August 11, 2025 • 44 mins
Most investors believe they're diversified, but they're likely clinging to an illusion. As the Shiller PE ratio hovers at 38 – a level only seen during the tech bubble – historical patterns show future returns likely to be flat over the next five years.
Brad Barry and Matt O'Brien from Dynamic Wealth Group challenge the conventional wisdom of diversification, revealing how those pretty colored slices on your pie chart might all move in lockstep when markets face real stress. Remember 2022? Both stocks and bonds plummeted together, exposing the fundamental flaw in traditional 60/40 portfolios.
True diversification isn't just about owning different labels – it's about understanding what drives returns. When economic growth falters, assets that seemed uncorrelated suddenly converge. Meanwhile, one single stock now comprises nearly 8% of the S&P 500, creating hidden concentration risk few investors recognize.
Global macro strategies offer a compelling alternative, historically performing well during precisely the market conditions we're facing today. By identifying supply and demand imbalances across currencies, commodities, and fixed income markets, these approaches can deliver returns through fundamentally different mechanisms than traditional investments.
The Dynamic Alpha Macro Fund combines global macro with US equities, creating smoother return profiles that don't rely solely on economic growth. As Brad aptly puts it, "Hope is not a plan" – hoping traditional diversification will protect you during the next market crisis isn't sound portfolio management.
Ready to rethink your approach to asset allocation? Download their enlightening white paper at rethinkassetallocation.com or visit dynamicwg.com to learn how multiple return drivers can help prepare your portfolio for whatever economic conditions lie ahead.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
So this is a scatterplot.
So each of the dots representsa return on the vertical and on
the horizontal you have thestarting valuation of the S&P
500.
Right so red line where we'reat currently, roughly where the
Shiller PE is of 38.
Historically, we tend torealize zero percent future
(00:24):
returns over the next five years.
This isn't a prediction.
We don't have a crystal ball.
Nobody has a prediction.
This is not saying that thisyear is going to be flat or next
year is going to be flat.
This is showing historicalpattern of when you start with a
high valuation, the futurereturns over the next five years
and we've done this analysisfor the next 10 years and other
(00:46):
firms like JP Morgan and GoldmanSachs you know listeners,
watchers may have seen that typeof the same chart done there.
Basically, high stockvaluations tend future stock
return.
Speaker 2 (01:08):
My name is Michael Guy, a publisher of the Lead Lag
Report.
Joining me here is Brad Barry.
Matt O'Brien of Dynamic Wealth.
They've got a mutual fund we'regoing to touch on.
I'm always a fan of the waythat they think about things.
They just put out a newresearch paper that, Brad, you
sent to me.
I kind of feel like we shouldstart with that.
So let's get into it.
Speaker 1 (01:25):
Yeah, so you mentioned illusion, right, and
illusion.
When you hear the word illusion, I sometimes think of magic,
right, and mystify.
And investing can be mystifyingto a lot of folks, a lot of
investors, a lot of evenfinancial advisors, you know,
given everything that's outthere.
And part of our mission at atdynamic wealth group is to
(01:47):
simplify the complexity, uh, foradvisors, and it's one of the
reasons we put out this, uh, uh,this little research paper to
help put things in perspectiveand help people realize that
maybe diversification isn't justa bunch of different, pretty
little colors on a on a piegraph, right, and?
And looking at those, thosedifferent colors and those
(02:07):
different percentages, and, andwe like to ask the question,
what drives the return of eachinvestment?
And if the drivers have a lotof the same characteristics,
you're not necessarilydiversified, right?
Um?
So you know the?
The technical term iscorrelation, right, and?
(02:28):
Uh, um, we also try to look forthe causation of the
correlation, um, you know,something could be
non-correlated on paper, butwhen you, when you look at it,
sometimes it's just happenstance.
And then, when you want it tobe non-correlated like 2022 and
both stocks and bonds, and itseemed like everything was going
(02:49):
down you realized you didnalways equal true portfolio
diversification.
It is available for download onour website.
(03:09):
We created a special URL for itrethinkassetallocationcom, so
you can go to rethink all oneword assetallocationcom and
download it.
It's a good, entertaining read.
One of the things we do try tostrive ourselves on is not just
throwing in a bunch of financialjargon and mumbo-jumbo and big
(03:33):
college-level words.
We try to again simplify thecomplexity and make it
understanding because you know,if we have time, we'll also talk
about the valuation of themarket and, with the market as
high as it is, having some realdiversification we think is
important.
You know, as always.
(03:55):
Right, you know so.
Speaker 2 (03:56):
So.
So I want to let's, let's,let's touch on the point you
mentioned earlier about thedrivers, right, because
correlation doesn't necessarilymean causation.
You know, we have to thinkabout sort of what actually
drives the correlation.
If you were to take a broadbrush approach to sort of saying
these are the two or threeprimary drivers for most
(04:18):
investments in the long term, atleast Short term can be a very
different dynamic.
What tends to be sort of thecommon thread.
Speaker 1 (04:27):
I think strong economic growth is a big factor,
right?
Whether you're, you know, large, cap or mid or small, to some
degree, you need customers,consumers, that have jobs, that
have discretionary income andcan spend that money.
And if there's a macro issuethat causes a slowdown, if there
(04:51):
are tariffs that happen toimpact the price of things, if
inflation comes back, if youknow, if there's unforeseen
circumstances, right, regularviewers know I love analogies
and one of them is it's the busthat you don't see that hits you
.
And if there's there's a busout there that we don't know
about that could cause a macroissue, a, a, a, a global
(05:14):
slowdown, a U S slowdown.
And if you, if you rely oneverything working out and you
need everything to work in yourfavor and you hope everything
works in your favor, you knowhope is not a plan, right?
You know hope is notdiversification.
You can have hope and wecertainly have hope and we all
hope that everything works inour favor.
(05:35):
But what if it doesn't right?
And that's where you needstrategies like ours in the
Dynamic Alpha Macro Fund, wherewe can go long or short um,
different uh futures markets,different commodities, different
uh interest rates or evenindices um or any other
strategies.
You know, um, that just beat bya different drum, that that the
(05:59):
driver of return is differentthan just strong economic growth
.
Yeah, cause that's what we seewhen you look at a traditional
60, 40,.
You know it's.
You have two, two drivers ofreturn equities and bonds.
So, Matt, you wanted to join in, or I?
Speaker 3 (06:20):
was just going to add in.
Yeah, I mean, I think I thinkbonds are a great example right
Of of know.
Hey, what's what's the driverof return here?
And it's your yield andinterest rates, right, you know
you're carrying your interestrates right Direction of
interest rates.
And so those things aren'tnecessarily always
non-correlated to equities, aseveryone's learned over the last
few years years, while some ofthat you know over long periods
(06:43):
of time, there's non-correlationthere.
But one of the things that wehighlight in the paper is, you
know, as Brad mentioned, whenyou needed it most it evaporated
because we had high inflationand rising interest rates, which
hammered it at the same timethat the market was getting
hammered because of those slowereconomic growth and higher
prices as well.
So we want to make sure there'sstuff in there that that's a
little bit more durable and haveextra layers of protection
(07:06):
inside of a portfolio.
So it's not relying on justthat one correlational benefit
of stocks and bonds because, aswe've seen, that can evaporate
very quickly.
It's it's relying on thingslike global macro or trend or
carry trades or whatever itmight be, but something else in
the portfolio that can carry usthrough periods when those
things are correlated.
Speaker 2 (07:27):
The problem, I think, is that most people want
correlation, right, and theywant correlation because markets
tend to go up more often thanthey don't, right?
So just from a a time andtraining perspective, you know
you're getting constantlyrewarded based on the number of
times, never mind the magnitudeof a decline.
(07:48):
Right, that's what causedpeople to to have that
overexposure over time.
How does one counter that, brad?
One big thing is understandingcorrelation.
Speaker 1 (08:00):
Non-correlation or low correlation doesn't mean
negative correlation, right?
Negative correlation is shortthe market, or you're the market
or you're a bear fund orwhatever.
And to your point, yeah, it's.
Those are generally losingpropositions when the market's
up 70% of the time on a calendaryear basis, right?
So non-correlation just meansit targets returns differently,
(08:22):
right, you know?
And Matt talked about bonds andyou know, one of the other
services we offer to financialadvisors is our OCIO service,
where we partner with advisorsto build customized model
portfolios using ourmultidimensional approach
towards asset allocation, andadding non-correlated bond-like
(08:44):
drivers or returns is a keycomponent of that.
We're big believers in arbitragestrategies, be it merger, arb,
convertible arb, and those willmake money.
Even if bonds make money, right, they're just making it
differently, right.
A global macro strategy likeours year to date, you know,
we're up more than the S and P500 as of our most recent uh
(09:07):
quarterly fact sheet.
Um, because we're drivingreturns differently, right?
So big thing is, yes, we, wewant positive, everyone wants
positive correlation when themarket's going up, but they want
negative correlation when themarket goes down, right?
And and of course they do right.
It's like we all want to justsit on the sofa, eat ice cream
and bonbons, and you know, look,look like you do.
(09:33):
Michael, you're right, it's,it's, but you can't do that.
Right, and that just doesn'twork.
And same thing with theportfolio.
Everyone wants the portfolio togo up all the time.
No one can guarantee that.
No one can can build that.
But by having multiple driversyou're increasing your odds of
having things again like ourfund, dynamic Alpha Macro Fund
is doing better than the marketthis year on a good year, right?
(09:54):
So non-correlation doesn't meannegative correlation, it just
means it's taking a differentroute, right?
One of the analogies I use islike if you have to pick up your
kids from school, right, andyou and your wife decide, well,
we're both going to leave thehouse to pick up the kids, you
go left, he goes right.
Maybe you get to the school atthe same time.
(10:16):
Maybe one of you gets stuckbehind a train.
Maybe one of you gets a flattire Right, and if you both get
the same time, great, one of you, you know, gets a flat tire
right.
And you know, if you both getto the same time, great, one of
you might get there earlier.
If it's raining out, if it'ssnowing out, if it's ugly out.
You know you want to getdifferent routes to get there,
and if you get through the sametime, great.
But if you both get stuck by atrain or both get a flat tire,
(10:39):
well, you only had two driversof return right, then had two
drivers of return right, thenyou should have called grandma
or grandpa or the neighbor or afriend right and having those
multiple route takers.
If the mission is critical,right Now, yeah, your kid can
stand out in the snow I did itas a kid, right, it builds
character.
And stand in the rain, I did it, it builds character.
(11:00):
But if it's a mission critical,like they have to be picked up,
or it's like I have to rely onmy retirement check or my, my
college fund, then you want tohave those multiple drivers, uh,
taking different routes to topick up the kids, to, to meet
the goal, so to speak.
Speaker 3 (11:21):
And just to add to that, right, I think the you
have to look at it as costbenefit analysis, right, what's
the cost of the diversificationyou're adding at any given point
?
Like with our fund, it's beenpretty minimal over time.
Right, we can deliver.
I mean, we have deliveredequity-like returns since our
inception, right, that's not thegoal of a lot of diversifiers.
(11:41):
A lot of diversifiers targetmore of a moderate allocation or
a more conservative allocation.
So what's your cost ofdiversification For a moderate
client?
Those are perfectly fine,they're going to be okay.
And again, their entireportfolio is not invested in
equities anyhow.
So it's really that's sort ofthe science.
The art, I guess more so, isfiguring out what's the
(12:03):
potential cost of adding thisdiversifier and what's the
benefit we're getting from it.
Like we think about likebuffers, which we use in some of
our strategies, more of ourconservative strategies, right,
but the whole story with abuffer is you're getting some
protection on the downside, butyou're also generally capping
your upside at some level.
And it's the gamble orproposition of figuring out is
(12:26):
that upside cap worth a littlebit of downside protection that
I'm getting and sometimes it is,sometimes it isn't.
It can be a little spurious,whether it's worth it this
calendar period or the nextcalendar period.
So I think it's one of thechallenges those types of
strategies have and, honestly,the dispersion in experience
that investors have, dependingupon which monthly buffer they
(12:46):
bought or when they bought it orhow they bought it, it really,
really filters in.
But one thing you said, michael,is everyone wants correlation.
Everyone wants correlation inmarkets like we've had post-GFC.
Right, you didn't wantcorrelation in the 2000s, you
ended up flat on the decade.
If you had correlations in the2000s, if you had no correlate,
(13:07):
I'm sorry.
If you were highly correlatedto the S&P in the 2000,.
If you had no correlate, I'msorry.
If you're highly correlated tothe S&P in the 2000, you wanted
correlations to EM, tocommodities, to small caps, to
value.
That was.
Those were the things youwanted the experience to and
those are things that generallyare represented in, I think
probably everyone on this calland most investors largest
holding, which tends to be theS&P, which is a growth and a
(13:28):
concentrated growth index atthis point.
So it's looking beyond just the, the asset class they might be
in, looking beyond the titlingof a given holding and really
understanding, you know, toBrad's first point of the
drivers of return.
What's really driving that boatin the SPX?
It's the top couple names andit's tech.
You know that's that's thedriver for the S&P for the most
(13:48):
part, and it's tech you knowthat's that's the driver for the
S&P for the most part.
Speaker 1 (13:51):
Currently there's one stock that's almost 8% of the
S&P 500.
That's the largest that onestock has ever been in the S&P
500 right now.
And I'm not saying it's a goodor a bad stock, but that tells
you something about valuationand diversification or lack
thereof.
Speaker 2 (14:09):
So that's a good place to pivot off of.
Because, going back tocorrelation, you want
correlation towards the end of abear market.
You don't want correlationtowards the end of a bull market
.
Hard to really know if you'rein a bull or bear market on a go
forward basis, right.
But valuations can at leastmaybe tell you the conditions
that maybe make it more likelyor not.
Let's talk about valuationswhen it comes to US markets.
Speaker 1 (14:32):
If valuations are high, right?
I mean, if you look at theShiller PE ratio, which is a
seasonally adjusted PE ratio,we're a little over 38 right now
, as of end of June, andhistorically it's only been
higher, I think, one other time,um, and I believe that was the
(14:52):
tech bubble, um.
So you know when, when you,when you have valuations that
high, historically the futurereturns of stocks tend to be
poor.
So this is a scatterplot.
So each of the dots representsa return on the vertical and on
(15:14):
the horizontal, you have thestarting valuation of the S&P
500, right?
So red line, where we're atcurrently roughly, where the
Shiller PE is of 38.
Historically, we tend torealize 0% future returns over
the next five years.
This isn't a prediction.
You know we don't have acrystal ball.
(15:36):
Nobody has a prediction.
This is not saying that thisyear is going to be flat or next
year is going to be flat.
This is showing historicalpattern of when you start with a
high valuation, the futurereturns over the next five years
, and we've done this analysisover the next five years and
we've done this analysis for thenext 10 years.
And other firms like JP Morganand Goldman Sachs you know,
(15:56):
listeners, watchers may haveseen that type of the same chart
done there.
Basically, high stockvaluations tend to yield lower
future stock returns, um it, andthis is why having in
diversification and noncorrelation is important.
We run a fund that combinesglobal macro uh, a very good
(16:19):
global macro manager with umequities.
So when you, when you throw onthe global macro index, um to
the same chart and the globalmacro index again is not our
fund, it's an index of globalmacro managers and again we
think we've got one of the bestones out there managing the
dynamic alpha macro fund you seean interesting relationship
(16:42):
where, historically, when wehave valuations this high,
global macro strategies tend toperform very well.
And the reason makes sensebecause when you have valuations
this stretch, there'sopportunities to find things
that are more attractive,there's opportunities to go long
or short, there's opportunitiesto take advantage of future
(17:05):
volatility that could very wellbe down the road, and our fund
combines global macro with USequities right.
So our fund is a 50-50 mixbetween these two types of
concepts and strategies right.
And it's, by design, right,because if you have both and
(17:28):
there's some low non-correlationbetween the two, it helps to
smooth out the return experience.
We think this is a compellingreason for why global macro
makes sense.
Now, when valuations normalize,global macro still makes sense,
(17:52):
especially the way that we'redoing it, where we're combining
it with equities to kind of youknow the term all weather is
commonly used for in thisindustry and for strategies like
ours, and it's what we strivefor.
Speaker 3 (18:05):
And I think this second chart also illustrates
that thing.
We talked about the cost ofdiversification.
Right, if you look at thatmiddle section, say, from you
know, starting valuations of 20,mid-20s to like mid-30s, the
purple and blue dots are all ontop of each other.
Right, there's not a hugedifference in where those are
(18:26):
clustered one way or another.
Sure, around 20, you get someoutliers to the upside in the
S&P and those are going to bethere, right?
But if you looked at yourclient and your diversifier was
up 20% in one of those windowsand the S&P was up 30%, I don't
know that many clients are goingto say, well, that diversifier
needs to be sold immediately.
Right, it's the issue of, youknow, and a lot of people had
(18:52):
this with with trend followersfrom time to time.
Right, trend you know, likemanaged futures coming out of 08
, had a phenomenal window in 08,09.
Right, and then, all of thesudden, all the money flew in.
You get QE, you get zerointerest rate policy and there's
just not nothing could beat theS&P for the next 10 years,
basically, and so money flowedin and money flows back out
because it's it's more of a onetime pop.
(19:14):
Now there's there's managers inthe space that have been more
consistent than that.
But that's that's reallyillustrative, because I remember
that being the beginning of mysort of formative investing
career and just the allure ofthat.
It's like, wow, these thingsdid 25 percent in 08.
You know, like there's got tobe something to this.
How do I put this in aportfolio?
And then you know being flat orup slightly and the market
(19:35):
being up, you know, 18%.
That's tough to keep a clientin at times.
Speaker 2 (19:41):
I think we should take a step back and just talk
about global macro in general,because I think when people hear
macro they're still thinkingit's just purely stocks.
I mean, let's define globalmacro and then, from what you've
seen, how much variability ofreturns is there among the
global macro manager space?
Speaker 3 (19:57):
Yeah, I mean yeah, global macro really starts.
And again, the strategy we runin global macro is probably
different than a lot of globalmacro funds that are out there
today.
Our manager likes to say heruns a throwback strategy to the
70s and 80s, the old Paul TudorJones, or you know.
I know George Soros is sort ofa name that lights some people
up or some people are excitedabout or very very not excited
(20:19):
about, but regardless you haveto respect him as a trader from
the early, from the 70s and 80s,right.
And so their whole approach isfind big supply and demand
imbalances be concentrated, onlyhave a couple of positions, a
couple of themes in theportfolio at any given time.
Over time that seemed to havemorphed into more macro, macro
(20:41):
oriented currency trades orfixed income trading.
That gives you sort of thatlower volatility, consistent
carry trade of like five toseven percent.
That's that's.
That's what a lot of the globalmacro index is made up of, and
the percentages might beslightly higher than that in
terms of performance, but theytend to focus on what's going on
in the macroeconomic economy.
(21:02):
Currencies, commodities, fixedincome these are going to be the
areas that they primarilyinvest in.
Certainly they can accessequities as well.
In our case, on the global macroside, it's all done through
futures, which gives us broadexposure to 40 different markets
, so plenty of different leversto pull in different
environments.
(21:22):
So, yeah, it's different than Ithink.
A lot of global macro funds arepositioned today because
concentration is not somethingpeople are comfortable with at
all times.
And you know, unfortunately, ifyou listen to the great
investors of our time, you knowlike, like even even Bridgewater
(21:43):
.
You know Ray Dalio saying findseven to 10 investments that are
non-correlated, that have apositive return profile, and
blend them together.
He's not telling you to own 30,50 names, 75 names.
No, find things that arethoughtfully put together, blend
them and have relatively highconviction of what those things
are.
Speaker 1 (22:01):
Yeah, and Michael, you allude to the dispersion of
returns amongst global macro or,you know, even, managed futures
.
You know, managed futures trendfollowing is is struggled a
fair amount this year.
Um, and it's one of the reasonswe're big believers in the
multi-dimensional approach toasset allocation.
It's not about having adiversifier, it's about having
(22:22):
multiple diversifiers.
Right, it's, it's, it's.
I'll say sometimesdiversification is not binary,
it's not like, oh, I've got todiversify.
You know, I got REITs.
Ok, you get a little bit of alittle bit of non-correlation
there, right, you know.
But I've got managed futuresGreat, that'll help you in
certain times.
But if you don't have globalmacro, managed futures,
arbitrage, multiple approaches,you're not really as diversified
(22:46):
as as you really should be inour opinion.
You're not really asdiversified as you really should
be in our opinion and toclarify, I'm not down on managed
futures.
Speaker 3 (22:53):
We use managed futures strategies in our
portfolios that we build forfinancial advisors.
It pairs very well with ourstrategy.
It's just a very differentreturn profile and driver as a
return than we have in ours.
So while we get lumped in witha lot of managed futures funds
as being an alternative, it's areally disparate category in how
(23:15):
everyone runs things, eveninside of managed futures.
To Brad's point, someone couldbe running at a 30 vol, someone
could be running at a 12 vol.
Those strategies look so wildlydifferent or what timeframe
they're using on their trendfollowing All of those things
can be wildly, wildly different.
Yet we sort of lump them alltogether and it's wild, frankly.
Speaker 1 (23:34):
It ties into that causation of the non-correlation
right, the cause, the approach,and that's why diversifying via
approaches and disciplines isso important in what we do when
we're building models andportfolios for advisors.
And our fund, you know, dynamicAlpha, macro Fund, dymx, is
(23:55):
non-correlated to equities, tobonds, to managed futures, to
other alternatives.
I mean we've some managedfutures strategies.
We have a negative correlationto those, you know.
So it's additive to's additiveto the, to the, to the overall
portfolio.
And you've seen it just thisyear, you know again, with our
returns have been, you know,extremely strong, which we're,
(24:19):
we're very proud of and happy todeliver to our shareholders,
you're supposed to.
Speaker 2 (24:23):
There's that old saying that diversification
fails when you need it the most.
Right, and much of that isrelated to the idea that when
you have high volatility,everything tends to change,
correlation wise, and convergeto one um, which makes me then
wonder if we should viewvolatility as an asset class,
(24:45):
because that's the ultimateinverse correlation right.
How should we think aboutvolatility and these volatility
products in that context, in theframework of better
diversification?
Speaker 3 (24:55):
Yeah, I mean, I think it's tough right, like the long
vol strategy, the hedging, withjust a holding tail risk, like
I think, in institutional worldit makes a lot of sense because
it's very, very thoughtful andthey understand what they're
getting for that payout on aconsistent basis.
But that's that at the end ofthe day.
That's the trouble is, howoften do you have these events
(25:17):
where owning volatility reallypays off for you?
There's another product outthere that's.
That's an ETF, that's aninterest rate hedge, and a lot
of money flowed into that afterthe rates rose substantially in
2022 or through the previousrate hiking cycle, and the thing
was up, you know, 20, 30, 40,50 percent over the course of a
few days or weeks.
(25:37):
But since then and holding itthroughout that period over time
, you've made almost no money inthe thing other than these few
days that you've owned it.
And so for retail clients, forthe investors that are out there
, it becomes really hard toconsistently justify something
that you know five out of sixyears you're probably not going
to make money on, or you'regoing to make very, very little
(25:57):
compared to other things outthere.
And so there is an optics tobuilding these portfolios we
like to steer away from it asmuch as possible, but you just
can't help but acknowledge that.
You know they always say thisabout like dieting and food
plans.
It's like the best plan is theplan you can stick with.
And for retail investors,sometimes they can't stick with
some of these more technicalproducts that are out there
(26:19):
because they they're just abovetheir grass and so you know,
global macro sounds reallycomplicated, but when we can
talk to an investor about thefundamental reason, we're in
something like a copper, forexample, right, hey, ai is
growing, electricity demand isgrowing.
All of that needs copper.
We really love that play overtime.
Now we can take that position,put it on, take it off.
(26:41):
We have over the life of thefund, but it's really easy to
understand for a client whythey're invested in that given
thing.
So I think it's really hard andalmost ephemeral to say someone
we're investing in volatilitybecause it's not something they
can hold, it's not somethingthey can they can really relate
to.
So much because it's sort of anabstraction.
It's a financial abstractionalmost.
Speaker 1 (27:01):
It's kind of tied to what you'd said earlier on, and
this is just a good visual onthe diversification, right, and
you think you have a lot, butyou really don't when you need
it most, right?
So you had mentioned thatcorrelations tend to merge to
one during times of stress,right, and we've seen it in 2022
, we've seen it in other yearsas well.
(27:23):
And again, when you just havetwo primary diversifiers
equities and bonds over 15 years, you get two colors.
The way you read these piegraphs are, the shading
represents the degree ofnon-correlation, right, and then
the numbers next to each, youknow, represent that correlation
to large cap stocks.
(27:44):
So US aggregate bonds over the15-year timeframe is 25%
correlated to large cap, but in2022, it was 67% Investment
grade bonds was 77% correlated.
When you look at global macro asa diversifier, global macro is
non-correlated for the 15 yeartime frame as well as when you
(28:05):
need it.
So correlations don't alwaysmerge to one if you have
multiple drivers, and you know,the point Matt was just making
is global macro, ideally, is nota drag on performance, right?
That's not what we want to be.
We want to deliver equity-likereturns differently over time
(28:28):
and, yeah, sometimes we willlook different.
Over a long term we'll lookdifferent, but we hope to
perform as well, if not better,than equities and do it in a
different way, which, again, iswhat diversification is supposed
to be right.
If you believe indiversification, you need to
have different drivers of returnso that you know when that bus
(28:53):
that we don't see hits us andcorrelations tend to merge
because in reality you didn'thave as many pretty little
colors as you thought you did.
You know you'll feel the pain.
Speaker 3 (29:04):
It's funny just thinking about the ags a great
example of you.
Know you'll feel the pain.
It's funny just thinking aboutthe ags a great example of you.
Know you were talking about howcorrelations go to one at these
volatile inflection points whenyou need your diversifiers the
most.
Well, in 08, long treasurieswere a phenomenal hedge.
Long treasuries didphenomenally well in 08, not so
much in 2022, right.
So we get pushback from clientson why do you own, like some ad
(29:27):
type positions in in fixedincome?
And it's because, over time,owning a little bit of duration
can really pay off in some ofthose more high level risk off
situations.
Right, it didn't this last timebecause inflation was wild and
we needed to raise rates toattain inflation, even those for
a short period of time.
(29:47):
So there were, there werecounter trends that were there
that just weren't going to workfor long bonds.
In that scenario, I mean, takeout the inflation part, Maybe.
Maybe the story looks totallydifferent coming out of COVID
and long bonds do work there,but occasionally trends going to
fill that need.
So we just feel that if we canbe thoughtful about the managers
we're selecting and the waywe're building a portfolio
(30:09):
together, we can offer two,three, four different layers of
protection inside the portfolioand, yeah, maybe two or three of
those don't work in the nextmajor drawdown, but one or two
of them should and that shouldprovide enough benefit to create
the overall return profile.
Speaker 2 (30:26):
I want to take some of the questions I'm seeing in
the comments.
This one's from Michael onLinkedIn.
What do your backtests of theanalytics used in managing
Dynamics indicate about theprospective performance during
times of a major marketcorrection?
Speaker 3 (30:38):
Okay so we don't have a systematic strategy.
We have a fundamentaldiscretionary strategy.
So the only back test we reallyhave is the hedge fund strategy
, which isn't something we canshare with retail investors.
Unfortunately, we can sharewith financial advisors, that's
not a problem.
So it's really hard for us togo back and say exactly what the
(30:58):
fund would have done,especially in an open
environment.
But we've been through somepretty volatile times already
over the last two years thatwe've run the strategy and I
think when you see the marketreally going through the
volatility right, the drawdownsin the equities, that's really
where our fund shines.
Now, some months when theequities are up, we're up as
well.
It's usually for weird reasons,like maybe gold was up at that
(31:20):
time, or silver did really well,or you know, the two year it
was all because of proposed ratecuts and a two year position
went sort of parabolic.
Um, there's all sorts ofreasons why inside the portfolio
it can do well duringvolatility time, but there's not
a back test per se cause.
It's not a formula that we'rerunning.
It's not an algorithm, it's.
It's a team of economists thatare looking constantly and
(31:43):
scouring the universes that theyhave to find supply and demand
imbalances and take advantagewherever they are.
And, importantly, noenvironment looks exactly the
same.
So what he was doing in 2010looks different than what he's
going to be doing today or in2015 or 2017.
So it's a little hard for us toanswer that question in this
(32:05):
type of form.
Brad, I don't know if youwanted to add anything to that.
Speaker 1 (32:07):
Yeah, I mean so, just to take a step back.
So our fund is and if you wantto share the screen, Michael,
there's a visual that goes withthis is 50% global fundamental
macro and 50% US equities.
Right, and the fundamentalglobal macro strategy, as Matt
said, has been run by a team forover 10 years now and for
(32:32):
financial advisors orinstitutional investors, we can
share the performance of thestrategy behind the mutual fund
Dimex Because, again, thestrategy is combining equities
with the global fundamentalsmacro strategy.
That's been run with real money.
It's not a backtest To Matt'spoint.
You can't backtest thediscretionary fundamental
(32:54):
strategy.
I'm sure there are some folksout there that do backtest the
discretionary and they say itwas a full moon and it rained
the night before and it wasended on the 12th, so I happened
to sell right before the marketcrash.
Those people are all on Twitterflashbacks yes, they are.
Speaker 3 (33:11):
It will drop to you, but I could guess yeah.
Speaker 1 (33:13):
Yeah, yeah, I've run across them.
Be careful out there folks.
Um uh, but we do have realworld performance history of the
global macro strategy and wecan share for financial advisors
or institutional investors Ifyou just email us.
Either Brad at dynamic wgcom orMatt at dynamic wgcom is email
(33:35):
us and we're happy to get on aquick zoom and share those
numbers with you.
Speaker 3 (33:40):
So sorry for that and and not answer answer.
Yeah, that's just media, theone that that's media and
compliance is what that is rightthere yeah, there's a another
question off of youtube.
Speaker 2 (33:51):
I want to hear from matt here on youtube.
Uh, do you see any riskcorrelations with equities
trading?
High valuations and privatecredit continue to grow as a
yield alternative.
So let's go back to drivers ofinvestments, private credit,
private equity, I mean.
It's still largely based on thesame thing.
Public markets are based off ofright, but maybe with a little
(34:13):
bit more opaqueness, fancinessand leverage.
Yeah, what are your thoughts onthat?
Speaker 3 (34:17):
Private credit's a weird space for us, because I
understand the appeal of thestructure and the lack of public
mark to market accounting.
There's just a net benefit andas long as more dollars chase
more deals, liquidity is not anissue, and so they'll continue.
(34:38):
You know, I'm XYZ privatecredit fund.
I have a company in theportfolio that's struggling.
I'm more apt to say, well,that's okay, we can extend terms
or we can provide someadditional liquidity or provide
some additional funding to makesure I don't have a bankruptcy
in the portfolio, to make sure Idon't do that.
In the public markets you haveto ensure that every bondholder
out there is going to agree tothose same terms, and that's a
much harder prospect than ifit's just one company or two
(35:01):
companies owning all of thepotential debt for this given
company.
So, yes, the driver of returnat the end of the day is the
same.
Right, it's economic growth.
Does this company continue togrow their earnings to pay off
this debt?
Usually at very high interestrates?
Right, we talk about, you know,bonds.
You know the interest ratesbeing, you know, four and a half
(35:21):
percent or 5% right now, ormortgages being seven.
Right, these private creditdeals are in the 10 to 15
percent neighborhood and I don'tknow many companies, especially
small companies, that are ableto withstand that level of
interest rate for a long periodof time.
So my biggest concern is whatdoes this look like when the
(35:43):
dollars stop flowing intoprivate credit, when they've
exhausted all the 401k money?
It seems to be.
I mean, we're seeing it kind ofin private equity right now.
Private equity is going throughthis lull of monetizations where
they just can't sell portfoliocompanies and they're owning
them much longer than theyexpected.
Or if they're selling them,they're just selling them to
another private equity company.
They're not IPOing them in thepublic markets and to me that
(36:05):
expresses that there's someexhaustion in that market.
People pay multiples that youknow five years later other
people aren't willing to pay anappreciated multiple on top of
that or the company never grewinto what they prospect.
Private credit feels like whereprivate equity was maybe five,
six years ago, where it's.
We're coming off this great run.
The Clipwater Index looksphenomenal, you know right.
The returns look great andthere's very little volatility.
(36:27):
This is perfect for all myclients and when you scratch a
little bit below the surface,you start finding out that, okay
, yes, it's interesting.
It's nice that we don't havedefaults just because a company
missed earnings or had a badproduct launch one quarter, but
at the end of the day you'restill owning debt of that
company.
Will that company continue tooperate and be able to pay it
off at some point in the futurefive years, seven years, 10
(36:49):
years from now?
And I don't have confidencethat a lot of these companies
will be able to do that.
But it's like valuations, it'sa timing game and I've been
wrong on the private equity side.
I'll probably continue to besomewhat wrong on the private
credit side.
So what I'd say is I think insmall doses it makes sense for
(37:10):
the right clients.
But again, that's not advice,that's just admitting that for
some clients it's going to makesense and it's not something we
really dabble in too much.
But if you ask me to boil downwhat the drivers of return are,
they're not distinctly differentfrom equities.
They just have a higher hurdlefor them being a problem in your
portfolio.
Speaker 1 (37:27):
Let's say yeah, one of the things I think about is
so we have a very small YouTubechannel and every week I try to
publish a small, a short, threeto five minute video.
I put it on LinkedIn andYouTube and I end every video
with thanking people andreminding them to make smart,
logical and fact based financialdecisions.
And when I think of, you know,12, 14 percent yields, just
(37:51):
logically think to yourselfwhat's the risk associated with
that?
To Matt's point why would acompany borrow money at 12 to 14
percent if if I'm not going tosay if they were financially
stronger, but why would they?
Right, why do they have toborrow at those types of rates?
And you know, you look at theseprivate credit funds and you'll
(38:12):
see a line that goes at a 45degree angle and you look at a
Sharpe ratio.
I'm like my gosh, it's got a 37Sharpe ratio or some infinity
Sharpe ratio because it's nevergone down.
Right, and it's phenomenal.
But again, just logically thinkabout it.
Right, it's, it's.
Things aren't marked to marketuntil they are Right.
And we've seen it where it'slike oh yeah, it's that part,
(38:34):
it's that part, it's that part.
Nope, zero, just now.
Speaker 3 (38:37):
I just don't think it is probably a non-traded BDCs
or non-traded REITs, Right?
I mean, anytime you get intothe private markets it becomes a
little bit more wonky as toassuming what the risks are,
because they can be papered overreally, really easily.
So I don't always know that.
I don't think that investorsalways appreciate the risks that
(38:57):
they're taking and what they'regiving up, what they're getting
for giving up the liquidity andthe transparency that they have
in public markets.
Speaker 1 (39:04):
You just have to be very careful.
Right, we're not saying youknow, don't do them, but you
have to be very careful.
And there's, you know, justlogically, think about it.
Speaker 3 (39:13):
More importantly, hopefully you're finding ones
that are actually somewhatunique, right, that are actually
doing something a little bitdifferent than just saying I'm
loaning to small and mid-tierbusinesses that need credit
between 50 and 100 milliondollars, right like that.
That's, that's very plainvanilla, where we sort of get
our ears perked up as someonethat's doing something truly
different.
Speaker 2 (39:32):
That might have, you know, some real correlational
benefit, regardless of theprivate structure or whatever
might be there um, as we wrap uphere, for those that want to
learn more about uh dy mix, yourmutual fund, where would you
point them to and how can peoplefollow you?
Speaker 1 (39:47):
Yep, so DynamicWGcom, as it says after my name.
There's our primary website.
You can go there to learn moreabout us.
Both Matt and I are on LinkedInand the white paper we
referenced the research paperagain is available through
RethinkAssetAllocationcom.
Reference the research paperagain is available through
rethinkassetallocationcom.
(40:08):
A quick URL to download ournewest thought leadership.
And don't be sure to put you onour regular monthly newsletter
where we give timely commentary.
You can find again DynamicWealth Group on YouTube.
Drop us an email Again, brad atdynamicwg or matt at
dynamicwgcom, and always happyto chat with folks.
Speaker 2 (40:29):
Thank you everybody for watching.
I certainly appreciate thecontinued support with these
live streams.
Thanks, matt and Michael, forthe questions live as we were
streaming and hopefully we'llsee you all next episode of
LeapLag live with a new host.
Thanks everybody.
Cheers of Leigh Blagg Live witha new host.
Thanks everybody, cheers, thankyou.
So this is a scatterplot.
So each of the dots representsa return on the vertical and on
the horizontal you have thestarting valuation of the S&P
500.
Right so red line where we'reat currently, roughly where the
Shiller PE is of 38.
Historically, we tend torealize zero percent future
(00:24):
returns over the next five years.
This isn't a prediction.
We don't have a crystal ball.
Nobody has a prediction.
This is not saying that thisyear is going to be flat or next
year is going to be flat.
This is showing historicalpattern of when you start with a
high valuation, the futurereturns over the next five years
and we've done this analysisfor the next 10 years and other
(00:46):
firms like JP Morgan and GoldmanSachs you know listeners,
watchers may have seen that typeof the same chart done there.
Basically, high stockvaluations tend future stock
return.
Speaker 2 (01:08):
My name is Michael Guy, a publisher of the Lead Lag
Report.
Joining me here is Brad Barry.
Matt O'Brien of Dynamic Wealth.
They've got a mutual fund we'regoing to touch on.
I'm always a fan of the waythat they think about things.
They just put out a newresearch paper that, Brad, you
sent to me.
I kind of feel like we shouldstart with that.
So let's get into it.
Speaker 1 (01:25):
Yeah, so you mentioned illusion, right, and
illusion.
When you hear the word illusion, I sometimes think of magic,
right, and mystify.
And investing can be mystifyingto a lot of folks, a lot of
investors, a lot of evenfinancial advisors, you know,
given everything that's outthere.
And part of our mission at atdynamic wealth group is to
(01:47):
simplify the complexity, uh, foradvisors, and it's one of the
reasons we put out this, uh, uh,this little research paper to
help put things in perspectiveand help people realize that
maybe diversification isn't justa bunch of different, pretty
little colors on a on a piegraph, right, and?
And looking at those, thosedifferent colors and those
(02:07):
different percentages, and, andwe like to ask the question,
what drives the return of eachinvestment?
And if the drivers have a lotof the same characteristics,
you're not necessarilydiversified, right?
Um?
So you know the?
The technical term iscorrelation, right, and?
(02:28):
Uh, um, we also try to look forthe causation of the
correlation, um, you know,something could be
non-correlated on paper, butwhen you, when you look at it,
sometimes it's just happenstance.
And then, when you want it tobe non-correlated like 2022 and
both stocks and bonds, and itseemed like everything was going
(02:49):
down you realized you didnalways equal true portfolio
diversification.
It is available for download onour website.
(03:09):
We created a special URL for itrethinkassetallocationcom, so
you can go to rethink all oneword assetallocationcom and
download it.
It's a good, entertaining read.
One of the things we do try tostrive ourselves on is not just
throwing in a bunch of financialjargon and mumbo-jumbo and big
(03:33):
college-level words.
We try to again simplify thecomplexity and make it
understanding because you know,if we have time, we'll also talk
about the valuation of themarket and, with the market as
high as it is, having some realdiversification we think is
important.
You know, as always.
(03:55):
Right, you know so.
Speaker 2 (03:56):
So.
So I want to let's, let's,let's touch on the point you
mentioned earlier about thedrivers, right, because
correlation doesn't necessarilymean causation.
You know, we have to thinkabout sort of what actually
drives the correlation.
If you were to take a broadbrush approach to sort of saying
these are the two or threeprimary drivers for most
(04:18):
investments in the long term, atleast Short term can be a very
different dynamic.
What tends to be sort of thecommon thread.
Speaker 1 (04:27):
I think strong economic growth is a big factor,
right?
Whether you're, you know, large, cap or mid or small, to some
degree, you need customers,consumers, that have jobs, that
have discretionary income andcan spend that money.
And if there's a macro issuethat causes a slowdown, if there
(04:51):
are tariffs that happen toimpact the price of things, if
inflation comes back, if youknow, if there's unforeseen
circumstances, right, regularviewers know I love analogies
and one of them is it's the busthat you don't see that hits you
.
And if there's there's a busout there that we don't know
about that could cause a macroissue, a, a, a, a global
(05:14):
slowdown, a U S slowdown.
And if you, if you rely oneverything working out and you
need everything to work in yourfavor and you hope everything
works in your favor, you knowhope is not a plan, right?
You know hope is notdiversification.
You can have hope and wecertainly have hope and we all
hope that everything works inour favor.
(05:35):
But what if it doesn't right?
And that's where you needstrategies like ours in the
Dynamic Alpha Macro Fund, wherewe can go long or short um,
different uh futures markets,different commodities, different
uh interest rates or evenindices um or any other
strategies.
You know, um, that just beat bya different drum, that that the
(05:59):
driver of return is differentthan just strong economic growth
.
Yeah, cause that's what we seewhen you look at a traditional
60, 40,.
You know it's.
You have two, two drivers ofreturn equities and bonds.
So, Matt, you wanted to join in, or I?
Speaker 3 (06:20):
was just going to add in.
Yeah, I mean, I think I thinkbonds are a great example right
Of of know.
Hey, what's what's the driverof return here?
And it's your yield andinterest rates, right, you know
you're carrying your interestrates right Direction of
interest rates.
And so those things aren'tnecessarily always
non-correlated to equities, aseveryone's learned over the last
few years years, while some ofthat you know over long periods
(06:43):
of time, there's non-correlationthere.
But one of the things that wehighlight in the paper is, you
know, as Brad mentioned, whenyou needed it most it evaporated
because we had high inflationand rising interest rates, which
hammered it at the same timethat the market was getting
hammered because of those slowereconomic growth and higher
prices as well.
So we want to make sure there'sstuff in there that that's a
little bit more durable and haveextra layers of protection
(07:06):
inside of a portfolio.
So it's not relying on justthat one correlational benefit
of stocks and bonds because, aswe've seen, that can evaporate
very quickly.
It's it's relying on thingslike global macro or trend or
carry trades or whatever itmight be, but something else in
the portfolio that can carry usthrough periods when those
things are correlated.
Speaker 2 (07:27):
The problem, I think, is that most people want
correlation, right, and theywant correlation because markets
tend to go up more often thanthey don't, right?
So just from a a time andtraining perspective, you know
you're getting constantlyrewarded based on the number of
times, never mind the magnitudeof a decline.
(07:48):
Right, that's what causedpeople to to have that
overexposure over time.
How does one counter that, brad?
One big thing is understandingcorrelation.
Speaker 1 (08:00):
Non-correlation or low correlation doesn't mean
negative correlation, right?
Negative correlation is shortthe market, or you're the market
or you're a bear fund orwhatever.
And to your point, yeah, it's.
Those are generally losingpropositions when the market's
up 70% of the time on a calendaryear basis, right?
So non-correlation just meansit targets returns differently,
(08:22):
right, you know?
And Matt talked about bonds andyou know, one of the other
services we offer to financialadvisors is our OCIO service,
where we partner with advisorsto build customized model
portfolios using ourmultidimensional approach
towards asset allocation, andadding non-correlated bond-like
(08:44):
drivers or returns is a keycomponent of that.
We're big believers in arbitragestrategies, be it merger, arb,
convertible arb, and those willmake money.
Even if bonds make money, right, they're just making it
differently, right.
A global macro strategy likeours year to date, you know,
we're up more than the S and P500 as of our most recent uh
(09:07):
quarterly fact sheet.
Um, because we're drivingreturns differently, right?
So big thing is, yes, we, wewant positive, everyone wants
positive correlation when themarket's going up, but they want
negative correlation when themarket goes down, right?
And and of course they do right.
It's like we all want to justsit on the sofa, eat ice cream
and bonbons, and you know, look,look like you do.
(09:33):
Michael, you're right, it's,it's, but you can't do that.
Right, and that just doesn'twork.
And same thing with theportfolio.
Everyone wants the portfolio togo up all the time.
No one can guarantee that.
No one can can build that.
But by having multiple driversyou're increasing your odds of
having things again like ourfund, dynamic Alpha Macro Fund
is doing better than the marketthis year on a good year, right?
(09:54):
So non-correlation doesn't meannegative correlation, it just
means it's taking a differentroute, right?
One of the analogies I use islike if you have to pick up your
kids from school, right, andyou and your wife decide, well,
we're both going to leave thehouse to pick up the kids, you
go left, he goes right.
Maybe you get to the school atthe same time.
(10:16):
Maybe one of you gets stuckbehind a train.
Maybe one of you gets a flattire Right, and if you both get
the same time, great, one of you, you know, gets a flat tire
right.
And you know, if you both getto the same time, great, one of
you might get there earlier.
If it's raining out, if it'ssnowing out, if it's ugly out.
You know you want to getdifferent routes to get there,
and if you get through the sametime, great.
But if you both get stuck by atrain or both get a flat tire,
(10:39):
well, you only had two driversof return right, then had two
drivers of return right, thenyou should have called grandma
or grandpa or the neighbor or afriend right and having those
multiple route takers.
If the mission is critical,right Now, yeah, your kid can
stand out in the snow I did itas a kid, right, it builds
character.
And stand in the rain, I did it, it builds character.
(11:00):
But if it's a mission critical,like they have to be picked up,
or it's like I have to rely onmy retirement check or my, my
college fund, then you want tohave those multiple drivers, uh,
taking different routes to topick up the kids, to, to meet
the goal, so to speak.
Speaker 3 (11:21):
And just to add to that, right, I think the you
have to look at it as costbenefit analysis, right, what's
the cost of the diversificationyou're adding at any given point
?
Like with our fund, it's beenpretty minimal over time.
Right, we can deliver.
I mean, we have deliveredequity-like returns since our
inception, right, that's not thegoal of a lot of diversifiers.
(11:41):
A lot of diversifiers targetmore of a moderate allocation or
a more conservative allocation.
So what's your cost ofdiversification For a moderate
client?
Those are perfectly fine,they're going to be okay.
And again, their entireportfolio is not invested in
equities anyhow.
So it's really that's sort ofthe science.
The art, I guess more so, isfiguring out what's the
(12:03):
potential cost of adding thisdiversifier and what's the
benefit we're getting from it.
Like we think about likebuffers, which we use in some of
our strategies, more of ourconservative strategies, right,
but the whole story with abuffer is you're getting some
protection on the downside, butyou're also generally capping
your upside at some level.
And it's the gamble orproposition of figuring out is
(12:26):
that upside cap worth a littlebit of downside protection that
I'm getting and sometimes it is,sometimes it isn't.
It can be a little spurious,whether it's worth it this
calendar period or the nextcalendar period.
So I think it's one of thechallenges those types of
strategies have and, honestly,the dispersion in experience
that investors have, dependingupon which monthly buffer they
(12:46):
bought or when they bought it orhow they bought it, it really,
really filters in.
But one thing you said, michael,is everyone wants correlation.
Everyone wants correlation inmarkets like we've had post-GFC.
Right, you didn't wantcorrelation in the 2000s, you
ended up flat on the decade.
If you had correlations in the2000s, if you had no correlate,
(13:07):
I'm sorry.
If you were highly correlatedto the S&P in the 2000,.
If you had no correlate, I'msorry.
If you're highly correlated tothe S&P in the 2000, you wanted
correlations to EM, tocommodities, to small caps, to
value.
That was.
Those were the things youwanted the experience to and
those are things that generallyare represented in, I think
probably everyone on this calland most investors largest
holding, which tends to be theS&P, which is a growth and a
(13:28):
concentrated growth index atthis point.
So it's looking beyond just the, the asset class they might be
in, looking beyond the titlingof a given holding and really
understanding, you know, toBrad's first point of the
drivers of return.
What's really driving that boatin the SPX?
It's the top couple names andit's tech.
You know that's that's thedriver for the S&P for the most
(13:48):
part, and it's tech you knowthat's that's the driver for the
S&P for the most part.
Speaker 1 (13:51):
Currently there's one stock that's almost 8% of the
S&P 500.
That's the largest that onestock has ever been in the S&P
500 right now.
And I'm not saying it's a goodor a bad stock, but that tells
you something about valuationand diversification or lack
thereof.
Speaker 2 (14:09):
So that's a good place to pivot off of.
Because, going back tocorrelation, you want
correlation towards the end of abear market.
You don't want correlationtowards the end of a bull market
.
Hard to really know if you'rein a bull or bear market on a go
forward basis, right.
But valuations can at leastmaybe tell you the conditions
that maybe make it more likelyor not.
Let's talk about valuationswhen it comes to US markets.
Speaker 1 (14:32):
If valuations are high, right?
I mean, if you look at theShiller PE ratio, which is a
seasonally adjusted PE ratio,we're a little over 38 right now
, as of end of June, andhistorically it's only been
higher, I think, one other time,um, and I believe that was the
(14:52):
tech bubble, um.
So you know when, when you,when you have valuations that
high, historically the futurereturns of stocks tend to be
poor.
So this is a scatterplot.
So each of the dots representsa return on the vertical and on
(15:14):
the horizontal, you have thestarting valuation of the S&P
500, right?
So red line, where we're atcurrently roughly, where the
Shiller PE is of 38.
Historically, we tend torealize 0% future returns over
the next five years.
This isn't a prediction.
You know we don't have acrystal ball.
(15:36):
Nobody has a prediction.
This is not saying that thisyear is going to be flat or next
year is going to be flat.
This is showing historicalpattern of when you start with a
high valuation, the futurereturns over the next five years
, and we've done this analysisover the next five years and
we've done this analysis for thenext 10 years.
And other firms like JP Morganand Goldman Sachs you know,
(15:56):
listeners, watchers may haveseen that type of the same chart
done there.
Basically, high stockvaluations tend to yield lower
future stock returns, um it, andthis is why having in
diversification and noncorrelation is important.
We run a fund that combinesglobal macro uh, a very good
(16:19):
global macro manager with umequities.
So when you, when you throw onthe global macro index, um to
the same chart and the globalmacro index again is not our
fund, it's an index of globalmacro managers and again we
think we've got one of the bestones out there managing the
dynamic alpha macro fund you seean interesting relationship
(16:42):
where, historically, when wehave valuations this high,
global macro strategies tend toperform very well.
And the reason makes sensebecause when you have valuations
this stretch, there'sopportunities to find things
that are more attractive,there's opportunities to go long
or short, there's opportunitiesto take advantage of future
(17:05):
volatility that could very wellbe down the road, and our fund
combines global macro with USequities right.
So our fund is a 50-50 mixbetween these two types of
concepts and strategies right.
And it's, by design, right,because if you have both and
(17:28):
there's some low non-correlationbetween the two, it helps to
smooth out the return experience.
We think this is a compellingreason for why global macro
makes sense.
Now, when valuations normalize,global macro still makes sense,
(17:52):
especially the way that we'redoing it, where we're combining
it with equities to kind of youknow the term all weather is
commonly used for in thisindustry and for strategies like
ours, and it's what we strivefor.
Speaker 3 (18:05):
And I think this second chart also illustrates
that thing.
We talked about the cost ofdiversification.
Right, if you look at thatmiddle section, say, from you
know, starting valuations of 20,mid-20s to like mid-30s, the
purple and blue dots are all ontop of each other.
Right, there's not a hugedifference in where those are
(18:26):
clustered one way or another.
Sure, around 20, you get someoutliers to the upside in the
S&P and those are going to bethere, right?
But if you looked at yourclient and your diversifier was
up 20% in one of those windowsand the S&P was up 30%, I don't
know that many clients are goingto say, well, that diversifier
needs to be sold immediately.
Right, it's the issue of, youknow, and a lot of people had
(18:52):
this with with trend followersfrom time to time.
Right, trend you know, likemanaged futures coming out of 08
, had a phenomenal window in 08,09.
Right, and then, all of thesudden, all the money flew in.
You get QE, you get zerointerest rate policy and there's
just not nothing could beat theS&P for the next 10 years,
basically, and so money flowedin and money flows back out
because it's it's more of a onetime pop.
(19:14):
Now there's there's managers inthe space that have been more
consistent than that.
But that's that's reallyillustrative, because I remember
that being the beginning of mysort of formative investing
career and just the allure ofthat.
It's like, wow, these thingsdid 25 percent in 08.
You know, like there's got tobe something to this.
How do I put this in aportfolio?
And then you know being flat orup slightly and the market
(19:35):
being up, you know, 18%.
That's tough to keep a clientin at times.
Speaker 2 (19:41):
I think we should take a step back and just talk
about global macro in general,because I think when people hear
macro they're still thinkingit's just purely stocks.
I mean, let's define globalmacro and then, from what you've
seen, how much variability ofreturns is there among the
global macro manager space?
Speaker 3 (19:57):
Yeah, I mean yeah, global macro really starts.
And again, the strategy we runin global macro is probably
different than a lot of globalmacro funds that are out there
today.
Our manager likes to say heruns a throwback strategy to the
70s and 80s, the old Paul TudorJones, or you know.
I know George Soros is sort ofa name that lights some people
up or some people are excitedabout or very very not excited
(20:19):
about, but regardless you haveto respect him as a trader from
the early, from the 70s and 80s,right.
And so their whole approach isfind big supply and demand
imbalances be concentrated, onlyhave a couple of positions, a
couple of themes in theportfolio at any given time.
Over time that seemed to havemorphed into more macro, macro
(20:41):
oriented currency trades orfixed income trading.
That gives you sort of thatlower volatility, consistent
carry trade of like five toseven percent.
That's that's.
That's what a lot of the globalmacro index is made up of, and
the percentages might beslightly higher than that in
terms of performance, but theytend to focus on what's going on
in the macroeconomic economy.
(21:02):
Currencies, commodities, fixedincome these are going to be the
areas that they primarilyinvest in.
Certainly they can accessequities as well.
In our case, on the global macroside, it's all done through
futures, which gives us broadexposure to 40 different markets
, so plenty of different leversto pull in different
environments.
(21:22):
So, yeah, it's different than Ithink.
A lot of global macro funds arepositioned today because
concentration is not somethingpeople are comfortable with at
all times.
And you know, unfortunately, ifyou listen to the great
investors of our time, you knowlike, like even even Bridgewater
(21:43):
.
You know Ray Dalio saying findseven to 10 investments that are
non-correlated, that have apositive return profile, and
blend them together.
He's not telling you to own 30,50 names, 75 names.
No, find things that arethoughtfully put together, blend
them and have relatively highconviction of what those things
are.
Speaker 1 (22:01):
Yeah, and Michael, you allude to the dispersion of
returns amongst global macro or,you know, even, managed futures
.
You know, managed futures trendfollowing is is struggled a
fair amount this year.
Um, and it's one of the reasonswe're big believers in the
multi-dimensional approach toasset allocation.
It's not about having adiversifier, it's about having
(22:22):
multiple diversifiers.
Right, it's, it's, it's.
I'll say sometimesdiversification is not binary,
it's not like, oh, I've got todiversify.
You know, I got REITs.
Ok, you get a little bit of alittle bit of non-correlation
there, right, you know.
But I've got managed futuresGreat, that'll help you in
certain times.
But if you don't have globalmacro, managed futures,
arbitrage, multiple approaches,you're not really as diversified
(22:46):
as as you really should be inour opinion.
You're not really asdiversified as you really should
be in our opinion and toclarify, I'm not down on managed
futures.
Speaker 3 (22:53):
We use managed futures strategies in our
portfolios that we build forfinancial advisors.
It pairs very well with ourstrategy.
It's just a very differentreturn profile and driver as a
return than we have in ours.
So while we get lumped in witha lot of managed futures funds
as being an alternative, it's areally disparate category in how
(23:15):
everyone runs things, eveninside of managed futures.
To Brad's point, someone couldbe running at a 30 vol, someone
could be running at a 12 vol.
Those strategies look so wildlydifferent or what timeframe
they're using on their trendfollowing All of those things
can be wildly, wildly different.
Yet we sort of lump them alltogether and it's wild, frankly.
Speaker 1 (23:34):
It ties into that causation of the non-correlation
right, the cause, the approach,and that's why diversifying via
approaches and disciplines isso important in what we do when
we're building models andportfolios for advisors.
And our fund, you know, dynamicAlpha, macro Fund, dymx, is
(23:55):
non-correlated to equities, tobonds, to managed futures, to
other alternatives.
I mean we've some managedfutures strategies.
We have a negative correlationto those, you know.
So it's additive to's additiveto the, to the, to the overall
portfolio.
And you've seen it just thisyear, you know again, with our
returns have been, you know,extremely strong, which we're,
(24:19):
we're very proud of and happy todeliver to our shareholders,
you're supposed to.
Speaker 2 (24:23):
There's that old saying that diversification
fails when you need it the most.
Right, and much of that isrelated to the idea that when
you have high volatility,everything tends to change,
correlation wise, and convergeto one um, which makes me then
wonder if we should viewvolatility as an asset class,
(24:45):
because that's the ultimateinverse correlation right.
How should we think aboutvolatility and these volatility
products in that context, in theframework of better
diversification?
Speaker 3 (24:55):
Yeah, I mean, I think it's tough right, like the long
vol strategy, the hedging, withjust a holding tail risk, like
I think, in institutional worldit makes a lot of sense because
it's very, very thoughtful andthey understand what they're
getting for that payout on aconsistent basis.
But that's that at the end ofthe day.
That's the trouble is, howoften do you have these events
(25:17):
where owning volatility reallypays off for you?
There's another product outthere that's.
That's an ETF, that's aninterest rate hedge, and a lot
of money flowed into that afterthe rates rose substantially in
2022 or through the previousrate hiking cycle, and the thing
was up, you know, 20, 30, 40,50 percent over the course of a
few days or weeks.
(25:37):
But since then and holding itthroughout that period over time
, you've made almost no money inthe thing other than these few
days that you've owned it.
And so for retail clients, forthe investors that are out there
, it becomes really hard toconsistently justify something
that you know five out of sixyears you're probably not going
to make money on, or you'regoing to make very, very little
(25:57):
compared to other things outthere.
And so there is an optics tobuilding these portfolios we
like to steer away from it asmuch as possible, but you just
can't help but acknowledge that.
You know they always say thisabout like dieting and food
plans.
It's like the best plan is theplan you can stick with.
And for retail investors,sometimes they can't stick with
some of these more technicalproducts that are out there
(26:19):
because they they're just abovetheir grass and so you know,
global macro sounds reallycomplicated, but when we can
talk to an investor about thefundamental reason, we're in
something like a copper, forexample, right, hey, ai is
growing, electricity demand isgrowing.
All of that needs copper.
We really love that play overtime.
Now we can take that position,put it on, take it off.
(26:41):
We have over the life of thefund, but it's really easy to
understand for a client whythey're invested in that given
thing.
So I think it's really hard andalmost ephemeral to say someone
we're investing in volatilitybecause it's not something they
can hold, it's not somethingthey can they can really relate
to.
So much because it's sort of anabstraction.
It's a financial abstractionalmost.
Speaker 1 (27:01):
It's kind of tied to what you'd said earlier on, and
this is just a good visual onthe diversification, right, and
you think you have a lot, butyou really don't when you need
it most, right?
So you had mentioned thatcorrelations tend to merge to
one during times of stress,right, and we've seen it in 2022
, we've seen it in other yearsas well.
(27:23):
And again, when you just havetwo primary diversifiers
equities and bonds over 15 years, you get two colors.
The way you read these piegraphs are, the shading
represents the degree ofnon-correlation, right, and then
the numbers next to each, youknow, represent that correlation
to large cap stocks.
(27:44):
So US aggregate bonds over the15-year timeframe is 25%
correlated to large cap, but in2022, it was 67% Investment
grade bonds was 77% correlated.
When you look at global macro asa diversifier, global macro is
non-correlated for the 15 yeartime frame as well as when you
(28:05):
need it.
So correlations don't alwaysmerge to one if you have
multiple drivers, and you know,the point Matt was just making
is global macro, ideally, is nota drag on performance, right?
That's not what we want to be.
We want to deliver equity-likereturns differently over time
(28:28):
and, yeah, sometimes we willlook different.
Over a long term we'll lookdifferent, but we hope to
perform as well, if not better,than equities and do it in a
different way, which, again, iswhat diversification is supposed
to be right.
If you believe indiversification, you need to
have different drivers of returnso that you know when that bus
(28:53):
that we don't see hits us andcorrelations tend to merge
because in reality you didn'thave as many pretty little
colors as you thought you did.
You know you'll feel the pain.
Speaker 3 (29:04):
It's funny just thinking about the ags a great
example of you.
Know you'll feel the pain.
It's funny just thinking aboutthe ags a great example of you.
Know you were talking about howcorrelations go to one at these
volatile inflection points whenyou need your diversifiers the
most.
Well, in 08, long treasurieswere a phenomenal hedge.
Long treasuries didphenomenally well in 08, not so
much in 2022, right.
So we get pushback from clientson why do you own, like some ad
(29:27):
type positions in in fixedincome?
And it's because, over time,owning a little bit of duration
can really pay off in some ofthose more high level risk off
situations.
Right, it didn't this last timebecause inflation was wild and
we needed to raise rates toattain inflation, even those for
a short period of time.
(29:47):
So there were, there werecounter trends that were there
that just weren't going to workfor long bonds.
In that scenario, I mean, takeout the inflation part, Maybe.
Maybe the story looks totallydifferent coming out of COVID
and long bonds do work there,but occasionally trends going to
fill that need.
So we just feel that if we canbe thoughtful about the managers
we're selecting and the waywe're building a portfolio
(30:09):
together, we can offer two,three, four different layers of
protection inside the portfolioand, yeah, maybe two or three of
those don't work in the nextmajor drawdown, but one or two
of them should and that shouldprovide enough benefit to create
the overall return profile.
Speaker 2 (30:26):
I want to take some of the questions I'm seeing in
the comments.
This one's from Michael onLinkedIn.
What do your backtests of theanalytics used in managing
Dynamics indicate about theprospective performance during
times of a major marketcorrection?
Speaker 3 (30:38):
Okay so we don't have a systematic strategy.
We have a fundamentaldiscretionary strategy.
So the only back test we reallyhave is the hedge fund strategy
, which isn't something we canshare with retail investors.
Unfortunately, we can sharewith financial advisors, that's
not a problem.
So it's really hard for us togo back and say exactly what the
(30:58):
fund would have done,especially in an open
environment.
But we've been through somepretty volatile times already
over the last two years thatwe've run the strategy and I
think when you see the marketreally going through the
volatility right, the drawdownsin the equities, that's really
where our fund shines.
Now, some months when theequities are up, we're up as
well.
It's usually for weird reasons,like maybe gold was up at that
(31:20):
time, or silver did really well,or you know, the two year it
was all because of proposed ratecuts and a two year position
went sort of parabolic.
Um, there's all sorts ofreasons why inside the portfolio
it can do well duringvolatility time, but there's not
a back test per se cause.
It's not a formula that we'rerunning.
It's not an algorithm, it's.
It's a team of economists thatare looking constantly and
(31:43):
scouring the universes that theyhave to find supply and demand
imbalances and take advantagewherever they are.
And, importantly, noenvironment looks exactly the
same.
So what he was doing in 2010looks different than what he's
going to be doing today or in2015 or 2017.
So it's a little hard for us toanswer that question in this
(32:05):
type of form.
Brad, I don't know if youwanted to add anything to that.
Speaker 1 (32:07):
Yeah, I mean so, just to take a step back.
So our fund is and if you wantto share the screen, Michael,
there's a visual that goes withthis is 50% global fundamental
macro and 50% US equities.
Right, and the fundamentalglobal macro strategy, as Matt
said, has been run by a team forover 10 years now and for
(32:32):
financial advisors orinstitutional investors, we can
share the performance of thestrategy behind the mutual fund
Dimex Because, again, thestrategy is combining equities
with the global fundamentalsmacro strategy.
That's been run with real money.
It's not a backtest To Matt'spoint.
You can't backtest thediscretionary fundamental
(32:54):
strategy.
I'm sure there are some folksout there that do backtest the
discretionary and they say itwas a full moon and it rained
the night before and it wasended on the 12th, so I happened
to sell right before the marketcrash.
Those people are all on Twitterflashbacks yes, they are.
Speaker 3 (33:11):
It will drop to you, but I could guess yeah.
Speaker 1 (33:13):
Yeah, yeah, I've run across them.
Be careful out there folks.
Um uh, but we do have realworld performance history of the
global macro strategy and wecan share for financial advisors
or institutional investors Ifyou just email us.
Either Brad at dynamic wgcom orMatt at dynamic wgcom is email
(33:35):
us and we're happy to get on aquick zoom and share those
numbers with you.
Speaker 3 (33:40):
So sorry for that and and not answer answer.
Yeah, that's just media, theone that that's media and
compliance is what that is rightthere yeah, there's a another
question off of youtube.
Speaker 2 (33:51):
I want to hear from matt here on youtube.
Uh, do you see any riskcorrelations with equities
trading?
High valuations and privatecredit continue to grow as a
yield alternative.
So let's go back to drivers ofinvestments, private credit,
private equity, I mean.
It's still largely based on thesame thing.
Public markets are based off ofright, but maybe with a little
(34:13):
bit more opaqueness, fancinessand leverage.
Yeah, what are your thoughts onthat?
Speaker 3 (34:17):
Private credit's a weird space for us, because I
understand the appeal of thestructure and the lack of public
mark to market accounting.
There's just a net benefit andas long as more dollars chase
more deals, liquidity is not anissue, and so they'll continue.
(34:38):
You know, I'm XYZ privatecredit fund.
I have a company in theportfolio that's struggling.
I'm more apt to say, well,that's okay, we can extend terms
or we can provide someadditional liquidity or provide
some additional funding to makesure I don't have a bankruptcy
in the portfolio, to make sure Idon't do that.
In the public markets you haveto ensure that every bondholder
out there is going to agree tothose same terms, and that's a
much harder prospect than ifit's just one company or two
(35:01):
companies owning all of thepotential debt for this given
company.
So, yes, the driver of returnat the end of the day is the
same.
Right, it's economic growth.
Does this company continue togrow their earnings to pay off
this debt?
Usually at very high interestrates?
Right, we talk about, you know,bonds.
You know the interest ratesbeing, you know, four and a half
(35:21):
percent or 5% right now, ormortgages being seven.
Right, these private creditdeals are in the 10 to 15
percent neighborhood and I don'tknow many companies, especially
small companies, that are ableto withstand that level of
interest rate for a long periodof time.
So my biggest concern is whatdoes this look like when the
(35:43):
dollars stop flowing intoprivate credit, when they've
exhausted all the 401k money?
It seems to be.
I mean, we're seeing it kind ofin private equity right now.
Private equity is going throughthis lull of monetizations where
they just can't sell portfoliocompanies and they're owning
them much longer than theyexpected.
Or if they're selling them,they're just selling them to
another private equity company.
They're not IPOing them in thepublic markets and to me that
(36:05):
expresses that there's someexhaustion in that market.
People pay multiples that youknow five years later other
people aren't willing to pay anappreciated multiple on top of
that or the company never grewinto what they prospect.
Private credit feels like whereprivate equity was maybe five,
six years ago, where it's.
We're coming off this great run.
The Clipwater Index looksphenomenal, you know right.
The returns look great andthere's very little volatility.
(36:27):
This is perfect for all myclients and when you scratch a
little bit below the surface,you start finding out that, okay
, yes, it's interesting.
It's nice that we don't havedefaults just because a company
missed earnings or had a badproduct launch one quarter, but
at the end of the day you'restill owning debt of that
company.
Will that company continue tooperate and be able to pay it
off at some point in the futurefive years, seven years, 10
(36:49):
years from now?
And I don't have confidencethat a lot of these companies
will be able to do that.
But it's like valuations, it'sa timing game and I've been
wrong on the private equity side.
I'll probably continue to besomewhat wrong on the private
credit side.
So what I'd say is I think insmall doses it makes sense for
(37:10):
the right clients.
But again, that's not advice,that's just admitting that for
some clients it's going to makesense and it's not something we
really dabble in too much.
But if you ask me to boil downwhat the drivers of return are,
they're not distinctly differentfrom equities.
They just have a higher hurdlefor them being a problem in your
portfolio.
Speaker 1 (37:27):
Let's say yeah, one of the things I think about is
so we have a very small YouTubechannel and every week I try to
publish a small, a short, threeto five minute video.
I put it on LinkedIn andYouTube and I end every video
with thanking people andreminding them to make smart,
logical and fact based financialdecisions.
And when I think of, you know,12, 14 percent yields, just
(37:51):
logically think to yourselfwhat's the risk associated with
that?
To Matt's point why would acompany borrow money at 12 to 14
percent if if I'm not going tosay if they were financially
stronger, but why would they?
Right, why do they have toborrow at those types of rates?
And you know, you look at theseprivate credit funds and you'll
(38:12):
see a line that goes at a 45degree angle and you look at a
Sharpe ratio.
I'm like my gosh, it's got a 37Sharpe ratio or some infinity
Sharpe ratio because it's nevergone down.
Right, and it's phenomenal.
But again, just logically thinkabout it.
Right, it's, it's.
Things aren't marked to marketuntil they are Right.
And we've seen it where it'slike oh yeah, it's that part,
(38:34):
it's that part, it's that part.
Nope, zero, just now.
Speaker 3 (38:37):
I just don't think it is probably a non-traded BDCs
or non-traded REITs, Right?
I mean, anytime you get intothe private markets it becomes a
little bit more wonky as toassuming what the risks are,
because they can be papered overreally, really easily.
So I don't always know that.
I don't think that investorsalways appreciate the risks that
(38:57):
they're taking and what they'regiving up, what they're getting
for giving up the liquidity andthe transparency that they have
in public markets.
Speaker 1 (39:04):
You just have to be very careful.
Right, we're not saying youknow, don't do them, but you
have to be very careful.
And there's, you know, justlogically, think about it.
Speaker 3 (39:13):
More importantly, hopefully you're finding ones
that are actually somewhatunique, right, that are actually
doing something a little bitdifferent than just saying I'm
loaning to small and mid-tierbusinesses that need credit
between 50 and 100 milliondollars, right like that.
That's, that's very plainvanilla, where we sort of get
our ears perked up as someonethat's doing something truly
different.
Speaker 2 (39:32):
That might have, you know, some real correlational
benefit, regardless of theprivate structure or whatever
might be there um, as we wrap uphere, for those that want to
learn more about uh dy mix, yourmutual fund, where would you
point them to and how can peoplefollow you?
Speaker 1 (39:47):
Yep, so DynamicWGcom, as it says after my name.
There's our primary website.
You can go there to learn moreabout us.
Both Matt and I are on LinkedInand the white paper we
referenced the research paperagain is available through
RethinkAssetAllocationcom.
Reference the research paperagain is available through
rethinkassetallocationcom.
(40:08):
A quick URL to download ournewest thought leadership.
And don't be sure to put you onour regular monthly newsletter
where we give timely commentary.
You can find again DynamicWealth Group on YouTube.
Drop us an email Again, brad atdynamicwg or matt at
dynamicwgcom, and always happyto chat with folks.
Speaker 2 (40:29):
Thank you everybody for watching.
I certainly appreciate thecontinued support with these
live streams.
Thanks, matt and Michael, forthe questions live as we were
streaming and hopefully we'llsee you all next episode of
LeapLag live with a new host.
Thanks everybody.
Cheers of Leigh Blagg Live witha new host.
Thanks everybody, cheers, thankyou.
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Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
The Clay Travis and Buck Sexton Show
The Clay Travis and Buck Sexton Show. Clay Travis and Buck Sexton tackle the biggest stories in news, politics and current events with intelligence and humor. From the border crisis, to the madness of cancel culture and far-left missteps, Clay and Buck guide listeners through the latest headlines and hot topics with fun and entertaining conversations and opinions.