Finding Ways to Diversify Portfolios as Tech Reclaims SPX Dominance

Nicole (0:00)

It's time now to check out our ETF watchlist. Joining me right now is David Aspell, CIO of Global Macro Mountain Lucas Management. Glad you are with us. So let's talk about what you're seeing in the recent market concentration. We were just looking at some of the sectors. You are gonna explain to us some ways of diversification, but let's first lay the groundwork here on what the market is doing.

David Aspell (0:26)

Yeah, hi, Nicole. Thanks for having me on.

Yeah, I think the market is trying to grapple with high oil prices and 10-year yields at 20-year highs, and the volatility that that's causing. And just the simple fact that what we're going through currently is a period where fixed income markets are really not diversifying stocks like they used to. And that's causing lots of problems for broader portfolios that have been relying on that correlation and relying on bonds to help out with stocks.

Nicole (0:53)

So with the top S&P names, the 10 top that are now 38% of the index, which is what you wrote there, it sounds about right to me. What are investors to do to find real diversification in the market rather than joining just let's say the S&P 500, which in your point is not necessarily true diversification?

David Aspell (1:13)

Yeah, that's it. I mean, as you said, wherever people are going to look for diversification now, they're finding that they're getting somewhat more concentrated in the underlying themes that Taiwan and Korea make up about half of the MSCI EM market. And there's just a few stocks that are some 30% of that index. If you go into privates or investment grade credit, what you're seeing is the AI theme is kind of bleeding through into those through data center funding and the AI build out generally. And that's causing it's been it's real hard to get that diversification. What we do is we go into complete different places. We trade in commodity markets, we trade in currency markets, we trade in the fixed income markets as well. And importantly, we're able to go both long and short, which means you can get a really different return stream. It's doing really well currently this year, in part because it's got nothing at all to do with the concentrated areas in the stock market.

Nicole (2:06)

And so, I mean, we're always watching the yen, for example. I think there were even some moves today.

But I wanted to feature here KMLM, the Crane Chair's Mount, Lucas Managed Futures Index Strategy ETF. Tell us specifically about that.

David Aspell (2:22)

Yeah, so the KMLM is an ETF. It tracks our MLM index, systematic trend following strategy. We've been running it since 1988, at least the strategy as a whole, the ETF is a little newer. We're trend following in global bonds, currencies and commodities.

It means we can go by as long and short things, which is where we get the diversification from. It's up around 20 percent on the year currently, with a low negative type of correlation to the stock market. The last few months have been really strong, top quartile amongst the peers, although the whole space is doing well. And the strategy allows you to do different things. We look under the hood at it. Let us say we trade those three asset classes.

We've been long of oil and heating oil and gasoline through this whole period. That's been really useful. That's one of the things that's driving up interest rates and is going to start having a stock market here. And we've also been short of fixed income, which gives you direct exposure to the rise in yield. So we've been able to get direct exposure to the areas that are making it difficult for the equity market. And that's really helping out in our portfolio and helping out in investors' portfolios.

Nicole (3:29)

Yeah. I mean, you said short bonds, long energy, diversified currencies was just exactly what you told us. Are you staying on that path? When does the, you know, the idea of this change at all? Because right now, that's the path you're on, right? I mean, do you expect to maybe upgrade it or change it in six months? And what might that be? What are you looking for?

Yeah.

David Aspell (3:53)

Well, what we do, I mean, it's a trend following strategy. So we're doing exactly what it says. If things are going up, then we stay long. And if things are going down, we stay short them. What will change is if the market's character starts to change. What ideally would happen is that markets level off at high levels for something like crude. And then that enables us to see a trend change coming, and then we'll exit those positions. And then if in a year's time, we're on the other side of this and crude oil is going straight down, then we'll just as happily be short as we are long right now. What we're doing is just following the markets and going where they're going. So currently, bond prices have been falling a lot, yields have been going up. Eventually, if that gets to a point where it levels off, that'll be okay. And then we'll just flip the other way. What it looks like in the future, I have no idea. We're not crystal ball people. What we're doing is just following trends. We're doing it for a really long time.