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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 iM Global Partner 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 – 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 along those lines, while many clients use the fund as a core alternative fund, many other clients 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 nearly 200 basis points – 191 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 quarter of the Agg during down periods, with 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, let’s get more in-depth here on the underlying managers and strategies.

Jason:

Thanks, Mike.

The Fund gained 3.4% in Q4 and a decent 5.9% for the full year. The Q4 return was pretty good, but trailed the everything rally we saw from traditional asset classes in the last two-plus months of the year. The cooling inflation data and dovish Fed messaging lit the fuse for the pivot party and juiced returns for just about everything. In just Q4 the S&P 500 gained 12% and the Agg bounced almost 7%. Those are good returns for a full year most of the time.

The fund did benefit from this and still outperformed core bonds for the full year with significantly lower volatility and a smaller intra-year drawdown. (In an environment where the Agg suffered its worst losses since the early 1980s, the fund has outperformed the index by approximately 400bps cumulatively over the trailing two years and by approximately 900bps over the trailing three years.)

We talked about ‘higher-for-longer’ last time and how it was delaying the payoff for a big part of the portfolio, but market sentiment can change fast, and it was already starting when we did the last update. A year ago we were very confident it would happen at some point in the not-too-distant future, but we obviously didn’t know when, which is why we made the significant portfolio moves we did, but didn’t go all-in, so to speak. It took a little longer to happen, which was frustrating, and it was also more dramatic than we would have guessed, but it did happen.  And although DoubleLine and Loomis made sizable gains in a short window, there’s still plenty juice in those portfolios, with a blended yield-to-maturity of 9.5% at year end, less than half a percentage point lower than what it was last quarter when things looked much less rosy in fixed income land. Similarly, despite the decent performance this year, our base case return expectations for the fund are very close to what they were a year ago (higher than 2023’s realized performance). Our estimates obviously won’t be spot on, but it’s a useful exercise, and we still see a nicely positive asymmetry in our expected returns across different scenarios, so we continue to really like the way the fund is positioned going forward.

Pg 6 – Blackstone/DCI

This is a strategy and group within Blackstone Credit that people may not know well, so I usually give a quick refresher. This team, formerly known as DCI before Blackstone acquired them, uses their proprietary multi-factor model to calculate default probabilities across the corporate credit universe and translate those to fair value credit spreads, which they then use to go long or short the most misvalued credits. The strategy they manage 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 as well as uncorrelated return potential. As we note here, 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.

Last year both sleeves of the strategy were nicely positive, generating performance from credit selection, as intended, with very diverse gains. I’d note that performance was actually a little hurt by the everything rally, as the rally at the end of the year pushed the credit derivatives they use to hedge the credit beta in cash bond sleeve higher faster than the cash bonds. This effect should revert in Q1.

The spread level makes that component of the opportunity set slightly less attractive than it was a year ago, but the theme of credit differentiation looks likely to remain in place, as the absolute cost of debt remains much higher than it was prior to 2022, which could cause big problems for weaker companies. So that part of the opportunity set is still very strong and bodes well for potential returns.

Pg 7 – DoubleLine

As Mike mentioned, we tactically overweighted DoubleLine’s sleeve at the beginning of last year, on the belief that the return profile was quite asymmetric in our favor. As I mentioned, it took a while to start to play out, but returns were good, up 7% in Q4 and 9 and change for the year. But the yield is still in the ballpark of where it was when we initially overweighted it, so this should still be a strong tailwind for performance.

I won’t beat this to death since we’ve talked a lot about DoubleLine and the duration/credit balance and barbel portfolio construction, but that is still in place. The U.S. government backed part of the portfolio is slightly less attractive than it was a quarter ago given the rally, but it’s still an attractive 6-7% yielding book that should hedge against weakness in the credit markets. That part of the portfolio is about 15%.

Corporates, consisting of EM, bank loans, and a bit of HY account for about 13% of the portfolio, but DoubleLine continues to favor securitized credit since it offers better spread while benefiting from structural enhancements. Securitized is over 70% of the portfolio, with non-Agency RMBS making up just over half of that. CLOs, non-Agency CMBS, and ABS make up the rest.

We’re very pleased this has started to work like we had envisioned, and we’re looking forward to continued strong contributions this year.

Pg 8 – DBi

As a reminder, this is a strategy we custom designed with DBi, consisting of a 75% allocation to trend following and 25% to Equity Hedge replication with some additional risk control tweaks.

The Enhanced Trend portfolio was down, up, and down again during the year, losing about 6% in the first quarter, making most of it back to pull to about break-even at mid-year, gaining further in the third quarter to climb into positive territory, and finally dropping by more than 5% in the fourth quarter to end the year down approximately 4%. The performance of the portfolio in the fourth quarter was negatively impacted by all asset classes, as the Everything Rally essentially reversed most major existing trends.

For the year, all asset classes except currencies detracted from performance, as the short JPY postion’s strong gains in the second quarter resulted in positive attribution for the year. The losses in short rates positions were most dramatic in the first quarter (thanks to the sudden banking crisis in March) and fourth quarter, but strong performance in the middle of the year meant that losses in rates for the year were actually less than the losses from commodities and equities. Equity positioning was whipsawed all year, while commodities detracted somewhat in the first quarter, as investors were torn between a hard or soft landing from the rate hikes, and then suffered from the big reversal in the trend of oil prices in Q4.

At year end, the portfolio was still slightly short in Rates and Bonds (although now it’s actually modestly net long duration), slightly net long the dollar (mostly against the Yen), basically no commodity exposure, and somewhat long equities, long mostly US and some DM, slightly short EM. That equity exposure has subsequently gone up, more than doubling to about 40% net long as of late January.

The strategy has proved diversifying, which is the intent, and it held up very well in the middle two quarters of the year, supporting fund performance while several other strategies struggled. The Enhanced Trend strategy won’t always be negatively correlated to the rest of the fund, and at this point, in a sustained rate rally, it should benefit significantly. While we do view the strategy as an important diversifier, we expect it to produce long-term returns similar to other strategies in the fund, resulting in a better overall fund-level risk-adjusted return profile.

Pg 9 – FPA

The Contrarian Opportunity portfolio gained over 7% in Q4 and was up over 17% for the year. Given the portfolio’s significant cash balance throughout the year, I think this is a pretty good result compared to the ACWI and even the S&P, where as everyone probably knows, the Magnificent Seven drove a huge portion of the index returns last year, with the equal-weighted S&P up only in the low teens.

Top contributors in Q4 included a mix of companies, but with more coming from traditional value sectors like financials and industrials, including commercial vehicles dealership group Rush Enterprises, building supply company Holcim Ltd, and Citigroup. As noted, Meta was also a good contributor in the quarter, and for the year it was actually the largest contributor, maybe not surprising since it basically tripled during the year. Holcim and Broadcom were big contributors on the year. Alphabet and Amazon were also top five contributors, although not nearly to the extent they drove performance in the S&P 500 since they’re such huge weights in the index.

This continues to be an unique, eclectic portfolio with a broad geographic mix, a balance of some growthier, high quality companies like Meta and Alphabet with more traditional value names like Holcim, Citi, AIG, Glencore, and some foreign holding companies. As we’ve talked about before, there are interesting positions around the edges like the busted converts and other credit, and the small but growing real estate positions (both debt and equity), where FPA has opportunistically added exposure and will likely continue as they see better prices.

With the rally in Q4, the PMs did more selling and trimming than buying, so cash increased to about a third of the portfolio. This is toward the high end historically, but at least the cash drag isn’t nearly as much of a drag as it used to be, and it gives the portfolio a lot of optionality to add exposure anywhere there’s dislocation across a variety of equity and credit markets. Given the level of risk in the world, with numerous hot wars, as well as the soft landing priced in as consensus, we think it’s not bad to have dry powder.

Pg 10 – Loomis

Although not as high yielding as DoubleLine, the Loomis Sayles portfolio is also very attractive, especially considering its relatively conservative positioning. It’s yielding almost 7.5% with a duration of about 3. As a reminder, we didn’t fund any of the overweight to DoubleLine from this portfolio, although it’s a smaller allocation anyway at 15%. Loomis has a larger allocation to corporates vs securitized, a higher cash balance, and significantly less in mortgages (both Agency and non-Agency), resulting in a lower duration and lower yield.

That said, Loomis will add aggressively when they see compelling opportunities, and have at peak had over 50% of the portfolio in high yield after spreads widened dramatically during the early part of the pandemic. So despite the credit-oriented nature of both portfolios, their approaches differ meaningfully and their largest exposures will typically be fairly different, which has produced complementary return patterns.

As we note here, investment grade and high yield corporate bonds were the biggest contributors both in Q4 and for the year, IG leading slightly in Q4 and HY slightly for the year. Securitized credit was a significant contributor for both the quarter and the year as well, and rate hedges added to performance for the year. Basically everything was positive on the year except emerging markets credit, where some small legacy positions in Chinese real estate names continued to cost the portfolio. The PMs bought these at distressed prices, but they became even more distressed unfortunately. These are so small and priced so low that Loomis is just retaining them for the option value on recoveries or restructurings.

Securitized remains the largest allocation at almost 32%. This includes non-Agency RMBS, which makes up a little under half the allocation, a broad range of ABS, which is about a third, and the balance in non-Agency CMBS. Securitized and IG are again basically unchanged in their allocaion, while net HY exposure is somewhat higher, not really from adding long exposure, but from reducing the hedges during the quarter, which proved wise given the huge rally. This portfolio also has high single digits in cash, so I’d expect them to be adding exposures if and when corporate spreads start to back up for any reason.

Pg 11 – Water Island

The Water Island sleeve of the fund was up over 3% in Q4 and more than 6% on the year after bouncing back from a challenging environment earlier in the year. The portfolio is still heavily weighted toward merger arbitrage, although other event-driven positions are creeping up in terms of exposure in the portfolio.

Spreads have narrowed, but they’re still good. Water Island’s portfolio had a gross annualized deal spread of close to 20% at the end of the year. Deal volume is still far below the levels it reached in 2020 and 2021, but that started to change late in the year, with Q4 volume higher than Q4 volume in 2022, which was the only quarter that showed a year over year increase. Strategic acquirers seem more willing to act with the regulatory challenges having been somewhat de-fanged and more clarity about the level and likely direction of financing costs. Private equity is also very active – the level of take-private transactions in 2023 reached the highest level since 2010, and PE firms still have almost $3 trillion in dry powder, which they’re not likely to release back to LPs. This strategy has been very consistent in its returns with pretty limited volatility. A pickup in deal volume with rates still relatively high and spreads still attractive would add to its potential.

Pg 12 – Risk/Return Stats

I’m not going to comment all the stats here, but I will wrap up by saying that we had a decent to good year in 2023 but based on the way the portfolio looks now, we think there’s a lot of runway for attractive returns to continue.

To go back to the metrics we highlighted last time, the blended portfolio of DoubleLine and Loomis Sayles has about a 9.5% yield to maturity (not that much lower than it was a quarter ago in a much uglier environment for fixed income) with a duration of under 5. If we add Water Island, we have almost 60% of the portfolio with really attractive yields or deal spreads and harder catalyst-orientation. That should mean potential returns get realized relatively sooner than something like value investing in equities. But as we saw for much of the year in 2023, there’s no guarantee things play out as fast as we’d like. However, it does seem like we’ve crested the hill, now, and returns could be somewhat easier to come by without the headwind of aggressive rate hikes.

After a positive performance in 2022, Blackstone Credit had a strong year in 2023, with returns coming throughout the year, not highly concentrated in Q4. This reinforced the benefit of their unique approach and why we like them as part of the portfolio. We expect them to generate good returns across cycles, but likely be among the best performers in an economic downturn and when traditional markets struggle.

On the negative side, DBi struggled in 2023, not surprisingly given the environment and the returns of peers in the managed futures space. On the rates side, that shouldn’t be a headwind anymore given the reduction in short exposure there, to basically flat or very slightly net long, and if rates decline, the portfolio has the ability to get long and that could be an additional tailwind to the fund. As I said before, DBi won’t always be negatively correlated to the rest of the fund, but it should provide a meaningful hedge and potentially positive absolute returns in really damaging extended dislocations like 2022, and generate positive returns over time, which we feel very strongly we’ll see in coming years, although I obviously can’t make any promises on that front.

Putting it all together, we’ve got a fund that should be significantly better positioned for different market environments than it was several years ago, with a very attractive medium term outlook based on tactically leaning into the opportunities presented by fixed income and credit markets in 2022. We remain really excited about the fund’s potential from here.

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]

Thanks for spending time with us today.