Portfolio Manager Matt Cardillo discusses why the Fund was launched, how it works, and how it has delivered on its objectives.
MATTHEW CARDILLO: So, when Tony and I first conceived the idea behind MDAF, we did a deep dive on the alternative product that's available in the Canadian marketplace. And, we didn't really find a lot of diversification there. And, we believe that the only true free lunch in finance is diversification. So, we wanted to offer a broad diversified exposure to alternative assets because we really think it would benefit Canadian investors. So, we designed this to be a complement to traditional 60/40 balance portfolios in Canada. And, the reason is is, you know, at this particular point in time, the two asset classes that drive balance product are looking pretty expensive and you're really only exposed to two risk premia in those two asset classes. That being, the equity risk premium and the interest rate risk premium. So, we think it's important to get exposure to different asset classes AND the risk premia that drives returns in those asset classes. And, that's what we mean with the 'complementary nature' of MDAF.
So, as an investor, you can expect to find the things that Canadian investors don't get exposure to in regular balance funds. This would be real estate, infrastructure equity, private equity, corners of the bond market that are less exposed to interest rate risk, stuff that we consider non-traditional fixed income. And then, corners of the equity markets that offer unique opportunities, as well, such as preferred shares or micro cap equities.
So, the goal of MDAF is to maximize the sharp. So, there is a model that is used. We use a model to manage MDAF. And, the model it sifts over returns, volatilities and correlations for these alternative asset classes and it comes up with a combination that is most likely to be sharp-enhancing when held in combination with a traditional global balance fund.
So, we always envisioned MDAF being tactical, of course, but not super tactical. So, on a spectrum of tactical nature, you would have static, strategic, which would be just market pricing, is changing the weights. And then, on the other end, you'd have super tactical, which we would consider high-frequency, higher frequency trading. So, being in an asset class for a week and then out of it. MDAF isn't meant to be either one of those. It's meant to be in the middle, which is still tactical but not heavily trading.
So, we have about 50 different assets classes that are available for investment within MDAF. And, if you consider all of the intra-correlations amongst these asset classes, and their correlation with a referenced benchmark for the traditional 60/40 core portfolio, that's a lot to keep track of. So, using a computer is a natural way to handle the complexity of the problem. And, again, it is a simple model. It takes in three inputs; their returns, volatilities and correlations for all of these asset classes. And, the model s ifts through that and comes up with the...it solves for the optimal allocation so that it should be sharp-enhancing when held in concert with traditional 60/40 core.
We’re very happy with the performance. It is doing what we set out to do. So, when we did the research on the concept behind MDAF...remember, the concept was sharp enhancement, sharp maximization, sharp ratio maximization, we have actually delivered that in the live performance. So, this has been by design. And, we have been gratified to see that in the live history of the product.