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Mike:

Hi everyone, I’m Mike Pacitto with iM Global Partner. Thanks for joining us for this quarterly video update on the iMGP Alternative Strategies Fund. I’m joined today by Jason Steuerwalt, Head of Alternatives here at iM Global Partner and co-Portfolio Manager for the fund.

After a brief update on some selected metrics, we’ll dive into each of the underlying strategies for more in-depth commentary on performance, positioning and outlook. Overall this video update should clock in at around 15 minutes. We appreciate your time and hope you find it well-spent.

In terms of allocation, our tactical overweight to the DoubleLine Opportunistic Income strategy remains intact and remains from our perspective very attractive. Jason will get into details on that later. Otherwise, the underlying distinctive orientation of the fund – a diverse group of separate account strategies unique to MASFX with low inter-correlation to each other – continues with six overall managers and strategies.

In terms of performance of the fund, you’ll see here that the fund has meaningfully outperformed t-bills and the Agg Bond index as well as the Morningstar peer group since inception.

And while the fund was down in 2022, it was down much less than equities and core bonds. 2023 was a positive year for the fund as it again beat the Agg – and that consistent delivery has continued so far this year, as MASFX has a sizable outperformance spread over core bonds in Q1 of 2024.

Along those lines, while many clients use the fund as a core alternative fund, many other clients do use it more specifically as a diversifier for their bond portfolio. In this respect, the Alternative Strategies fund has really shined – historically since inception beating the Agg Bond index by over 200 basis points – 219 to be exact – annualized, while maintaining a similar standard deviation volatility level and yield, with very low correlation, thus providing real diversification benefits to bond allocations.

To get a bit more granular, the fund’s downside average return has been less than a fifth of the Agg during down periods, with over three times the up-capture – so net-net the upside/downside characteristics have been very favorable. This is why we see many consultants and institutional investors continue to like this strategy for immunizing so to speak their bond portfolios.  Okay Jason, a bit more on performance then let’s get more in-depth on the underlying managers and strategies.

Jason:

Thanks, Mike.

The Fund was up 3.1% in Q1 after a decent 5.9% gain in 2023.

Last quarter we talked about the fund’s good absolute performance trailing the huge Everything Rally the last two months of the year. That phenomenon continued in Q1, at least in terms of equities and to a much lesser extent credit, with the S&P 500 up over 10% and high yield up about 1.5%. Duration was another story, as TLT, the iShares 20+ Year Treasury ETF, was down 3.7%. The Agg, which is investment grade and has a duration over 6, was down almost 80 bps. Since many investors use the fund at least in part as a complement to fixed income, we feel pretty good about outperforming by almost 4 percentage points in Q1.

Blackstone/DCI

As a reminder, the strategy Blackstone (formerly DCI) manages for our fund consists of a long-short market neutral CDS portfolio and a cash bond sleeve that’s predominantly HY, where credit beta and interest rate duration are hedged to low levels. The intention is for individual security selection to drive performance over time rather than rates or credit spreads.

We like this strategy since it adds some diversity in approach, using a systematic, model-driven process, as well as uncorrelated return potential. It was up almost 5% in the terrible market environment of 2022, and up almost 8% last year in a better market for risk assets. This year it’s up 1.5% through Q1 and has held up nicely in April.

As we note here, the lower absolute spread level in credit markets somewhat limits the upside since the strategy is market neutral on the CDS side and they don’t take crazy levels of gross exposure to chase returns, and the long bond side is hedged to low rate and credit sensitivity.

However, since the strategy is relatively defensively positioned, underweight low quality and declining quality names, it should provide good protection, likely with positive absolute performance if markets weaken, That would be consistent with the strategy’s historical tendency. And in the meantime, it can certainly continue chugging along at a solid pace.

DoubleLine

As Mike mentioned, we tactically overweighted DoubleLine’s sleeve at the beginning of 2023, on the belief that the return profile was quite asymmetric in our favor. It didn’t work right away, but the portfolio finished up over 9% last year, and it was up another 2.5% in Q1 of this year. The yield has come down a bit as some of the structured credit has begun to catch up to the sharper, quicker recovery in corporate credit, but the portfolio still yields almost 10% with a duration under 6.

The “risk integration” or barbell of duration and credit is, not surprisingly, still in place. The U.S. government backed part of the portfolio, consisting of Agency RMBS, Agency CMBS, and Treasuries was about 15%. It yields over 5% with significant duration as a flight to safety hedge. That part of the portfolio was a detractor in Q1 given the increase in yields across the curve.

Credit sensitive non-Agency RMBS and CMBS, along with CLOs were the biggest contributors in the quarter. Non-Agency RMBS remains the biggest part of the portfolio at a little more than a third, with CLOs the second biggest credit allocation at almost 20%, and non-Agency CMBS almost 13%. The securitized credit collectively yields over 10%. Corporates, at 12% made up mostly bank loans and EM credit, yield almost 11%.

Given the continued overweight here, we still obviously really like the positioning of this portfolio, giving the fund a healthy tailwind of attractive yield.

DBi

Last year was a rollercoaster for this portfolio, given the market’s twists and turns on expectations of interest rate moves. It ultimately ended the year down about 4%. But what a difference a quarter makes. The portfolio was up over 9%, driven by long positioning in equities and the US dollar. It was great to see this portfolio perform well at the same time as more traditional assets, demonstrating that it’s not just a risk-off allocation that will be a drag for much of the time. It should have almost no correlation to equities or bonds long-term, and can perform well in different environments, although as we know, it will tend to do well in extended market drawdowns, which is a nice feature.

At quarter end, the portfolio was quite long equities and the US dollar, somewhat long commodities, and modestly short bonds again. It’s also worth noting that despite ending the quarter with significant long equity exposure, the strategy has held up pretty well in April’s reversal, as currency and commodity gains have offset losses in equities.

We’re obviously happy to see strong absolute performance from this strategy, and again, we believe it should be very likely to increase the long-term risk-adjusted returns of the fund, and we’re pretty confident it will potentially increase the absolute returns as well. There’s no free lunch, so it won’t be without bumps in the road, which we hit almost immediately after adding the strategy, but we’re still very optimistic about this allocation.

FPA

FPA’s sleeve was up over 17% for the year last year, and continued its strong performance this year, up over 5% in Q1, although its given a bit of that back in April.

Top contributors in Q1 included a mix of companies, from both traditional value and growthier, tech names. That’s consistent with the eclectic, benchmark-agnostic portfolio construction.

With the continued rally into Q1 this year, the PMs again sold more than they bought, so cash increased again to over 36% of the portfolio. AIG and Heidelberg Cement are notable longtime holdings that were finally sold with strong gains as they continued to appreciate. There are select situations, like taking advantage of price drop due to a corporate scandal, or industry specific pair-trades that FPA added during the quarter, akin to successful investments they’ve made in the past, but those haven’t been plentiful enough yet to offset the cash generated by sales of significant, long-term core equity holdings.

This cash level is a multi-year high, reflective of high to very high valuations in much of the equity market. As stocks continue to levitate, it’s tempting for FOMO to creep in, but I think it’s important to keep in mind the opportunity cost isn’t nearly what it was two years ago when you earned next to nothing on cash. And the optionality is more attractive now with the market still near all-time highs and plenty of risks, both economic and geopolitical, that could set off a downturn.

Credit exposure is also at a multi-year high, having doubled to 10% in the last five quarters. FPA has done very well here historically, and that’s another area that could increase further if RE-related or corporate credit sell off.

Loomis

The Loomis Sayles portfolio was up over 1.5% in Q1 after a strong 8% return last year. We think it’s also very attractive, especially considering its relatively conservative positioning. It’s yielding over 7.5% with a duration of about 3.4.

Compared to DoubleLine, Loomis typically has a larger allocation to corporates vs securitized, more dry powder, and significantly less in mortgages (particularly Agency MBS), resulting in a lower duration and lower yield. I’ve mentioned this before but it’s worth reiterating, Loomis will add aggressively when they see compelling opportunities. They had over 50% of the portfolio in high yield after spreads widened dramatically during the early part of the pandemic, after starting with almost zero net HY exposure that year. So despite the credit-oriented nature of both portfolios, the DL and Loomis approaches and portfolios are pretty different, which has produced complementary return patterns.

Securitized credit is about a third of the portfolio and contributed the most to Q1 performance, about 1.2%. Convertible bonds and equity together accounted for less than nine percent of the portfolio at quarter end, but contributed almost 60bps of performance. High yield bonds were a slight detractor, offset by small gains from IG bonds and bank loans. As spreads continued to grind tighter, corporate bond exposure has come down significantly over the last few quarters on both a gross long and net basis, with IG ending the quarter at 17% net long and HY at 16% net long. Loomis also has 9% cash to opportunistically add when opportunities arise.

Water Island

The Water Island sleeve of the fund was just barely positive net of fees in Q1 after a solid 6%+ return last year.

Spreads are wider again, and still quite attractive if you can avoid deal breaks. With the spread widening experienced in some large deals, Water Island’s portfolio had a gross annualized deal spread well above 20% at the end of Q1. The loss in the US Steel acquisition is far from the worst we’ve seen, but it wasn’t trivial. Volatility in specific deals is par for the course, though, particularly in a more hostile regulatory environment. We’ve seen a number of cases over the last few years where the biggest losers in a quarter subsequently turn into the biggest winners in subsequent quarters, like VMWare and Activision, for example.

In further good news for the strategy, M&A activity is picking back up. January started strong, with more definitive merger arbitrage opportunities in deals valued at $1 billion or greater than in any January since 2006, according to Morgan Stanley. In Q1, the total value of M&A activity surpassed $750 billion, 30% higher than Q1 last year, according to Dealogic. The number of mega-buyouts ($10 billion or more) spiked to 14 transactions in Q1 2024 compared to 5 deals announced in Q1 last year. Strategic buyers are flush with cash, CEO confidence is rising, and markets are very open to investment grade credit issuance, which could lead to a continued boom in strategic deals to generate inorganic growth. PE buyers also have massive liquidity to use, with $2.5 trillion in dry powder on the books and private credit available to finance deals. This all bodes well for the strategy going forward.

Risk/Return Stats

To return to the Agg comparisons, over the last year, the fund has beaten the Agg by over six and a half percentage points, almost and a half cumulatively over the last 3 years, and about twelve percentage points over the last 5 years. Since the fund’s high point at the end of August 2021, the outperformance is about eight percentage points, and since the Agg’s peak at the end of July 2020, the outperformance is about twenty percentage points.

Sorry for throwing out a lot of numbers, I just want to give a little perspective on relative performance in what has obviously been a challenging time for bond investors. And despite that outperformance, the long-biased bond-oriented managers in the fund, DoubleLine and Loomis Sayles, still have very attractive portfolios on an absolute basis and obviously relative to the Agg. Between them, there’s a blended yield-to-maturity of 9% at quarter end with a duration of under 5. We’ve often talked about high yields and relatively low durations, but I think it’s also worth noting that having more duration here, with the 10Yr Treasury yielding well over 4% at quarter end and rate cuts still likely at some point later this year, is very different than having a lot of duration when the 10Yr was yielding under 1.5% like it was through most of 2021.

Stepping back, we have that healthy yield with the credit portfolios, a strong annualized deal spread with relatively short average expected deal duration inside of 90 days that make up collectively about 60% of the fund. That’s complemented by the smaller, opportunistic, go-anywhere portfolio FPA manages, and the very lowly correlated DCI and DBi strategies, both of which can continue to do well in a strong market but should protect capital well in an extended downturn.

Based on all of that, we think there’s still a long runway for strong performance, and we remain very excited about the fund’s future prospects.

Back to you, Mike.

Mike:

Thanks Jason.

I’ll close here by saying thanks to all of our clients and to our prospective clients for your confidence and interest in the iMGP Alternative Strategies Fund. 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]