation or zero-correlation or even negative-correlation to both stocks and bonds.  Your private-equity is going up-and-down with your equities.  Your private-credit is going up-and-down with your credit.  REITs are going up-and-down with both.  Et cetera, et cetera.

          Managed-futures – even if you invest in hedge-fund or mutual-fund versions of it – is a very, very valuable long-term allocator.  In fact, I think it is the most under-invested space that I’ve seen, relative to its benefits, in portfolios.  All we’re trying to do is give you the most straight-forward and efficient way to get exposure to this space, with four potential benefits.

          We think we can outperform, over time, through fee-and-expense disintermediation.  This is the equivalent of the institutional-share class versus the retail share class.  It’s how the biggest and largest investors invest in this space.  We’re trying to get rid of that single-manager risk I talked about.  It’s very, very hard to hold this for a long time, if your guy is all of a sudden underperforming everybody else by 20%.  Even if he comes back next year.  It’s hard to hold it.

          We’re giving this to you in an ETF, with daily liquidity – intraday liquidity.  And full transparency. 

          The ETF, right now, is close to a billion dollars.  It’s by-far the largest managed-futures ETF, and I think it’s now the largest hedge fund ETF in the country.  The expense-ratio is 85-bps, all in.  And no incentive fees.

          Our belief is that if we keep the costs low, your clients will do better, over time.  You’ll remain invested and everybody will be happy.

          I’ll call it, there, and turn it back to Mike.  Then we’d love the opportunity to answer any questions you guys have.

MP:    Yes.  Thanks, Andrew.

          We don’t have any questions, yet.  But I’ve got two very common ones.  I’ll ask those two very-commonly-asked questions.  Then we’ll see what other questions.  Well, I just got a question that came in.  Eric, type in your question to q-and-a.  I’ll ask this question, real quick.  Then we’ll get to your question.

00:40:00

          The question I have for you is this, Andrew.  I think it’s really pertinent.  Okay, great.  The strategy’s done well when you needed it to.  Right?  September – during market corrections, et cetera.  What about when you don’t need it?  This is, I think, where people sometimes get hung up – very often.  They’re like, “Oh, I’m buying it at the top.”  Or, “I’m buying it now,” and then it’s not going to do what it’s supposed to do when markets get a little bit more stable.  What’s the argument for holding this, long-term – versus just in this crisis-alpha panic situation?  Which people typically think about, when they think, “Managed-futures.”  That’s kind of what we’re trying to disprove.

AB:     Sure.  The biggest mistake people make is trying to time the strategy in the short-term.  Look – nobody has an earthquake detector that works well.  If you knew the markets were going to implode in a month — honestly, there are much better things and better ways to capitalize on that, than investing in managed-futures. 

          A lot of people who were in this space got out at the wrong time.

          The advice that we give people is, on the front-end, when you’re thinking about investing in this space, you describe it to clients as a strategic allocation part of the overall portfolio.  It’s a Tetris.  It’s a block that fits into the overall portfolio.

          The expectations you should be giving them are that this is something that will help us to achieve this goal, of helping you to grow your assets, with the smoothest ride possible. 

          My advice to people is to come up with an allocation that you’re comfortable with.  Talk to clients about the fact that it’s going to be in your portfolio today.  You’ll be seeing it in 10 years.  You’ll be seeing it, probably, in 20 years.  Maybe in different amounts, over time.

          I think from that perspective, if you set those expectations appropriately, then you’re going to – as every asset class does – go through periods where it underperforms and outperforms.  The key is, as part of an integrated whole, I think it’s the best way of generating these high risk-adjusted returns in what seems to be this new-world market.  New-world regime.

          You and I have had so many conversations.  Maybe you have a few things to add to that.

MP:    No, I just have been in the business for quite a while, and I’ve seen various advisors use managed-futures, and then it doesn’t do anything.  Or it’s just kind of an expensive rock in the portfolio.  I think what DBMF does is, it solves for the problem of being really efficient by getting all those expenses off the table.  By delivering real, true diversification.  Right?  No correlation.  Then, true, long-term actual performance.

          Ultimately, you want it to perform and deliver positive returns over a long period of time.  Otherwise, you could just buy puts.  Right?  Just buy insurance on the portfolio. 

          I think this does something that’s much different than just providing insurance to a portfolio.  It does that, but it also provides a long-term returns stream to the portfolio.  That’s what a hedge typically doesn’t do, a lot of times.

AB:     The way these guys make money – in a year like this, when they do really well – it’s pretty simple, actually.  They’re very, very nimble when the world starts to change.  Starting in early 2021 into 2022, inflation started to come back.  But the way this business is set up, most people can’t change their portfolios that fast.

          You can’t go back to your client – you’ve got FAANG stocks left-and-right.  You’ve got 10-year double-A-rated paper that’s earning a 1.5% yield.  To go back to your clients and say, “New-World Order.  We’re seeing signs of inflation.  We’re ripping up the playbook –

          It’s not really the way the asset-management advisor business is set up.  Nor is the institutional asset-allocation business.

          It’s not an accident that it does best in a year like that.  The inflation-trade was out there.  People were talking about it.  I wrote a paper on it in early January of 2021, about the potential return of inflation.  Talking about how some hedge funds were starting to position for it.

          It was out there, but most investors couldn’t hop on the bandwagon until the evidence was crystal-clear, and that was 18 months later.  Twelve to 18 months later.

          Most people are going to have these pretty-stable portfolios.  Long-term asset-allocation decisions.  But having a part of your portfolio that’s nimbler, precisely for those moments when the world changes, I think is extraordinarily valuable.

          This point, though, about not having a crystal ball as to what’s going to happen next month –

00:45:00

          Look at September!  I just don’t know of anybody who, in late August, was thinking rates were going to shoot up the way that they did.  That was going to crush equities and crush bonds.  Gold, in that context, would go down as much.  Yet, the space went up!

          I think the idea is, just like we’re thinking long-term about the structure of the portfolio is to help clients achieve their objectives – this is a short-term strategy that needs to be a long-term allocation, to realize its benefits.

MP:    Okay.  I don’t think this Zoom was set up in a way where a person can get on-video and speak.  Usually, we do it that way.  But I don’t think this one’s that way.  I’m going to have to read the question, is what I’m getting to.

          Let me read Eric’s question.

          His question is, “As the ETF is getting so big, will there be an issue, replicating, if other strategies come and go?”

          That’s kind of two questions.  Go ahead.

AB:     Eric, thank you for the question.  Yes, we don’t have a capacity issue.  The instruments that we invest in are the deepest and most-liquid futures contracts that we can find. 

          You’d run into capacity issues if we were typical managed-futures fund that might want to invest in heating oil or wheat or corn or sugar or these different markets that just, themselves, are so much smaller.

          When we’re investing in crude oil, gold, the euro, yen, 2-year, 10-year, 30-year treasuries.  S&P 500.  EAFE and emerging markets.  These are so deep.

          We as a strategy really don’t have a capacity issue for the foreseeable future.    You’re talking tens of billions of dollars before it becomes an issue.

MP:    Let me reframe it.  He just kind of corrected me on the question.

          The question is really more so about replicating – he said it doesn’t mean “capacity.”  He’s talking about so much, “Things to replicate.”

AB:     The managed-futures space is about $400 billion.  We’re a billion.  There are always going to be a lot of [MAN-HL], AQR and all these firms that are out there.  They’re not going away.  They’re always going to be bringing in the best and brightest to help them, to make their models better and their models more efficient.

          We’re not trying to copy what they’re doing down at a granular level.  We just want to know what their big signals are.  We want to copy those signals.

          By the way – sometimes AQR will get it more right.  Sometimes [MAN-HL] will get it more right.  Sometimes this firm will get it more right.

          By looking across what these guys are doing, collectively, we’re trying to come up with more of an index-like representation of the overall space.  Not making a bet on this guy or that guy.

MP:    I think I’m grasping the question a little bit better, now.

          We’re one-quarter of one-percent of the managed-futures space.  Right?  Think about it like the S&P 500; right?  Investing in the SPY or whatnot.  Well, eventually, that got so gigantic.  All of the active managers are smaller than that.  If we had that problem, where DBMF got to be 75% of the space, that would be crazy.  It would be wonderful, I guess, but I don’t think that’s a bridge we’re going to be crossing any time soon.  You see where it’s going?

          If you’re bigger than the space, what are you going to replicate?  Right?

AB:     I mean people like investing in individual funds.  If you’re in a pension plan, I don’t think you’re going to invest with us.  You like going out and interviewing.  It’s your job to go out and interview all these guys.  It’s a little bit like the passive-versus-active debate.  It’s been going on for decades.

          Active is still much bigger than passive.

          I hope we’re at a point where we’re talking about capacity issues with this strategy.  It will be 10 years before we even start to cross that bridge.

MP:    Yes.  That’s interesting, though.

AB:     By the way – I think millions of investors will have been better off, at that point, if that becomes a reality.

MP:    Yes.

          Next question is about income that comes off the ETF.  Can we talk about that?  The collateral underneath.  It’s not [short cash management]?  Good question.  And a good answer, I think.

AB:     The collateral is basically invested in treasuries, or the equivalent.  It’s a really pertinent question, today.  The best thing to own this year other than AI-related stocks has been cash.  If rates stay up where they are, we’re just going to have a natural tailwind.

          Now, in the 2010s, when cash was earning zero, the whole return to this strategy came down.  But it was still earning cash-like returns over time.  But it was also doing it after a lot of fees.

00:50:00

          The goal really, here, is to be able to generate returns above cash, over time.  From the futures positions.  We are huge beneficiaries of a rise in sustained higher short-term rates, in that it will or should play into higher nominal returns, over the next decade.

MP:    Okay.  Basically, you’re getting the underlying yield of short-term treasuries – minus the expense ratio.

AB:     Yes.

MP:    Okay.

          Those are all the questions we have.

AB:     We’re very much of an open-door.  This is just designed to be –

          First of all, thank you very much for your time.  It’s designed to be a kind of a quick pass through a lot of these things.

          My experience has been in talking to people, that everybody has different issues that they’re trying to solve.  Part of the fun of my job is talking to you about what you’re trying to do in your portfolios.  I’ll give you my very candid response, as to whether or how what we’re doing can fit or benefit you, in the context of what you’re doing, already.

          Just to reiterate, the door is open, if you guys want to have one-on-one talks, to talk through some of these questions in more detail.

MP:    Okay.  We’re going to go a little bit overtime.  Thanks, Julia, for clarifying.  Great answer!  Not exactly what you were looking for, though.

          Tax impact for the client.  Is the income distributed to the client from this?  The answer to that is, “Yes.”  It’s distributed at the end of the year.  There is some tax-benefit being a [inaudible] wrapper.  But only versus other managed-futures strategies, I would say, that are in 40-Act.

          I don’t know if you want to add anything to this, Andrew –

AB:     I’m going to put a red-flashing disclaimer that I’m not a tax advisor.  Basically, this is marginally more tax-efficient – I think – than a typical managed-futures mutual fund.  But it’s not a tax-efficient vehicle, any more so than a bond that’s generating income that’s sitting inside of an ETF is more efficient than a bond.

          We don’t get the benefits of in-kind distributions of equity positions that you’d see in an S&P 500 ETF.

MP:    I’ll hit that red button about not being a tax-advisor.  But you will see distributions come out.  Yes.  And there’s inherent trading in the portfolio; right?  It’s kind of how the portfolio works.

          It’s not designed to be tax-efficient, necessarily.  But it’s as tax-efficient as a managed-futures ETF could be.  I guess I’d say it like that.

AB:     We try.  We are marginally better, but you should assume it’s taxable.

MP:    Okay.  Great.  Julia says that’s what she was looking for.

          One other point on that.  We have been asked if we could do quarterly instead of annual distributions.  Doesn’t look like that’s going to happen any time soon.  But I don’t know – with yields staying where they are, that might happen.  I don’t know.  It smooths out the distributions.  You do get that lump at the end, which isn’t great.

AB:     Yes.  That’s a decision that – right now – you should assume it’s essentially annual.

MP:    Yes.  Okay.  All right.  With that, everyone – thanks for joining.  Just echoing Andrew’s gratitude.  Thank you for joining us.  We’ll follow up and send you the deck.  We’ll send you some bullets.  If you’d like to ever have a one-on-one call with us or your representative that covers your region – on behalf of IMGP, we’re happy to do that.

          You can also send us an email, if you have any questions, to:

          Team@imgpfunds.com

          We’ll follow up with you there, as well.

          Thanks much for joining.

AB:     Thanks everyone.  Have a great day!

00:54:00

[session ends]

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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.imgpfunds.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.

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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.

LGE000261 exp. 1/31/2025