Lead-Lag Live

Dynamic Portfolio Strategies for a Shifting Financial Landscape with Brad Barrie and Matt O'Brian

• Michael A. Gayed, CFA

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Unlock the secrets of crafting a robust investment portfolio with insights that challenge conventional wisdom. Join me, Michael Gayed, alongside experts Matt O'Brian and Brad Barrie, as we explore the critical role of diversification and the potential risks when concentration takes center stage. We'll unravel the intricacies of true diversification, discuss "line item risk," and emphasize why preparation should be prioritized over prediction in the ever-volatile market landscape.

Our conversation ventures into the uncharted territory of risk management by challenging traditional views on asset allocation. With insights from Harry Markowitz and our guests' expertise in tactical management, we highlight the necessity of understanding varying risk profiles rather than simply spreading investments across asset classes. As we dissect the influence of market psychology and valuation metrics, you'll learn how these elements affect investment decisions, especially during economic downturns.

Discover innovative strategies for navigating complex market environments through mutual funds and global macro hedge fund approaches. This episode uncovers the often-overlooked advantages of mutual funds in less traditional asset classes and their synergy with hedge fund strategies. As markets continue to shift, we advocate for tactical active approaches and flexible portfolio management, ensuring you're equipped to adapt and thrive in a fluid financial world.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Dynamic Wealth Group and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

And sometimes people forget what diversification really means. I've used the old adage diversification means always having to say you're sorry, right, and if you look at your portfolio and everything is going up, you're not diversified right. And again, I was an advisor, so I dealt with what we call line item risk. Line item risk is you look at your statement and you got 10 holdings and eight of them are up and two of them are down, or two of them are flat or not up as much. And then the questions come in why is this one not doing well? Why is that one not doing well? And what I would tell my clients is well, it's doing its job, you know. And I would say if everything goes up at the same time, it usually means everything will go. And my clients were smart, they knew they'd finished the sentence Right. So advisors need to give clients credit and just need to help them understand and if you're an investor, you know this If everything goes up at the same time, it means everything's going to go down at the same time.

Speaker 2:

And we'll talk to Bradbury Matt O'Brien, because they're kind of kindred spirits when it comes to how to think about markets tactically and from an active perspective and how to think about diversification and how to think about conditions as opposed to predictions, which we're going to touch on here. And, with all that said, my name is Michael Guy, publisher of the Lead Lag Report. This conversation is sponsored by Dynamic Wealth Group. We're going to be talking about their fund as well as their firm in general. I want to have Mr Matt O'Brien introduce himself. Matt is the jovial one of the group. Yeah, sure.

Speaker 3:

So, just as an introduction, I'm an analyst here at Dynamic Wealth Group, dynamic Alpha Funds, helping out on the fund, but also primarily focused on our OCIO, where we really help partner with advisors and help them navigate sort of this new frontier of investing right, the getting out of the two-dimensional world of stocks and bonds and thinking about allocating more towards tactical strategies, alternatives etc. So my background has been in running home office models for almost 16, 17 years now. So building portfolios has been something that I've just been focused on for for my entire career. So, uh, a lot of depth to that analogy, unfortunately.

Speaker 2:

And, of course, mr Bradbury, go ahead, brad.

Speaker 1:

Yes, sir, yes, sir, yes sir. Um, yeah, as Mark, as Matt said, we're an OCIO firm. I like to actually say that we're a partnering CIO firm, uh, working with advisors, because we with advisors, because we try to improve on the traditional OCIO model or the traditional TAMP model that an advisor might utilize, and work with advisors to build differentiated portfolios and we manage a mutual fund. I myself was a financial advisor for 20 years, so I sat at the table and I dealt with any question and you could imagine the colors and the depth of the questions, especially during days like today when the market seems to wake people up with some gyrations. So I had a little extra caffeine in the morning this morning the market did. But yeah, I could probably go on and on, but not to bore people.

Speaker 2:

There's definitely more Caffeine is one way to put it. There are more illicit ways of saying it, based on what's going on in markets today. Let's talk about this. We're talking today, on the 27th of January, a lot of movement following this sudden realization by the street that guess what there's competition when it comes to AI with China and this deep, deep seek dynamic. A lot of the comments I put out when we're people don't realize when I post, when I start writing on on X, I'm actually laughing as I'm writing. I'm trying to get a little comedic with it, but I think there's a lot of interesting dynamics here. I want to, I want to ask each of your thoughts from an OCIO perspective Is the stock market diversified when a single stock, nvidia, can be down that hard and take down averages with it?

Speaker 1:

no-transcript. Away with the S&P 500 index mutual funds. Well, there's a loophole to allow for index strategies in certain sector funds. And what have you? They usually sector funds are not called diversified. Um, so yeah, the S and P 500, if that's what you're referring to as a stock market, it's, it's not diversified, it's it's significantly concentrated. And look, if people had been invested, they benefited from that concentration, uh, in the growth of the market. But prudent money management is balance. We'll talk about prediction versus preparation. It's being ready for anything. So yeah, to answer your question, I would say no.

Speaker 2:

Matt. Is there any counter argument? Can you tell me that the S&P is diverse? Give me something, you're the jovial one, come on.

Speaker 3:

I got nothing for you, buddy. I mean, at the end of the day, I think brad nailed it on the head it's something we've talked about to our teams time and time again. Just pointing out the concentration and and uh, I I think the funniest is, you know, occasionally we get pushes for like benchmarking, the sp, and you're just like, well, we're, we're trying to build a diversified portfolio here. So large cap US stocks is in our entire universe. More importantly, large caps tech stocks is not our universe. And so, like you know, we beat up on the style box right. Look where the style box went for the S&P 500 over the last 25 years and the shift it's been for more of a blend oriented index to clearly a growth and, frankly, tech oriented index. So, yeah, nothing to add. Unfortunately, I wish I could be the red hat here.

Speaker 2:

Okay, so I like this direction for a number of reasons. To say significantly concentrated, I've called it the concentration bubble. You also argued significantly overvalued. Which of those risks the concentration risk or the overvaluation risk and I know they're obviously connected Do you tend to think it's more of a uh, a danger for investors?

Speaker 1:

uh, brad the uh, the the over concentration risk, or the uh the lack of diversification or the evaluation in general being as high as the evaluation.

Speaker 1:

Which is the greater risk? Uh, I mean pick your poison, right? I mean it's, it's, you know, to some degree I would say it doesn't matter, because they're both very high risks and, like you said, they are related. I mean, a day like today, it's the, the over concentration risk, and look, they're so related, right? I mean the term price to perfection is used a lot in our industry and we're seeing it today. To perfection is used a lot in our industry and we're seeing it today.

Speaker 1:

You know the, the, the ai stocks were priced to perfection, the, the very, very high valuations some would call ridiculous valuations were justified by the continued growth. And, look, in some cases it's right, right, I mean, you could look back, and I'm a fan of tesla and, and you look back, and Tesla's valuations have been high for quite some time and it grew for quite some time, right, I mean, the thing about a bubble is you can identify a bubble, but, but you can't and I'm not saying we are or are not in a bubble, but but, um, you can't necessarily identify when that bubble is going to pop and you don't know what that, that that pin is that's going to going to pop it, right. So, um, you know, that's why diversification is so important, right? And sometimes people forget what diversification really means. I've used the old adage diversification means always having to say you're sorry, right, and if you look at your portfolio and everything is going up, you're not diversified, right?

Speaker 1:

And again, I was an advisor, so I dealt with what we call line item risk. Line item risk is you look at your statement and you got 10 holdings and eight of them are up and two of them are down, or two of them are flat or not up as much. And then the questions come in why is this one not doing well? Why is that one not doing well? And what I would tell my clients is well, it's doing its job. And I would say, if everything goes up at the same time, it usually means everything will go.

Speaker 1:

And my clients were smart, they knew they finished the sentence right. So advisors need to give clients credit and just need to help them understand and if you're an investor, you know this if everything goes up at the same time, it means everything's going to go down at the same time. And yeah, we wish we all had a hundred percent and triple leveraged NVIDIA up until this point. Um, but you can't time it right. So that's what we focus on is, is we call it true diversification or multidimensional diversification, and it's more than just stocks and bonds, it's approaches, disciplines, you name it. But yeah, that lack of diversification overall, combined with the valuation is is, is a concern, is a concern.

Speaker 2:

I want to play with that phrase you can't time it Because some people hearing this would say well, if you can't time it, then what's the point of anything that's active? Active is, to some extent, timing right and, matt, I'm going to go to you on this because I think this is sort of interesting. The reality is everything is there's some degree of timing in everything. Right, if you're onboarding a new OCIO client, there's timing in terms of when you're actually implementing right.

Speaker 2:

Based on whatever plan you're going to implement, on If you have new income and you're going to do dollar cost averaging. Well, that's timing too. I mean everything's timing to some extent, isn't it?

Speaker 3:

Yeah, I mean, I think you're right. It's like everything. There's this assumption of you take things to extremes, right. So like when we talk about timing, we're talking about making drastic moves, right, saying, hey, the you know, the Shiller PE right now is at 37. And so we should be selling stocks and we should be buying equal weight and we should be doing X, y and Z because of that, and I think the more the approach we would take, especially in building a portfolio, is more so. Let's just be wary of where things are right.

Speaker 3:

There's the old adage that bull markets don't die of old age. I think it's the same for valuations. Right, valuations get extended I think Howard Marks wrote about this in his update to sort of identifying bubbles in the market. Right, and it's more psychological than it is based on the numbers. It's people willing to pay whatever price to get access to NVIDIA, to get access to Bitcoin, and not doing the math of saying what has to go right for this to continue, and so that psychological aspect is harder to time than I think people give credit for.

Speaker 3:

As a reformed value investor, I guess I'd call myself. I still have a sweet place in my heart for old school value, but the reality is, if you would have followed value metrics that were built in the 80s or in the 50s or 60s, going back to Graham and Dodd, you haven't made any. You've made very little money in the market over the last 5 or 10 years, basically since QE. So it becomes really, really hard to say I want to time the market from that perspective. But I mean, it's something to be aware of, it's something to be wary of, it's something to sit there and say, hey, I haven't rebalanced my portfolio in three years and now, all of a sudden, spy or whatever ETF tied to the S&P is now eating up 50, 60, 70% of your risk budget. Like, is now eating up 50, 60, 70% of your risk budget. Like, let's trim that back. Let's think about adding smart diversifiers, not necessarily just buying small cap or mid cap, but thinking about other return streams you can add to the portfolio to create that robust portfolio overall.

Speaker 2:

I think we also have to make a distinction in terms of what it is worth timing, sure, so the studies on market timing show that market timing doesn't work and in my view, it's not because it's like. Why do market timing studies show that market timing doesn't work? It's because you're timing cash, you're timing the asset class, that if you're wrong, you don't really have a chance at making money or compounding in a meaningful way, as opposed to going into a different asset class or over-weighting or under-weighting. That's a different type of timing, because even if you're wrong in your timing, you still have a chance of making money, which is, I think, an important framework. It's like you want to allow yourself, ideally, an opportunity set where you time that opportunity set but still have a chance to compound. How do you think about where we are, brad, in terms of asset class timing here? I think it's an important part of the active discussion.

Speaker 1:

Yeah, and it's interesting because sometimes people will get a little confused because we don't like. You said you can't time the market, but that doesn't mean you shouldn't be active or tactical or flexible, right. And and that goes into our philosophy on diversification right. And if you look back to what Harry Markowitz and the Nobel Prize for asset allocation said, is he never said have your assets in different asset classes and diversify asset classes? He said, have different risk profiles. And if you have stocks and bonds, you have two risk profiles. And if you have stocks and bonds, you have two risk profiles. And if you added a tactical stock manager, you actually added a third risk profile. Because the risk to stocks is earnings go down, economy slows down. What have you right? A competitor from China comes out and undercuts you. Right, that's the risk to stocks.

Speaker 1:

But a risk to a tactical stock manager or fund is that strategy or manager's approach successful or not? Right, so that adds an entirely different risk profile. Same with bonds. You can have buy and hold bonds or you can have a tactical bond fund where the manager could say, as a lot of them did a few years ago, and said really, bonds, bonds, real yield right now is about negative one to zero. So do I really want to be in three to 10 year bonds? Are going to give me negative one to zero yield? Probably not. Maybe I should be in floating rate or short term or certain you know international bonds. And let me deviate from what the index that tells me to do. Right, that adds a risk profile but it takes away another risk and, and that's our philosophy on multidimensional, that's what diversification is always supposed to be. So now, being tactic, look, it always makes sense to buy and hold and always makes sense to be tactical at the same time. Right Again, that's diversification.

Speaker 1:

Because one of the things I say a lot is I say it's the bus that you don't see that hits you. And I might've missed it last week, all the television specials on Deep Seek I think I missed that on CNBC and all the other ones, because I'm sure they talked about it. Right, I'm sure everybody saw that bus coming I'm being sarcastic. Obviously Nobody saw deep sea, I mean per se. And that's a bus that you don't see that hits you, right. And and because if you saw the bus coming Right, then you'd get out of the way. Right, then you'd get out of the way.

Speaker 1:

So if people see stuff coming like inflation or, or you know, tariffs or whatever, it's already priced into the market. The market's pretty fast acting. So that's why you know, that's why, again, our philosophy is don't try to predict but prepare, but prepare. And preparation indirectly includes some tactical management, which is not prediction per se. It's a different approach to investing Because, like you said, michael, even S&P 500 to some degree is timing. You look back at 30 years. Technically that's a little bit of a backtest. It's a real worldworld back test, but it's still a back test.

Speaker 2:

It's 100% a back test. I'm laughing as you're saying that, because when I was presenting at CFA chapters across the country, I'd show back tests of certain tactical strategies and I'd always ask this room full of CFA charterholders how many of you believe in back tests? Half the audience would raise their hand and then I'd say well, how many of you believe in backtests? Half the audience would raise their hand and then I'd say well, how many of you believe in buy and hold? The other half would raise their hand and then I'd say I guess you all believe in backtests, because buy and hold is a backtest, backtest with one trade.

Speaker 2:

Of course it's a backtest, right. I mean, it's a backtest that sometimes fails with lost decades, right, which is, I think, an everyone's timing, even though there's the argument that you shouldn't be timing or can't time markets. There is the argument that, well, you can't necessarily predict. But the reality is, every action to some extent is a prediction. But I guess the issue is, what is it that you're predicting? If you are slowing down while driving, entering a storm, you are predicting that you're going to crash. That's why you're slowing down.

Speaker 3:

Yeah, I think the prediction side of it's maybe a little overstated, right, prediction implies some clairvoyance, right, that we have a definitive endpoint, as opposed to acknowledging that the risks are more elevated than they might be.

Speaker 3:

And I think that's the valuation discussion, right.

Speaker 3:

When the Shiller PE or just the PE is 27 or 37 on the Shiller PE, those things tell you that in order for this to continue, earnings have to grow at X percent to maintain this long-term, and any headwind is much more detrimental than it would be at a PE of 15 or 10.

Speaker 3:

Right, like you know, think about and this is why the psychology of markets is so interesting is because, if you think about it like I remember I came into the business around the great financial crisis and trying to get anyone to put money to work in the three or four years after the GFC was hilarious, but meanwhile you had generational buying opportunities in these names. And so it's this idea of yeah, maybe we don't own as much in bonds when PEs broadly are in the single digits. Right, but it's never. You know, part of part of our philosophy is we just generally don't want to zero weight certain things when there's, when there's long term merit to holding them Right, like that's more of our approach. So it's it's a swinging pendulum more than it is a light switch, if that makes sense.

Speaker 1:

And I think there's short term predictions and long term predictions. Right, and you know you slow down because you see the clouds, you're not in it. You see the clouds, you don't. You don't slam on the brake thinking, oh, the deer is going to pop in front of me. Until you see the deer, then you do it. Right, you're not just going to haphazardly slam on the brakes. You know, and that's not a very fun, fun ride. And it's funny because we're still in January, right, and you know, new Year's resolutions and predictions are a popular thing, especially in our industry with like S&P 500 price targets. So we have a fun slide, michael. I don't know if you want to share that now. So this is an interesting slide. It shows the beginning of 2024, where a number of different strategists from Wall Street were predicting the S&P 500.

Speaker 1:

To finish, research budget on all these firms, but there's some pretty large firms in there, I would imagine more than ours, yeah, more than Mike was probably, even probably, in the tens.

Speaker 2:

I got no budget for anything. I got no budget for anything.

Speaker 1:

The research budget in all these firms is probably in the hundreds of millions, I would guesstimate, and the average was about a two to 3% rise in the S and P 500 last year and we all know where the market finished it was up 25 ish percent give or take, um. So you know, the the best and brightest minds can't predict a one year timeframe, um, and it puts it in perspective, right. And now we're in, you know, 2025 and predictions came out and average prediction was a fair amount higher than it was last year, um. Are those predictions going to be right? You know there's, there's, uh, another slide. I'll let Matt go through.

Speaker 3:

Yeah, it's just a study man group did at. I think they released it sometime last year, but it shows exactly what we're talking about, right, and we hate the design of this because the colors are just awful, but that really hard to read light green line is the actual return of the S&P, and every other line there is the predicted return by those different investment banks. And so, to be fair, I'm not going to pick on any one of them because they're all wrong from time to time and there seems to be no consistent winner in those, but it just it speaks to the idea of we start every year with with our teams and talking about how, how we're thinking about the year to come, but like they're always surprised when there's not some big aha moment and big, you know, reallocation trade on January 1st to take advantage of it.

Speaker 3:

Because the reality is, most of the time, the portfolios are built to help those things, to deal with those things, and it's shifts around the edges or adding a more unique allocation. It's not what CNBC would have you believe or what some of these portfolio strategies come on and say oh well, for 2025, we decided and this is what I always love it's first week of January, this is how we're allocating portfolios for 2025. And it's like well, why weren't you thinking about this three weeks ago when it was the middle of December? The calendar is great and all, but at the end of the day, this is a perpetual machine and we've got to continue thinking about where the puck's going, not where it's been. And they just look at it and say, well, it's January, here's our market predictions for the year, and they update them. But it's usually they update them, you know, after the floor has been blown through or the ceiling's been blown through, and then it's a time to raise those price targets because you know we'd look silly otherwise and they'll take credit.

Speaker 2:

Oh, I hit a price target. Yeah, but price target.

Speaker 1:

It's the end of the year price target, not the March price target.

Speaker 2:

Yeah, we were so good that we was early in that. It's bizarre to me how the street operates. Having said that, I mean this is not like news. I mean I think a lot of people know that price targets are largely nonsense and nobody can predict anything, including the Fed, by the way, and we clearly have seen all the credit around. The Fed's done such a great job. Well, if they did such a great job then we wouldn't have had inflation to begin with. It's like they saw it wrong too. So I mean, if we agree that nobody can predict what tomorrow brings, why do so many people still do it? I mean, is it just entertainment? Is it just we need to latch on to something in the face of uncertainty?

Speaker 3:

Humans don't do well with uncertainty. I think this has been studied time and time again and that the human mind just is not built to deal with uncertainty of any way, shape or form Right. And there's plenty of implications that outside of investing, obviously but just an inside of investing it feels warm and snuggly to say, oh well, if all the people, all the banks that are invested in people staying invested in equities, think that the market's going to go up this year, well, that feels good for me to continue being in the market and at the end of the day, I mean, our business has some optics to it and I think that's part of it. And it's unfortunate because I think at least us on the call, like it tends to be more of like okay, well, that's great and everything, but really, what does this mean for how I'm actually investing? And it's just why our strategy looks a lot different than a lot of others, because we don't look at it on an asset class level as much as we do.

Speaker 3:

What's the historical correlation between these two strategies? Has it been consistent or is it more spurious? Where times it flips around, and understanding how to build that into a portfolio Like that's much more important to us than what asset class it's in. I give a an example to some of our teams that, uh, I worked for a team that was at Ameriprise for for a number of years and there was, there was a high yield bond fund that got kicked off the platform because it was in the 99th percentile. But they bought bonds. They turned over their portfolio every 90 days, like 70% of their portfolio turned over, so there was almost no volatility for the thing and it was yielding three times what you'd get in money markets with volatility. That was under one.

Speaker 3:

And it's this idea of well, I was in the high yield asset class, yeah, but that's not what you're thinking of when you're buying HYG right, or you're buying just a long only. You know duration, or you know a three-year duration high yield bond fund that's buying non-rated issues. It's a very different strategy overall, and if you just focused on the asset class, you weren't focused on what it's actually delivering for your portfolio, which, at the time, was steady income that was not to be found anywhere else. So it's just it's tough to get out of that mindset of thinking about what's the S&P going to do, because people can focus on one or two things, and so it's our job to refocus them on. The more important thing for most clients is making sure that their investment portfolio grows and we maintain the right level of risk so that they can achieve their goals, and we maintain the right level of risk so that they can achieve their goals. It's never beating the S&P, year in and year out.

Speaker 3:

That's a fool's errand for a lot of reasons and for the people that can stomach being long, only equities all the time.

Speaker 2:

God bless them. It's not for me, you know like I think about.

Speaker 3:

You see, all these influencers, like these younger, millennial influencers and I'm a geriatric millennial so I'll admit that as is but they look and they say I made a million dollars by doing X, y and Z and it's like their food budget was like four dollars a week and you're like what kind of life is that to lead?

Speaker 3:

Well, that's kind of like the decision to own equities as your only S&P is your only holding of.

Speaker 3:

Like the decision to own equities as your only S&P, as your only holding.

Speaker 3:

Are you able to stomach a 25% drawdown or a 30% drawdown with nothing else in your portfolio that might be up or sideways or delivering the income you may need off that portfolio? So it's not saying, from an academic perspective, it may not be the right thing to do for a non-emotional you know, android, but for those of us humans, like our minds don't work that way that risk is very, very painful. Those drawdowns are incredibly painful and so it's always when I do see and there have been, to be fair, I've run into a handful of clients that own like three things and it's like you know, total market and this, and they've stomached and they're the ones that actually call and put money to work when the market draws down. But for every one of those, there's 100 others where, when the market draws down by 3%, or when COVID was happening, or the GFC, or 2018 in the fourth quarter, they're on the phone every day like what's going on in my portfolio, walking them off that ledge constantly.

Speaker 2:

You had mentioned you said our strategy so we should talk about that strategy. Let's get into it. So you've got the OCIO business. First of all, I don't think we've ever actually talked about this. Why go into launching a mutual fund.

Speaker 1:

Yeah, I mean, it's a long story, right, I mean yeah, yeah, yeah, I mean again, I was a financial advisor for 20 years. I transitioned my practice to my partners and started exploring other, consulting other advisors, helping them on advanced estate planning cases, charitable planning cases. You know, if we really want to do a separate podcast, we can talk about what I call not I call it, but it's called a flip nimcrut with a spigot. A flip nimcrut with a spigot is a great estate charitable planning vehicle. You know it sounds like a word salad, but-.

Speaker 2:

That sounds fascinating.

Speaker 1:

It is fascinating actually. It's an amazing vehicle and I've used it and helped other advisors use it in the right type of situation, with highly appreciated assets, business sales things like that. So I did a lot of that after in 2017, when I transitioned out of my practice and a lot of the consulting help I was giving advisors in 2022, kind of positioned towards what do you know about investing, because the market with stocks and bonds it's killing us, and started to then focus on the OCIO. And then the OCIO is really what led into the fund, because the OCIO introduced us to a lot of unique funds and fund providers. And I had a relationship with a hedge fund manager that great global macro, long short futures hedge fund that I was invested in for some time and he knew my background and knew I had connections with financial advisors and said you think other advisors would like this hedge fund? And I said well, I like it. Why wouldn't other people like it? And we presented the hedge fund by itself to some advisors at some conferences and advisors loved it.

Speaker 1:

The performance of the fund was great. Market beating, even after the two and 20, is non-correlated. And the number one question we got was what's the ticker symbol and we said no, it's a private placement, accredited status two and 20, paperwork, money getting wired and advisors are very busy individuals and with compliance and regulations and communication and staying on top of the newest tax and estate planning rules. So it didn't go very far as a hedge fund for advisors to buy. So but through the OCIO, building connections with amazing mutual fund companies, we partnered with a mutual fund company. Advisors Preferred and presented the idea and thus we created a mutual fund. Never you know 20 years as an advisor, I never once thought I'd be managing a mutual fund. Never you know, 20 years an advisor, I never once thought I'd be uh, managing a mutual fund. But uh, life is interesting and sometimes you gotta open doors as they uh come to you and uh um, we did and uh, that's where we are. So we created a mutual fund that combines the uh? Um mutual fund, that combines the global macro hedge fund strategy with stocks. So we think now is probably an even better time for the strategy than ever, especially with valuations where they're at.

Speaker 1:

So actually, if you want to share the screen, I'll show the valuation chart and that'll pivot pretty well into the fund. So this is a common chart. Jp Morgan guide to the market has this type of chart in there. This is S&P 500 with the starting valuation Shiller PE ratio. On the horizontal, the red line is where we are now with the current 37 Shiller PE. The red line is where we are now with the current 37 Shiller PE. And then the returns on the vertical are the forward and the following 10 year forward returns. Right, so there's a pretty obvious correlation the higher the valuation, the lower the future average returns over the next 10 years. So that's this is again. Is this predicting? No, because, again, if we looked at a one year chart of this, it looked like I sneezed on it. Right, it's like dots all over the place, high and low, and market could go up 30% this year or down 30% this year. There's no correlation to a one year or two year return based on PE. But at the longer term, again, seeing that storm cloud out there, you can start to slow down because there's storm clouds out there, right, and the averages are going to be not the greatest and interesting to now. So this is shown pretty commonly out there in the market.

Speaker 1:

We did some further analysis to say what does a global macro strategy look like. So this is the global macro index, and very interesting in which you'll see is non-correlation during a fair amount of it and some negative correlation, where global macro tends to do very well during periods of higher valuation metrics Right, it also does well during periods of normal valuation metrics. So this we saw very interesting, very timely as it is, it shows us that now is a great time to to gain access to global macro strategy, and you know, this is also what we call. It's what preparation should look like. Right, because we're not saying only be global macro, and this is one of our key decisions in creating the mutual fund.

Speaker 1:

We didn't want to be just pure global macro. By combining global macro with equities, you could kind of, if you averaged them, you're going to be closer to the middle most of the time. Closer to the middle most of the time. Right, and my joke was going to be I wish we knew of a mutual fund that combined global macro with, uh, with stocks, and we do.

Speaker 1:

Um, so this is our uh, uh, most recent fact sheet for the mutual fund and again, you can see that, um, it's, the purple side is half the global macro and then the green side is we call it strategic equity or basically buy and hold equity.

Speaker 1:

We're not trying to get cute, we're not trying to put more in growth, less in value or dividend or smaller mid cap. It's just a buy and hold equity exposure. And then we're very tactical, extremely tactical, with the global macro futures, with the ability to go long or short, the gold seal. There you can see, we're actually the number one rated mutual fund in the macro trading category for Morningstar last year, which we're very proud of because it means we made our investors money, which, again, as an advisor for 20 years, my goal was to help my clients reach their goals and that's why I did the job. It's extremely rewarding job and being able to help people retire, send their kids to college, live their dreams, and now, as a fund manager, we're able to help advisors do the same thing with a great, unique, innovative strategy.

Speaker 2:

Yeah, and congrats on the performance. I mean I was looking at Morningstar on my other screen as we're chatting because I haven't seen it in a few weeks, but yeah, I mean, you actually crushed the category last year. For sure. A lot of people watching may think that mutual funds are kind of a generation prior to us type of vehicle. Right, as I think about ETFs, and I happen to think that that's completely wrong, and as somebody who also, you know, lives in that space, talk through why maybe the mutual fund structure actually could be beneficial for something like this, as opposed to an ETF where there might be a temptation to do the wrong thing.

Speaker 3:

Matt, where to start? Right Like I think let's start at the top end, right Like there might be a temptation to do the wrong thing, matt. Yeah, go ahead, matt. Where to start? Right Like I think let's start at the top end, right Like, forgetting the nefarious reasons of why it may be easier to do an open end versus an ETF, but the number of like, if you look at the ETF world and think of all the thinly traded or low asset ETFs out there those people that have traded ETFs in size for advisors in any way, shape or form, it's kind of a pain. It just requires a lot more attention. It requires a lot more details and when you're in less traditional asset classes outside of very liquid large cap equities or fixed income, if they're not using swaps or something on the back end, your pricing and placing big trades can really be deleterious, right Like.

Speaker 3:

It could be a big headwind to whatever the returns you're actually delivering in the underlying arm, not to mention if you've got someone active like the hedge fund is on our side. Getting a sponsor to align with those trades in real time can be a bit of a pain and it takes out a lot of the benefit where when he trades he block trades across all of his accounts at once. It gets allocated to the fund the same time as it does to his hedge fund clients, to his SMA clients, everyone. So it eliminates that ability because all of a sudden someone wants to create some units. All of a sudden we're now buying at whatever price might be there. He may decide he wants to get out of that position and wouldn't have added to it if we had other funds, other money coming in. So let's just start there. It's just easier. Tax benefit there's no real tax benefit to the future side for us inside of an ETF as long as we're assuming it's not done via swaps or something like that, which would be a huge cost of performance to the end client as well.

Speaker 3:

So from what delivers the easiest and best solution for clients, it ends up being an open-end fund for us and it's one of the reasons why, whenever you see a lot of the alternative mutual funds, they have to go into the reasons and things they can't do. Because Not open-end mutual funds, etfs in the alt space that are active. We have to go into all the reasons. This might be different than an open-end version of it. Or hey, we can't trade these overnight futures because the market makers just don't like it for us inside this product which, like JGBs, that's a huge market for futures but that's fully traded overnight. That may not be something that you're able to invest in and scale in those. So it gives us unlimited ability and, frankly, we don't trade the equity side too much. I mean, as long as we're in that inflows hopefully, as long you know, knock on wood that keeps up and equities continue to appreciate, we don't have to actively buy and sell those equities regularly. It's there to serve as a counterweight to the global macro and if you go to that that's you don't have to go to it. But the slide with the two crossing trend lines for the 10-year forwards, that's the whole idea.

Speaker 3:

What Brad didn't mention is one of the other reasons that the hedge fund by itself can be a little bit tough to own is because it does have lumpy performance at times. Over the long run it does really really well. But I mean, I certainly know this like in 2010,. If you own a managed futures fund, a pure managed futures fund in 2010, your clients looking at your well, let me go a little forward, 2012,. Call it the last time this return to positive return was probably 2008, 2009. It's probably been flattish while the market was doing double digits each of those years and, to their credit, a lot of managed futures managers realize this as well and sort of do the same thing. It gives you this tailwind because most of the time, equities work and guess what, when they don't work, that other side usually works really, really well, as witnessed by this slide or any others where you look at what happens during drawdowns for a lot of alternative indices.

Speaker 3:

So yeah, it seems like a throwback, but at the end of the day it's really the best thing for the end investor, the easiest way for them to access this.

Speaker 1:

with that between us, 100% agree and it's fun. That was one of the number one questions we got when we launched the fund is why did you choose mutual fund instead of ETF? And it seems like the love affair for ETFs is very high. And look, we use ETFs in our OCIO models, love ETFs. They can make a lot of sense, but we we'd like to look at every tool in our toolbox. Right? We think it's a bad craftsman that only uses half their toolbox. Right, and with us, matt gave all the reasons. It just it made sense.

Speaker 2:

I'm of the mindset that this is going to be the year for tactical active right, because as the pendulum shifts towards passive and everyone goes passive, the opportunities for active become larger and there aren't that many players left in the active and tactical space because it's been hard to really outperform. I mean certain players like you have obviously done well, but broadly speaking there's been no tailwind because it's been a beta-driven, s&p-only, market cap-weighted type of momentum environment. For those that are listening to this, make the case for why this year in particular which again is a prediction could be really potent for active approaches.

Speaker 1:

I mean, I think the points you make are correct and I think every year is a year to have some money in active right, and again, that's diversification, right. If you only have passive, you have one strategy. Right, and don't fool yourself the S&P 500 is an active strategy. It's just very low activity and it's a quantitative strategy. It's an algorithm. They pick the 500 biggest companies and they market cap, wait, boom, done. You know, it's an algorithmic, actively managed in a very slow way. In my opinion. Right, they only have one strategy. It's just not diversified, right.

Speaker 1:

I mean, you need multiple strategies, whether it's a strategy like ours, which opens you up to additional markets right. There's more than just the stock market and the bond market, right, there's the gold market, there's the silver market, there's the cocoa market. There's the gold market, there's the silver market, there's the cocoa market. There's the cattle market, there's the currency market. You know the different interest rate markets and maybe you can go long or short and make money. If the price is too high and you think the price of something is going to come down, right, it's. It's that's that's what we do in in our mutual fund that gives additional. We call them drivers of return. Right Like what's going to drive the return of an investment, and you want to have multiple drivers. Otherwise you rely on one driver. What if they get a flat tire, you know? Um then, then you're not going to get to where you need to be.

Speaker 3:

Well, and think about it this way right, not to not to harp on valuations, but, like you know, goldman put out a piece saying you know, over the next 10 years they expect, you know, minus one to positive three percent. You know, on large cap equities, right around that range, right, a lot of that being based off the Shiller PE and just what, what historical returns look like there. So if you're of that belief, well, all of a sudden and the trouble with adding diversification and alternatives has been the S&Ps returning up here and they're returning down here. So, all of a sudden, if your belief is that we're at a period where that return's not up here and it is closer down here, that relative cost shrinks incredibly, right For a tactical manager. Let's say they are binary, right, and they get out at the wrong time.

Speaker 3:

Well, if the market's rip roaring, having 20% years and having 10% or 6% months and they're out that month, that's a huge amount to miss. But if you're of the belief that it's going to be more choppy and volatile over that time and at the end of the year we're talking sort of mid single digits, let's say it's beyond what Goldman predicts or what the Shiller-Cape predicts over the next 10 years. Even still bonds with a coupon of 4% all% is a competitive return with S&P. The cost of diversification has never been lower, if you think that forward equity returns are going to be smaller than they've been historically. Certainly over the last, over my investing career, but over the last 20 years, really broadly I guess, with the exception of the first decade of the 2000s maybe yeah.

Speaker 2:

Yeah, no, I think it's very well articulated, brad. For those who want to learn more about the mutual fund and reach out to you guys, where would you point them to?

Speaker 1:

Yeah, you can go to our website, dynamicwgcom, for Dynamic Wealth Group, dynamicwgcom. You can email us directly either brad at dynamicwgcom, matt at dynamicwgcom. We can just send it to info and any one of us or anyone on our team will be happy to reach back to you. We do put out a monthly newsletter. We're very transparent on the mutual fund holdings. Every month we go through what's worked, what hasn't worked, where do we stand now and why, and we have a nice write-up that kind of goes into our outlook and positioning so that advisors and investors can understand.

Speaker 1:

You know why are we? You know long cocoa, for example, why are we? Short cattle, for example? Right, and those are just examples, but those are markets that some people aren't usually in. So we're very transparent and give color and we're always around happy to help people understand our strategy or address any questions they have. The mutual fund is available through most advisors. If you are an advisor and it's not available at your platform, reach out to us and we'll put you in touch with the people at your firm and express it to your firm that you do want to gain access to innovative, differentiated fund that will help you and your clients.

Speaker 3:

I can't believe you didn't say the number one macro trading fund for 2024.

Speaker 1:

Yeah, it's the number one macro trading. That's right, I should yeah.

Speaker 2:

Better you than me. I appreciate everybody that's watched this live Lead Like Live learned more about the fund and connect to Brad, connect to Matt, as I've gotten to know them over the last several months as clients given this is a sponsor conversation I've very much enjoyed their perspective and, you can tell, very knowledgeable when it comes to thinking about how to not predict and how to prepare instead. So thank you very much for watching and I'll see you all in the next episode. Cheers everybody.

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Michael A. Gayed, CFA

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