Lead-Lag Live

The Diversification Illusion with Brad Barrie and Matt O'Brian

• Michael A. Gayed, CFA

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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.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


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Speaker 1:

So this is a scatterplot. So each of the dots represents a return on the vertical and on the horizontal you have the starting valuation of the S&P 500. Right so red line where we're at currently, roughly where the Shiller PE is of 38. Historically, we tend to realize zero percent future 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 this year is going to be flat or next year is going to be flat. This is showing historical pattern of when you start with a high valuation, the future returns over the next five years and we've done this analysis for the next 10 years and other firms like JP Morgan and Goldman Sachs you know listeners, watchers may have seen that type of the same chart done there. Basically, high stock valuations tend future stock return.

Speaker 2:

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're going to touch on. I'm always a fan of the way that they think about things. They just put out a new research paper that, Brad, you sent to me. I kind of feel like we should start with that. So let's get into it.

Speaker 1:

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 mystifying to a lot of folks, a lot of investors, a lot of even financial advisors, you know, given everything that's out there. And part of our mission at at dynamic wealth group is to simplify the complexity, uh, for advisors, and it's one of the reasons we put out this, uh, uh, this little research paper to help put things in perspective and help people realize that maybe diversification isn't just a bunch of different, pretty little colors on a on a pie graph, right, and? And looking at those, those different colors and those different percentages, and, and we like to ask the question, what drives the return of each investment? And if the drivers have a lot of the same characteristics, you're not necessarily diversified, right? Um? So you know the? The technical term is correlation, right, and? Uh, um, we also try to look for the causation of the correlation, um, you know, something could be non-correlated on paper, but when you, when you look at it, sometimes it's just happenstance. And then, when you want it to be non-correlated like 2022 and both stocks and bonds, and it seemed like everything was going down you realized you didn always equal true portfolio diversification.

Speaker 1:

It is available for download on our website. We created a special URL for it rethinkassetallocationcom, so you can go to rethink all one word assetallocationcom and download it. It's a good, entertaining read. One of the things we do try to strive ourselves on is not just throwing in a bunch of financial jargon and mumbo-jumbo and big college-level words. We try to again simplify the complexity and make it understanding because you know, if we have time, we'll also talk about the valuation of the market and, with the market as high as it is, having some real diversification we think is important. You know, as always. Right, you know so.

Speaker 2:

So. So I want to let's, let's, let's touch on the point you mentioned earlier about the drivers, right, because correlation doesn't necessarily mean causation. You know, we have to think about sort of what actually drives the correlation. If you were to take a broad brush approach to sort of saying these are the two or three primary drivers for most investments in the long term, at least Short term can be a very different dynamic. What tends to be sort of the common thread.

Speaker 1:

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 and can spend that money. And if there's a macro issue that causes a slowdown, if there are tariffs that happen to impact the price of things, if inflation comes back, if you know, if there's unforeseen circumstances, right, regular viewers know I love analogies and one of them is it's the bus that you don't see that hits you. And if there's there's a bus out there that we don't know about that could cause a macro issue, a, a, a, a global slowdown, a U S slowdown.

Speaker 1:

And if you, if you rely on everything working out and you need everything to work in your favor and you hope everything works in your favor, you know hope is not a plan, right? You know hope is not diversification. You can have hope and we certainly have hope and we all hope that everything works in our favor. But what if it doesn't right? And that's where you need strategies like ours in the Dynamic Alpha Macro Fund, where we can go long or short um, different uh futures markets, different commodities, different uh interest rates or even indices um or any other strategies. You know, um, that just beat by a different drum, that that the driver of return is different than just strong economic growth. Yeah, cause that's what we see when you look at a traditional 60, 40,. You know it's. You have two, two drivers of return equities and bonds. So, Matt, you wanted to join in, or I?

Speaker 3:

was just going to add in. Yeah, I mean, I think I think bonds are a great example right Of of know. Hey, what's what's the driver of return here? And it's your yield and interest rates, right, you know you're carrying your interest rates right Direction of interest rates.

Speaker 3:

And so those things aren't necessarily always non-correlated to equities, as everyone's learned over the last few years years, while some of that you know over long periods of time, there's non-correlation there. But one of the things that we highlight in the paper is, you know, as Brad mentioned, when you needed it most it evaporated because we had high inflation and rising interest rates, which hammered it at the same time that the market was getting hammered because of those slower economic growth and higher prices as well. So we want to make sure there's stuff in there that that's a little bit more durable and have extra layers of protection inside of a portfolio. So it's not relying on just that one correlational benefit of stocks and bonds because, as we've seen, that can evaporate very quickly. It's it's relying on things like global macro or trend or carry trades or whatever it might be, but something else in the portfolio that can carry us through periods when those things are correlated.

Speaker 2:

The problem, I think, is that most people want correlation, right, and they want correlation because markets tend to go up more often than they don't, right? So just from a a time and training perspective, you know you're getting constantly rewarded based on the number of times, never mind the magnitude of a decline. Right, that's what caused people to to have that overexposure over time. How does one counter that, brad? One big thing is understanding correlation.

Speaker 1:

Non-correlation or low correlation doesn't mean negative correlation, right? Negative correlation is short the market, or you're the market or you're a bear fund or whatever. And to your point, yeah, it's. Those are generally losing propositions when the market's up 70% of the time on a calendar year basis, right? So non-correlation just means it targets returns differently, right, you know? And Matt talked about bonds and you know, one of the other services we offer to financial advisors is our OCIO service, where we partner with advisors to build customized model portfolios using our multidimensional approach towards asset allocation, and adding non-correlated bond-like drivers or returns is a key component of that.

Speaker 1:

We're big believers in arbitrage strategies, be it merger, arb, convertible arb, and those will make money. Even if bonds make money, right, they're just making it differently, right. A global macro strategy like ours year to date, you know, we're up more than the S and P 500 as of our most recent uh quarterly fact sheet. Um, because we're driving returns differently, right? So big thing is, yes, we, we want positive, everyone wants positive correlation when the market's going up, but they want negative correlation when the market goes down, right? And and of course they do right. It's like we all want to just sit on the sofa, eat ice cream and bonbons, and you know, look, look like you do. Michael, you're right, it's, it's, but you can't do that. Right, and that just doesn't work. And same thing with the portfolio. Everyone wants the portfolio to go up all the time. No one can guarantee that. No one can can build that. But by having multiple drivers you're increasing your odds of having things again like our fund, dynamic Alpha Macro Fund is doing better than the market this year on a good year, right? So non-correlation doesn't mean negative correlation, it just means it's taking a different route, right?

Speaker 1:

One of the analogies I use is like if you have to pick up your kids from school, right, and you and your wife decide, well, we're both going to leave the house to pick up the kids, you go left, he goes right. Maybe you get to the school at the same time. Maybe one of you gets stuck behind a train. Maybe one of you gets a flat tire 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 get to the same time, great, one of you might get there earlier.

Speaker 1:

If it's raining out, if it's snowing out, if it's ugly out. You know you want to get different routes to get there, and if you get through the same time, great. But if you both get stuck by a train or both get a flat tire, well, you only had two drivers of return right, then had two drivers of return right, then you should have called grandma or grandpa or the neighbor or a friend 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 it as a kid, right, it builds character. And stand in the rain, I did it, it builds character. But if it's a mission critical, like they have to be picked up, or it's like I have to rely on my retirement check or my, my college fund, then you want to have those multiple drivers, uh, taking different routes to to pick up the kids, to, to meet the goal, so to speak.

Speaker 3:

And just to add to that, right, I think the you have to look at it as cost benefit analysis, right, what's the cost of the diversification you're adding at any given point? Like with our fund, it's been pretty minimal over time. Right, we can deliver. I mean, we have delivered equity-like returns since our inception, right, that's not the goal of a lot of diversifiers. A lot of diversifiers target more of a moderate allocation or a more conservative allocation. So what's your cost of diversification For a moderate client? Those are perfectly fine, they're going to be okay. And again, their entire portfolio is not invested in equities anyhow. So it's really that's sort of the science. The art, I guess more so, is figuring out what's the potential cost of adding this diversifier and what's the benefit we're getting from it. Like we think about like buffers, which we use in some of our strategies, more of our conservative strategies, right, but the whole story with a buffer is you're getting some protection on the downside, but you're also generally capping your upside at some level. And it's the gamble or proposition of figuring out is that upside cap worth a little bit 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 next calendar period. So I think it's one of the challenges those types of strategies have and, honestly, the dispersion in experience that investors have, depending upon which monthly buffer they bought or when they bought it or how they bought it, it really, really filters in.

Speaker 3:

But one thing you said, michael, is everyone wants correlation. Everyone wants correlation in markets like we've had post-GFC. Right, you didn't want correlation in the 2000s, you ended up flat on the decade. If you had correlations in the 2000s, if you had no correlate, I'm sorry. If you were highly correlated to the S&P in the 2000,. If you had no correlate, I'm sorry.

Speaker 3:

If you're highly correlated to the S&P in the 2000, you wanted correlations to EM, to commodities, to small caps, to value. That was. Those were the things you wanted the experience to and those are things that generally are represented in, I think probably everyone on this call and most investors largest holding, which tends to be the S&P, which is a growth and a concentrated growth index at this point. So it's looking beyond just the, the asset class they might be in, looking beyond the titling of a given holding and really understanding, you know, to Brad's first point of the drivers of return. What's really driving that boat in the SPX? It's the top couple names and it's tech. You know that's that's the driver for the S&P for the most part, and it's tech you know that's that's the driver for the S&P for the most part.

Speaker 1:

Currently there's one stock that's almost 8% of the S&P 500. That's the largest that one stock has ever been in the S&P 500 right now. And I'm not saying it's a good or a bad stock, but that tells you something about valuation and diversification or lack thereof.

Speaker 2:

So that's a good place to pivot off of. Because, going back to correlation, you want correlation towards the end of a bear market. You don't want correlation towards the end of a bull market. Hard to really know if you're in a bull or bear market on a go forward basis, right. But valuations can at least maybe tell you the conditions that maybe make it more likely or not. Let's talk about valuations when it comes to US markets.

Speaker 1:

If valuations are high, right? I mean, if you look at the Shiller PE ratio, which is a seasonally adjusted PE ratio, we're a little over 38 right now, as of end of June, and historically it's only been higher, I think, one other time, um, and I believe that was the tech bubble, um. So you know when, when you, when you have valuations that high, historically the future returns of stocks tend to be poor. So this is a scatterplot. So each of the dots represents a return on the vertical and on the horizontal, you have the starting valuation of the S&P 500, right? So red line, where we're at currently roughly, where the Shiller PE is of 38. Historically, we tend to realize 0% future returns over the next five years. This isn't a prediction. You know we don't have a crystal ball. Nobody has a prediction. This is not saying that this year is going to be flat or next year is going to be flat. This is showing historical pattern of when you start with a high valuation, the future returns over the next five years, and we've done this analysis over the next five years and we've done this analysis for the next 10 years. And other firms like JP Morgan and Goldman Sachs you know, listeners, watchers may have seen that type of the same chart done there. Basically, high stock valuations tend to yield lower future stock returns, um it, and this is why having in diversification and non correlation is important.

Speaker 1:

We run a fund that combines global macro uh, a very good global macro manager with um equities.

Speaker 1:

So when you, when you throw on the global macro index, um to the same chart and the global macro index again is not our fund, it's an index of global macro managers and again we think we've got one of the best ones out there managing the dynamic alpha macro fund you see an interesting relationship where, historically, when we have valuations this high, global macro strategies tend to perform very well.

Speaker 1:

And the reason makes sense because when you have valuations this stretch, there's opportunities to find things that are more attractive, there's opportunities to go long or short, there's opportunities to take advantage of future volatility that could very well be down the road, and our fund combines global macro with US equities right. So our fund is a 50-50 mix between these two types of concepts and strategies right. And it's, by design, right, because if you have both and there's some low non-correlation between the two, it helps to smooth out the return experience. We think this is a compelling reason for why global macro makes sense. Now, when valuations normalize, global macro still makes sense, especially the way that we're doing it, where we're combining it with equities to kind of you know the term all weather is commonly used for in this industry and for strategies like ours, and it's what we strive for.

Speaker 3:

And I think this second chart also illustrates that thing. We talked about the cost of diversification. Right, if you look at that middle section, say, from you know, starting valuations of 20, mid-20s to like mid-30s, the purple and blue dots are all on top of each other. Right, there's not a huge difference in where those are clustered one way or another. Sure, around 20, you get some outliers to the upside in the S&P and those are going to be there, right? But if you looked at your client and your diversifier was up 20% in one of those windows and the S&P was up 30%, I don't know that many clients are going to say, well, that diversifier needs to be sold immediately.

Speaker 3:

Right, it's the issue of, you know, and a lot of people had this with with trend followers from time to time. Right, trend you know, like managed futures coming out of 08, had a phenomenal window in 08, 09. Right, and then, all of the sudden, all the money flew in. You get QE, you get zero interest rate policy and there's just not nothing could beat the S&P for the next 10 years, basically, and so money flowed in and money flows back out because it's it's more of a one time pop. Now there's there's managers in the space that have been more consistent than that. But that's that's really illustrative, because I remember that being the beginning of my sort of formative investing career and just the allure of that. It's like, wow, these things did 25 percent in 08. You know, like there's got to be something to this. How do I put this in a portfolio? And then you know being flat or up slightly and the market being up, you know, 18%. That's tough to keep a client in at times.

Speaker 2:

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 thinking it's just purely stocks. I mean, let's define global macro and then, from what you've seen, how much variability of returns is there among the global macro manager space?

Speaker 3:

Yeah, I mean yeah, global macro really starts. And again, the strategy we run in global macro is probably different than a lot of global macro funds that are out there today. Our manager likes to say he runs a throwback strategy to the 70s and 80s, the old Paul Tudor Jones, or you know. I know George Soros is sort of a name that lights some people up or some people are excited about or very very not excited about, but regardless you have to respect him as a trader from the early, from the 70s and 80s, right. And so their whole approach is find big supply and demand imbalances be concentrated, only have a couple of positions, a couple of themes in the portfolio at any given time.

Speaker 3:

Over time that seemed to have morphed into more macro, macro oriented currency trades or fixed income trading. That gives you sort of that lower volatility, consistent carry trade of like five to seven percent. That's that's. That's what a lot of the global macro index is made up of, and the percentages might be slightly higher than that in terms of performance, but they tend to focus on what's going on in the macroeconomic economy. Currencies, commodities, fixed income these are going to be the areas that they primarily invest in. Certainly they can access equities as well.

Speaker 3:

In our case, on the global macro side, it's all done through futures, which gives us broad exposure to 40 different markets, so plenty of different levers to pull in different environments. So, yeah, it's different than I think. A lot of global macro funds are positioned today because concentration is not something people are comfortable with at all times. And you know, unfortunately, if you listen to the great investors of our time, you know like, like even even Bridgewater. You know Ray Dalio saying find seven to 10 investments that are non-correlated, that have a positive return profile, and blend them together. He's not telling you to own 30, 50 names, 75 names. No, find things that are thoughtfully put together, blend them and have relatively high conviction of what those things are.

Speaker 1:

Yeah, and Michael, you allude to the dispersion of returns amongst global macro or, you know, even, managed futures. You know, managed futures trend following is is struggled a fair amount this year. Um, and it's one of the reasons we're big believers in the multi-dimensional approach to asset allocation. It's not about having a diversifier, it's about having multiple diversifiers. Right, it's, it's, it's. I'll say sometimes diversification is not binary, it's not like, oh, I've got to diversify. You know, I got REITs. Ok, you get a little bit of a little bit of non-correlation there, right, you know. But I've got managed futures Great, that'll help you in certain times. But if you don't have global macro, managed futures, arbitrage, multiple approaches, you're not really as diversified as as you really should be in our opinion. You're not really as diversified as you really should be in our opinion and to clarify, I'm not down on managed futures.

Speaker 3:

We use managed futures strategies in our portfolios that we build for financial advisors. It pairs very well with our strategy. It's just a very different return profile and driver as a return than we have in ours. So while we get lumped in with a lot of managed futures funds as being an alternative, it's a really disparate category in how everyone runs things, even inside of managed futures. To Brad's point, someone could be running at a 30 vol, someone could be running at a 12 vol. Those strategies look so wildly different or what timeframe they're using on their trend following All of those things can be wildly, wildly different. Yet we sort of lump them all together and it's wild, frankly.

Speaker 1:

It ties into that causation of the non-correlation right, the cause, the approach, and that's why diversifying via approaches and disciplines is so important in what we do when we're building models and portfolios for advisors. And our fund, you know, dynamic Alpha, macro Fund, dymx, is non-correlated to equities, to bonds, to managed futures, to other alternatives. I mean we've some managed futures strategies. We have a negative correlation to those, you know. So it's additive to's additive to the, to the, to the overall portfolio. And you've seen it just this year, you know again, with our returns have been, you know, extremely strong, which we're, we're very proud of and happy to deliver to our shareholders, you're supposed to.

Speaker 2:

There's that old saying that diversification fails when you need it the most. Right, and much of that is related to the idea that when you have high volatility, everything tends to change, correlation wise, and converge to one um, which makes me then wonder if we should view volatility as an asset class, because that's the ultimate inverse correlation right. How should we think about volatility and these volatility products in that context, in the framework of better diversification?

Speaker 3:

Yeah, I mean, I think it's tough right, like the long vol strategy, the hedging, with just a holding tail risk, like I think, in institutional world it makes a lot of sense because it's very, very thoughtful and they understand what they're getting for that payout on a consistent basis. But that's that at the end of the day. That's the trouble is, how often do you have these events where owning volatility really pays off for you? There's another product out there that's. That's an ETF, that's an interest rate hedge, and a lot of money flowed into that after the rates rose substantially in 2022 or through the previous rate hiking cycle, and the thing was up, you know, 20, 30, 40, 50 percent over the course of a few days or weeks. But since then and holding it throughout that period over time, you've made almost no money in the thing other than these few days that you've owned it. And so for retail clients, for the investors that are out there, it becomes really hard to consistently justify something that you know five out of six years you're probably not going to make money on, or you're going to make very, very little compared to other things out there. And so there is an optics to building these portfolios we like to steer away from it as much as possible, but you just can't help but acknowledge that. You know they always say this about like dieting and food plans. It's like the best plan is the plan you can stick with.

Speaker 3:

And for retail investors, sometimes they can't stick with some of these more technical products that are out there because they they're just above their grass and so you know, global macro sounds really complicated, but when we can talk to an investor about the fundamental reason, we're in something like a copper, for example, right, hey, ai is growing, electricity demand is growing. All of that needs copper. We really love that play over time. Now we can take that position, put it on, take it off. We have over the life of the fund, but it's really easy to understand for a client why they're invested in that given thing. So I think it's really hard and almost ephemeral to say someone we're investing in volatility because it's not something they can hold, it's not something they can they can really relate to. So much because it's sort of an abstraction. It's a financial abstraction almost.

Speaker 1:

It's kind of tied to what you'd said earlier on, and this is just a good visual on the diversification, right, and you think you have a lot, but you really don't when you need it most, right? So you had mentioned that correlations tend to merge to one during times of stress, right, and we've seen it in 2022, we've seen it in other years as well. And again, when you just have two primary diversifiers equities and bonds over 15 years, you get two colors. The way you read these pie graphs are, the shading represents the degree of non-correlation, right, and then the numbers next to each, you know, represent that correlation to large cap stocks. So US aggregate bonds over the 15-year timeframe is 25% correlated to large cap, but in 2022, it was 67% Investment grade bonds was 77% correlated.

Speaker 1:

When you look at global macro as a diversifier, global macro is non-correlated for the 15 year time frame as well as when you need it. So correlations don't always merge to one if you have multiple drivers, and you know, the point Matt was just making is global macro, ideally, is not a drag on performance, right? That's not what we want to be. We want to deliver equity-like returns differently over time and, yeah, sometimes we will look different. Over a long term we'll look different, but we hope to perform as well, if not better, than equities and do it in a different way, which, again, is what diversification is supposed to be right. If you believe in diversification, you need to have different drivers of return so that you know when that bus that we don't see hits us and correlations tend to merge because in reality you didn't have as many pretty little colors as you thought you did. You know you'll feel the pain.

Speaker 3:

It's funny just thinking about the ags a great example of you. Know you'll feel the pain. It's funny just thinking about the ags a great example of you. Know you were talking about how correlations go to one at these volatile inflection points when you need your diversifiers the most. Well, in 08, long treasuries were a phenomenal hedge. Long treasuries did phenomenally well in 08, not so much in 2022, right.

Speaker 3:

So we get pushback from clients on why do you own, like some ad type positions in in fixed income? And it's because, over time, owning a little bit of duration can really pay off in some of those more high level risk off situations. Right, it didn't this last time because inflation was wild and we needed to raise rates to attain inflation, even those for a short period of time. So there were, there were counter trends that were there that just weren't going to work for long bonds. In that scenario, I mean, take out the inflation part, Maybe. Maybe the story looks totally different 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 can be thoughtful about the managers we're selecting and the way we're building a portfolio together, we can offer two, three, four different layers of protection inside the portfolio and, yeah, maybe two or three of those don't work in the next major drawdown, but one or two of them should and that should provide enough benefit to create the overall return profile.

Speaker 2:

I want to take some of the questions I'm seeing in the comments. This one's from Michael on LinkedIn. What do your backtests of the analytics used in managing Dynamics indicate about the prospective performance during times of a major market correction?

Speaker 3:

Okay so we don't have a systematic strategy. We have a fundamental discretionary strategy. So the only back test we really have is the hedge fund strategy, which isn't something we can share with retail investors. Unfortunately, we can share with financial advisors, that's not a problem. So it's really hard for us to go back and say exactly what the fund would have done, especially in an open environment.

Speaker 3:

But we've been through some pretty volatile times already over the last two years that we've run the strategy and I think when you see the market really going through the volatility right, the drawdowns in the equities, that's really where our fund shines. Now, some months when the equities are up, we're up as well. It's usually for weird reasons, like maybe gold was up at that time, or silver did really well, or you know, the two year it was all because of proposed rate cuts and a two year position went sort of parabolic. Um, there's all sorts of reasons why inside the portfolio it can do well during volatility time, but there's not a back test per se cause.

Speaker 3:

It's not a formula that we're running. It's not an algorithm, it's. It's a team of economists that are looking constantly and scouring the universes that they have to find supply and demand imbalances and take advantage wherever they are. And, importantly, no environment looks exactly the same. So what he was doing in 2010 looks different than what he's going to be doing today or in 2015 or 2017. So it's a little hard for us to answer that question in this type of form. Brad, I don't know if you wanted to add anything to that.

Speaker 1:

Yeah, I mean so, just to take a step back. So our fund is and if you want to share the screen, Michael, there's a visual that goes with this is 50% global fundamental macro and 50% US equities. Right, and the fundamental global macro strategy, as Matt said, has been run by a team for over 10 years now and for financial advisors or institutional investors, we can share the performance of the strategy behind the mutual fund Dimex Because, again, the strategy is combining equities with the global fundamentals macro strategy. That's been run with real money. It's not a backtest To Matt's point. You can't backtest the discretionary fundamental strategy. I'm sure there are some folks out there that do backtest the discretionary and they say it was a full moon and it rained the night before and it was ended on the 12th, so I happened to sell right before the market crash. Those people are all on Twitter flashbacks yes, they are.

Speaker 3:

It will drop to you, but I could guess yeah.

Speaker 1:

Yeah, yeah, I've run across them. Be careful out there folks. Um uh, but we do have real world performance history of the global macro strategy and we can share for financial advisors or institutional investors If you just email us. Either Brad at dynamic wgcom or Matt at dynamic wgcom is email us and we're happy to get on a quick zoom and share those numbers with you.

Speaker 3:

So sorry for that and and not answer answer. Yeah, that's just media, the one that that's media and compliance is what that is right there yeah, there's a another question off of youtube.

Speaker 2:

I want to hear from matt here on youtube. Uh, do you see any risk correlations with equities trading? High valuations and private credit continue to grow as a yield alternative. So let's go back to drivers of investments, private credit, private equity, I mean. It's still largely based on the same thing. Public markets are based off of right, but maybe with a little bit more opaqueness, fanciness and leverage. Yeah, what are your thoughts on that?

Speaker 3:

Private credit's a weird space for us, because I understand the appeal of the structure and the lack of public mark to market accounting. There's just a net benefit and as long as more dollars chase more deals, liquidity is not an issue, and so they'll continue. You know, I'm XYZ private credit fund. I have a company in the portfolio that's struggling. I'm more apt to say, well, that's okay, we can extend terms or we can provide some additional liquidity or provide some additional funding to make sure I don't have a bankruptcy in the portfolio, to make sure I don't do that. In the public markets you have to ensure that every bondholder out there is going to agree to those same terms, and that's a much harder prospect than if it's just one company or two companies owning all of the potential debt for this given company. So, yes, the driver of return at the end of the day is the same. Right, it's economic growth. Does this company continue to grow their earnings to pay off this debt? Usually at very high interest rates? Right, we talk about, you know, bonds. You know the interest rates being, you know, four and a half percent or 5% right now, or mortgages being seven. Right, these private credit deals are in the 10 to 15 percent neighborhood and I don't know many companies, especially small companies, that are able to withstand that level of interest rate for a long period of time. So my biggest concern is what does this look like when the dollars stop flowing into private credit, when they've exhausted all the 401k money? It seems to be. I mean, we're seeing it kind of in private equity right now.

Speaker 3:

Private equity is going through this lull of monetizations where they just can't sell portfolio companies and they're owning them much longer than they expected. Or if they're selling them, they're just selling them to another private equity company. They're not IPOing them in the public markets and to me that expresses that there's some exhaustion in that market. People pay multiples that you know five years later other people aren't willing to pay an appreciated multiple on top of that or the company never grew into what they prospect. Private credit feels like where private equity was maybe five, six years ago, where it's. We're coming off this great run. The Clipwater Index looks phenomenal, you know right. The returns look great and there's very little volatility.

Speaker 3:

This is perfect for all my clients 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 have defaults just because a company missed earnings or had a bad product launch one quarter, but at the end of the day you're still owning debt of that company. Will that company continue to operate and be able to pay it off at some point in the future five years, seven years, 10 years from now? And I don't have confidence that a lot of these companies will be able to do that. But it's like valuations, it's a timing game and I've been wrong on the private equity side.

Speaker 3:

I'll probably continue to be somewhat wrong on the private credit side. So what I'd say is I think in small doses it makes sense for the right clients. But again, that's not advice, that's just admitting that for some clients it's going to make sense and it's not something we really dabble in too much. But if you ask me to boil down what the drivers of return are, they're not distinctly different from equities. They just have a higher hurdle for them being a problem in your portfolio.

Speaker 1:

Let's say yeah, one of the things I think about is so we have a very small YouTube channel and every week I try to publish a small, a short, three to five minute video. I put it on LinkedIn and YouTube and I end every video with thanking people and reminding them to make smart, logical and fact based financial decisions. And when I think of, you know, 12, 14 percent yields, just logically think to yourself what's the risk associated with that? To Matt's point why would a company borrow money at 12 to 14 percent if if I'm not going to say if they were financially stronger, but why would they? Right, why do they have to borrow at those types of rates?

Speaker 1:

And you know, you look at these private credit funds and you'll see a line that goes at a 45 degree angle and you look at a Sharpe ratio. I'm like my gosh, it's got a 37 Sharpe ratio or some infinity Sharpe ratio because it's never gone down. Right, and it's phenomenal. But again, just logically think about it. Right, it's, it's. Things aren't marked to market until they are Right. And we've seen it where it's like oh yeah, it's that part, it's that part, it's that part. Nope, zero, just now.

Speaker 3:

I just don't think it is probably a non-traded BDCs or non-traded REITs, Right? I mean, anytime you get into the private markets it becomes a little bit more wonky as to assuming what the risks are, because they can be papered over really, really easily. So I don't always know that. I don't think that investors always appreciate the risks that they're taking and what they're giving up, what they're getting for giving up the liquidity and the transparency that they have in public markets.

Speaker 1:

You just have to be very careful. Right, we're not saying you know, don't do them, but you have to be very careful. And there's, you know, just logically, think about it.

Speaker 3:

More importantly, hopefully you're finding ones that are actually somewhat unique, right, that are actually doing something a little bit different than just saying I'm loaning to small and mid-tier businesses that need credit between 50 and 100 million dollars, right like that. That's, that's very plain vanilla, where we sort of get our ears perked up as someone that's doing something truly different.

Speaker 2:

That might have, you know, some real correlational benefit, regardless of the private structure or whatever might be there um, as we wrap up here, for those that want to learn more about uh dy mix, your mutual fund, where would you point them to and how can people follow you?

Speaker 1:

Yep, so DynamicWGcom, as it says after my name. There's our primary website. You can go there to learn more about us. Both Matt and I are on LinkedIn and the white paper we referenced the research paper again is available through RethinkAssetAllocationcom. Reference the research paper again is available through rethinkassetallocationcom. A quick URL to download our newest thought leadership. And don't be sure to put you on our regular monthly newsletter where we give timely commentary. You can find again Dynamic Wealth Group on YouTube. Drop us an email Again, brad at dynamicwg or matt at dynamicwgcom, and always happy to chat with folks.

Speaker 2:

Thank you everybody for watching. I certainly appreciate the continued support with these live streams. Thanks, matt and Michael, for the questions live as we were streaming and hopefully we'll see you all next episode of LeapLag live with a new host. Thanks everybody. Cheers of Leigh Blagg Live with a new host. Thanks everybody, cheers, thank you.

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Michael A. Gayed, CFA

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