Myles Zyblock, chief investment strategist and portfolio manager at Dynamic Funds, takes a tactical, rules-based approach in making asset-class selections for Dynamic Global All-Terrain. And right now, the fund's disciplined methodology is strongly favouring bonds.
The $71-million fund -- launched in September of last year -- has a broad asset mix of 82% fixed income versus only 10% in equities. with the remaining 8% in gold bullion. That's a significant shift from its previous weighting of 60% fixed income and 40% equities during the first half of February.
The fund's current largest allocation by asset class is 53% in U.S. fixed income, with holdings in iShares 7-10 Year Treasury Bond (IEF) and iShares 20+ Year Treasury Bond (TLT). The fund also holds 19% in non-U.S. fixed income, through Vanguard Total International Bond Index (BNDX), and 10% in emerging-markets debt, through iShares JP Morgan USD Emerging Markets Bond (EMB).
Zyblock, who is lead manager, says the repositioning was based on signals that there is more risk in the equity markets and better risk-adjusted opportunities in bonds. This is particularly so for U.S. government bonds, including longer-dated issues that are higher-yielding than those with short-term and mid-term maturities.
To the limited extent the fund is exposed to equities, it favours the U.S. In fact, all of the fund's stock-market exposure is currently in the U.S. "Right now, given the turbulence in the markets, we're finding the best risk-adjusted opportunities in America, generally speaking," says Zyblock.
Like other funds in the Tactical Balanced category, Dynamic Global All-Terrain has a go-anywhere mandate. Along with developed and emerging equity and fixed-income markets around the world, the fund may also invest in real estate, gold and other commodities.
As a general rule, the fund's maximum allocation to equities will be 75%, so it's not as free-wheeling as some funds in its peer group. The reason for this constraint is to reduce risk. "Equities are very jumpy," says Zyblock, "so there's a lot of volatility around an equity investment."
The fund's potential fixed-income investments are also global in scope. Along with investment-grade government and corporate bonds, the fund may invest in the high-yield market and in emerging-markets debt. But since the fund has a global mandate, Zyblock expects it will generally have minimal Canadian exposure. During adverse market conditions, the fund may hold a substantial portion of its assets in cash or cash equivalents.
Setting Dynamic Global All-Terrain apart from other funds in the Dynamic family managed by 1832 Asset Management LP is its strategy of obtaining asset-class exposure through exchange-traded funds rather than through individual stocks and bonds.
"Most of my colleagues are very bottom-up oriented," says Zyblock. "This definitely offers a little bit different approach to investing, where we focus on different asset classes and different geographies from a top-down perspective for risk-adjusted returns."
In determining the asset mix for Dynamic Global All-Terrain, the managers' rules-based discipline focuses on market breadth -- the number of securities going up compared with those going down -- along with price momentum and the strength of price moves. The quantitative, model-based approach takes emotions out of decision-making, Zyblock says.
The investing model enables Zyblock and his colleagues at 1832 Asset Management to track buy and sell signals in real time. But the managers will generally monitor a buy or sell signal for a month before taking action on it. Based on decades of collective experience, that delay protects the managers from "whipsaws" in the market," says Zyblock. "We let the signal almost ripen like a fruit a little bit before we act. We don't want to bite the fruit when it's not ripe. It doesn't taste as good."
Despite its use of ETFs rather than individual stocks and bonds, the fund is very much actively managed and is "using passive instruments actively," says Zyblock. "If you want a passive product, this is not the one for you. It's not benchmark-driven."
As an investment choice, "I think clients sensitive to downside risk would be interested in the product," says Zyblock. "And those looking for a global product with a true sense of active management where I can in effect concentrate the holdings away from a traditional benchmark weighting when I think it's deemed appropriate. Ninety per cent of your volatility comes from equities, and if equities are in for a rough time in a 60%-40% portfolio, maybe it's not as balanced in terms of risk as people think."
