Navigating Inflation

Christian Argyros:

On today's segment of navigating inflation. Our team is pleased to introduce Doug Vaaler regional vice president of low core funds, low core fund's primary investment objective is capital appreciation in rising and falling commodities markets with managing volatility as a secondary objective, please enjoy our brief discussion with Doug as he discusses inflation and how it affects their portfolios as a whole

Doug Vaaler:

General thoughts on inflation. I mean, I think most people would say, you know, pretty clear they feel it in their own pocketbook. So there's clearly some inflation, but the question that seems to get debated so much right now is, you know, is it persistent inflation or is it transitory? And quite frankly, we, we at low core kind of feel like we don't know for certain, there's probably aspects of both. There's some persistent inflation that's probably in the economy, but then there's some of that transitory stuff that's coming out of the pandemic and, you know, shortages and, you know, uh, problems at the ports and things like that, all the things that you're hearing about and will, you know, when those get solved or settled or flush themselves out, some of that inflation will probably go away. And I don't think that's any great revelation. I think a lot of people can kind of think through that on their own, but the, the point that I would get to as far as how it affects our portfolios at low core is that we, you know, low core stands for low correlation.

Doug Vaaler:

We believe correlations are very important in building a well-diversified portfolio. You have to take them into account. And so all of our portfolios in one way or another are designed to be uncorrelated or have as low correlation as possible to the traditional markets that you're in bonds, um, and, and low correlation, or, you know, no correlation doesn't mean negative correlation. It doesn't mean we go in the opposite direction, always, although that does happen, but it also means we can go in the same direction. It basically means we're independent. Those other markets, which is really what you want in a diversifier. And to us, that's the key because the question shouldn't be, uh, are you, you know, wondering whether inflation is a real threat or if it's transitory or a persistent, the question is what does inflation do to all in all the markets that we operate in?

Doug Vaaler:

And we, we operate in stock, indexes, currencies, interest rates, and commodities, well, inflation is going to affect all of those things and it can affect it to the upside or to the downside. The beauty of our strategies is we can go long or short meaning we can adapt to whatever happens. So whether inflation's real, whether it's persistent, whether it's transitory, that doesn't change the way our managers manage their portfolios, they're constantly adapting to the changing market environments, which is very unique in the investment world. There's not a lot of things out there that do that. So for us, it's more important that you, that , the clients have a portfolio that is diversified across asset classes, and aren't just limiting themselves to long, only equities or bonds as a diversifier. You know, I think we've touched on a number of times interest rates being at, you know, the 10 year treasury being at 1.5, 1.6, somewhere in that area.Doug Vaaler:

There's just not a lot of room for bonds to help you going forward as a diversifier. Like they have the last 30 years where you've had falling interest rates, which means bond prices are going up. And your total return from the bond side of your portfolio is, you know, probably five to 7%, depending on, you know, how aggressive you are. That's not going to happen going forward. And I think most would agree with that. And if interest rates rise, then you pretty quickly are going to get into some negative returns from that diversifier side of your portfolio is, which is what you've used bonds for. So in, in relation to inflation, what, what we think is it's more important that your portfolio be prepared for whatever happens, as opposed to trying to react to, you know, what your thoughts are going forward and make a prediction. And that's the beauty of what low core does is we, we don't make predictions.

Doug Vaaler:

So we, we don't typically put out, uh, white papers on where we think inflation's going to be or where we think the S and P is going to close at the end of the year. Like a lot of asset managers. Um, there's some good information out there from managers that do that. Instead, our managers are constantly monitoring the markets around the world and trying to adapt and take advantage of the price momentum movements either up or down. And so we just feel, we, we feel real strongly that it's important to have, uh, correlated strategies like ours, somewhere in the mix, particularly on that diversifier side of your portfolio.

Cary Stalnecker:

No, that's helpful. That's, that's really thank you that Doug question for you to get more specifically and more specific. And by the way, since we're going to cut this up, that was, that was great. So thank you. Yep. Um, I think there's a couple points in there that were really salient and really hit the nail in the head that we haven't heard from anyone else. I think that was great.

Doug Vaaler:

And some that were working.

Cary Stalnecker:

Yeah. Some that were, but Hey, it's less worthless than I than I probably would've had. So, um, any question for, so ask not to talk your book too much, but I think you, you got my mind thinking about the way the low core thinks about their role in their portfolio and how they're managing their strategies. Can you talk about whether it's persistent or not, how strategies has kind of navigated this, this lift and, and asset prices over the past 12 months in commodities and how long the long short strategies has, has navigated that and how are they doing it differently?

Doug Vaaler:

Yeah, let me grab something here and I will, So I can give you a kind of a rough idea. So if you look at, you know, commodity prices, as an example, uh, depending again, think about commodities cert, just because there's inflation and certain things, cert Caroline, sorry.

Doug Vaaler:

Um, certain things are going up, certain things might be going down at the same time, right? So we have to look at all the different commodities and that's in both portfolios. And then we also have to look at, you know, other things in macro strategies that we're just looking at commodities on the long, short commodity, obviously, but in macro strategies, we add in equity indexes, uh, fixed income rates, you know, or, or the, uh, interest rate futures as well as the, uh, currencies. And so we constantly adjusting from long to short or even more, more importantly, how long, or how short meaning, how much risk do we employ? So a good example would be oil. Um, you know, energy, you've seen oil kind of bounce. It, it went up from a, a low, I mean, what was, didn't it get? We, I think we had negative, uh, futures on the oil for a day, uh, or an hour, but we went from that point to where we got up close to what, 85 or plus a barrel.

Doug Vaaler:

And we've kind of come back down. Well, those changes are constantly happening, but there's an overall trend, obviously that's up. And so the way our managers manage, they're typically going to, if that trend is up, they're going to be long oil. And that if it keeps in a prolonged trend, they're going to get longer as that trend continues. And they're going to profit from that as long as they can, when things turn around and oil reverses itself, which it actually did, it went back down to 80 something. And now I don't know where it is today, but when that happens, we're going to give some of that back. But the managers, you don't want them to switch all of a sudden to try to get every move that the, that these things, all the things we trade make, you want them to slowly adjust. So if oil started going on a prolonged downturn, we may lose for a little while.

Doug Vaaler:

Some of the gains we got while, while it was going up, but then the beauty of the models and what makes them good is that they, well, we quickly, we get over to the right side of that, and then they'll profit as oil prices move downward. And then that, that is just constantly going on. Just like, particularly if you think about commodities, it's such a cyclical environment that you, you see things moving up and down and sometimes they're in cycle. So you feel like you can predict them, but I would challenge anyone to be able to do that. But as if you, if you're using a disciplined model that causes you to, you know, do what they do get longer, as the trend continues upward, make more and more profits. Then you give some back, they know that's going to happen. And then they get on the right side when things turn around and go down.

Doug Vaaler:

So again, back to, you know, inflation, you know, inflation, like I said, affects everything. So inflation clearly affects commodities. That's, you know, kind of the bell weather, but then that also affects what the, the federal reserve’s going to do with interest rates. Are they going to, you know, they're going to raise interest rates to dampen inflation. That's typically, you know, what they will do. Um, when are they going to do that? And when that happens, that's going to cause trends in the interest rates, which our managers then will be able to profit from those trends. Um, everything is kind of interrelated. You know, commodities are dollar denominated for the most part. So then that affects currency exchange rates, you know, with a dollar versus all the world's currencies. And so all of those things are interrelated and the models take that into account.

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