Investing in frontier markets gavin graham
And so if that is the underlying computational mechanism for markets, then what you need is a very large number of models informed by a very large array of different sources of information so that some of those models are in sync with the market at any given time. And enough of those models are in sync with the market.
Keep in mind being in sync with the market beans that you're able to more consistently generate profit. Otherwise the models are noise. So it's not that they're a consistent money loser. It's just that they're consistent noise. If you have some fraction of your models that are operating with skill, they're all in alignment with the market and another basket of models that are currently noise traders, they're misaligned with the market.
Then you at least have a chance at generating fairly consistent P and L. And so that if I were to sort of describe what the underlying mechanics of our current investment strategies, that would be the overarching kind of mechanics of what's going on. And to recognize which ones are working and which ones aren't.
And of course those. Won't change, those will not remain the same the whole time, they will change. Part of the skill, presumably, is the ability to know when to make the move from what's working to what's not working or what might be working in the future. Cause it's not enough to wait until you have enough data in hand to make a strong statistical conclusion on whether a model is working or not, because you may need to wait 5, 10 years.
Even if you're trading at daily timeframes in order to be able to determine with some degree of statistical confidence that a model is no longer operating as expected. So I think the idea is to have a large enough set of models where at least a substantial proportion of them are expected to be operating in alignment with the market at any given time so that you don't need to have to make those choices in real time. That's not to say you can't, you know, absolutely a high-frequency trader where you're getting, you know, hundreds of thousands of data points a day.
Absolutely those types of traders can switch models on and off, derive new bottles, et cetera, derive conditional relationships much more quickly because the data is coming at them a lot more quickly. But for those operating with strategies that they want to be able to run with large capacity. So in other words, be able to run billions of dollars in service, many thousands of different investors and their objectives, you can't trade it at microsecond timescale. You know, you need to trade maybe throughout the day, et cetera, or at daily scale, move a little bit more slowly.
And when you move a little bit more slowly, you just don't have the statistical data generating process that allows you to turn models on and off very easily over time. I would quantify that as a hard problem. Would you like to describe the way that the fund is positioned at the moment? Not in terms of giving away any secrets as such, but what have you found has been helpful in terms of generating returns?
So the underlying variables that we use to make forecasts of what's going to happen in markets, and our forecasts are typically over kind of one to five days. So they do end up being fairly short term. We take information from the underlying time series.
So the sort of evolution of the price over time, as well as things like the term structure of the futures market. So our futures that mature in several months, trading at a higher or lower price than the futures that are maturing in the most recent month, or what we're observing in the spot markets that carries a lot of information. There's a lot of seasonal information because of, for example, the fact that global banks have a regulatory requirement to square their books to conform to global rules like Basil II, or various country level regulatory states at the end of every month, or at the end of every quarter.
Every country has different rules about how automatic deposits are made for retirement plans. You know, every two weeks or bi-weekly once mid month and once at the end of the month, et cetera. There are all these sort of competing dynamics. If you have favorable trend dynamics, aligning with favorable seasonal dynamics, aligned with favorable futures term structure, for example, then you've got a lot of different models that are converging on a certain direction in a certain market. And that gives us higher confidence.
So at the moment, We actually don't have very much risk on. The models do have a decent allocation to energies, to grains, a lot of longs and shorts in both fixed income and equity markets. Very modest positions in currencies. We have had a very good year. We had a very good year last year. We started out with a very good year. This year many of our models were short, fixed income into January.
Sort of switched over a few days to a mix of longs and shorts and a fairly consistent allocation on the long side to energies has obviously really helped this year. But I mean the secret sauce really is diversity. Having a wide variety of markets in which we can express views because the macro economic situation can change dramatically. I mean, let's face it we've just gone through 30 plus years of, you know, let's call it 26 out of those 30 years have been a period of reasonable, positive growth.
But 9 inflation and abundant liquidity conditions. These are very positive dynamics for global equities and especially developed equities like the S and P We're now potentially moving into a period of, first of all, we had a major pivot in monetary and fiscal policy.
Which is leading to a very substantial inflation shock. And historically inflation shocks do not fade overnight. And there's a lot of path dependency and volatility in how inflation manifests over the coming 5 or 10 years. And so we're coming into a period where having the ability to be a bit more agile, and the ability to allocate to a wide variety of different global regions, markets, asset classes, is likely to come in very handy.
And we've already seen that type of dynamic payoff so far in the last couple of years. Because again, that's a very interesting. I think that suspicion answered. But that's an interesting point in that once you have the dynamics that they tend to run in inflation. They tend to run for 5 or even 10 years. And certainly that was very much an experience in the 70s where you had not one, but two oil shocks and a lot of geopolitical tension. But also effectively the end of the postwar Bretton Woods regime.
And am I correct in feeling that you're saying we might be in a similar position now that that post ended the Cold War benign environment for Marlowe or disinflation and Apple liquidity might be coming to an end? So we're now experienced a period where governments of the world need to tread this very fine line between allowing inflation to run hot as we continue to try to sustain a level of economic growth that delivers on the promise of prosperity that really dates back to Reagan and Thatcher, against the fact that it's getting harder and harder, and it's consuming more and more debt and central bank reserves to maintain the level of growth that we came to expect in the 70s and 80s.
And so I think maybe we're nearing the terminal phase of this paradigm. We've shifted from a reliance on monetary policy, to a regime where we're now going to begin to rely on fiscal policy. And now we have monetary policy now competing with fiscal policy and different countries and regions around the world turning inward in response to this de-globalization trend. And so we're going to see a lot of the underlying dynamics that lead to stability and disinflation over the past several decades, unwind.
And so the opposite of disinflation and stability is inflation and instability. And I expect that that's what we're going to see. You said you had a very good year last year, and so far this year, is the fund intended to generate a particular level of return?
What does it pay in the way of distributions? How are those composed? Obviously if you're able to give some insight on that, that would be very helpful. So first to be clear in Canada we run an ETF. And the ETF has a combination of sort of an underlying global market diversified global market exposure.
That's kind of layer one. The second layer is to emphasize yield. So which bond markets, stock markets, and commodity markets, and currency markets are generating the highest expected yield. And in commodity market you evaluate the expected yield by something called Kerry. So the degree to which the next month's contracts are above or below the current month's contract, and therefore the price will either roll up towards the spot price or down towards the spot price to generate a yield in either direction.
So that is a layer of this sort of yield layer. And then there's a third layer, which is our, that all of the different models that I described across all these different global markets, right? So there's sort of a three layer global general global market exposure, yield, and alpha all in one product in the ETF. And that's designed to be a total portfolio replacement.
Relatively moderate risk. And then our hedge fund products. Alpha component, the hedge fund products allocate to that exclusively. But we've designed our strategies to have a good shot at delivering the returns that a typical require a retiree, or soon to be retiree, or, you know, foundation endowment, et cetera, requires in order to be able to meet their long-term funding requirements. So I think per unit of risk we'd expect the ETF to deliver between one and maybe one and a quarter units of return per unit of risk.
And to have some correlation with global markets. So maybe the correlation of 0. And therefore you're giving them the opportunity or indeed for that matter institution that doesn't have the capacity or want to get into actually doing futures itself and that's readily available. And the management expense on that? And I would add as well that we run the ETF as a sub-advisor through Horizons and the structure that Horizons has us running the fund in has an enormous tax asset.
So it is virtually impossible for the gains that we generate in the fund to create a tax liability for investors. So we feel that's an extremely accretive value add for inventors, especially for what is essentially an absolute return product.
Which in most other structures would attract very high tax rates. Because obviously if you can actually deliver tax efficiency with the possibility of superior returns, certainly no volatility and in some cases, no correlation or very low correlation that makes it a very attractive mix. Have you been seeing a fair amount of inflows in the last 18 months or so with the good performance? Have you been seeing more people becoming aware of what results been doing? Especially in our publicly available mutual funds.
We're seeing a lot of really great flows. Investors are starting to become aware of what we do and how it fits into the portfolio. And the guardians at the gate at the Canadian banks and investment firms are, you know, coming to better understand what's going on under the hood and how risk is managed and where it might fit into portfolios.
So really exciting to see both firms and advisors and investors start to really get behind the potential value of these products. You talked about foundations and endowments. Are you seeing a sort of increased interest in that space as well?
Like a battleship or an oil tanker. And so yeah, we're at due diligence process with, you know, just under a dozen different institutions in both Canada and the US and expect to be moving forward with at least a handful of those over the next year or two.
So very excited to begin to that next level of our firm's maturity and pushing into the institutional space. If any, cause like any committee dominated organization, it has to go through several levels and to convince a large number of people. But it's obviously very encouraging that you are in due diligence processes there. Again, you've said that this has maybe the beginning major sea change in the macro economic outlook which would obviously be good use for what resolve is doing, but in general, in terms of how the average investor you know, individual or whatever, would you have any words of advice in terms of what that's quite apart from buying a wonderful product, like Resolve's, how you might position yourself?
Fairly basic simple things they could do it to protect themselves in this type of environment. So in an environment of inflation and growth volatility, the prime directive should be diversity and balance. So you want to have exposure to a wide variety of different regional markets and a wide variety of asset classes. And you want to do your best to ensure that all of these diverse asset classes have the best opportunity to express their unique qualities when the time is right.
And the vast majority of traditional portfolios are, you know, like I said, designed really to primarily thrive during periods of benign inflation, abundant growth, and abundant liquidity. And we are about to see that process reverse. In all likelihood the markets that have done the best over the last 10 years are going to be moved towards the bottom of the pile over the next 10 years. So while it may be emotionally difficult, I think investors would benefit from looking through some of the stuff that looks least attractive based on his performance over the last 10 years, and making sure to have a reasonable allocation to those areas of the market going forward, because they're likely to end up near the top of the pile over the next five to 10 years.
That's been extremely useful indeed. Thank you very much. Really enjoyed some of the personal stories as well. I like the Burger King crown. But then how soon the king is deposed, because again, and I think that that maybe that risk is out there and when it arrives it's very, very difficult to control, but it seems as though you and Resolve have an excellent process in place to help do that. Thank you very much and we hope we'll have the chance to talk to you again on SmartBe Investments', podcast in the not too distant future.
It's been a great pleasure. If you would like to learn more about the subjects discussed today, please go to our website at smartbeinvestments. As emerging markets mature, the question that begs is What investor opportunity is next? The answer is frontier markets. Frontier markets offer the opportunity for investors to achieve comparable returns to the present generation of emerging markets, such as Brazil, Russia, India and China.
Frontier markets include parts of Asia, Central and South America, the Middle East, sub-Saharan Africa, and Eastern Europe, and this book explains the factors underpinning the growth and success of emerging markets and why and how these will be replicated in frontier markets.
Gavin Graham is a highly experienced fund manager who has a close eye on frontier markets. He sees the future potential by having hands-on information from teams who live and work in these markets. He helps guide the reader through the huge diversity that exists in these markets and explains that it is important to differentiate countries within regions by looking at economic development and wealth distribution, among other factors and fundamentals. Al Emids background in covering most financial and investing issues--including emerging markets--has largely been for financial services publications.
Together the authors bring over 75 years experience and insights to the narrative. The book is a not a view through rose-colored glasses.
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