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Smoother Dynamic Total Return
Dreyfus' Dynamic Total Return Fund
Interview with: Sinead Colton, Vassilis Dagioglu

Author: Ticker Magazine
Last Update: Aug 27, 8:34 AM ET
Traditionally investors have been encouraged to diversify portfolio between stocks and bonds with 60/40 allocation. Dreyfus’ Dynamic Total Return Fund takes that process further and can diversify across many asset classes to generate equity like returns. With the strong overlay of risk management tools, the fund seeks to limit downside and remains focused on delivering superior outcome to benchmarks.

“The fund is a go-anywhere, managed volatility strategy that invests across a variety of asset classes from stocks, bonds, cash, currency, and commodities.”
Q: What is your portfolio construction process and how do you employ your diversification strategy?

A: We start by developing bench returns for each market and asset class. We also develop our expected risk for each market and asset class, and their correlations. We use an optimization process to create a portfolio at a particular risk level. The optimization process keeps us from concentrating risk in any one or two positions, and ensures that the overall portfolio is diversified.

The second element is the liquidity screen, by which we score the entire market. For markets that are less liquid, we take a slight haircut on those positions within the optimizer so that the targeted risk level of the portfolio the optimizer produces is diversified.

Q: What benchmark do you use?

A: As we practice dynamic total return strategy, we are benchmark-agnostic. Internally, we aim to deliver an equity-like return within the expected risk range of 7% to 10%. We can be outright short certain asset classes, we can have some leverage in the portfolio, and we can, in an extremely risk-averse scenario, be 100% in cash. What that means is that over short periods of time, our positions and our performance could look quite different than a more traditional benchmark.

Over a 5‒7-year basis, we’re fine with people comparing our returns to those of the equity market, whether that’s the U.S. dollar-based MSCI World Index or MSCI ACWI [All Country World Index]. In addition to comparable returns, we want to deliver a much higher Sharpe ratio, delivering returns at a significantly lower risk level.

Some people like to assess our returns from a risk perspective and profile. The risk is similar to risk in the traditional 60/40 allocation strategy.

Q: How do you define and control risk?

A: Ultimately, we focus on delivering outcome, so our risk lies in not meeting that outcome, losing money and getting back less principal than was invested.

There are a number of measures that we monitor within the portfolio. The first is the expected risk, which is really the standard deviation of our positions, or the expected volatility of those positions. We also monitor the potential drawdown.

We have our own measures for the standard deviation we allow concerning risk that we created in-house. However, we also use third-party measures as a second pair of eyes on what our risk estimates are.

Outside of that, we look at potential drawdowns in the portfolio. It comes back to our stress testing, what’s coming down the track that might have a big impact on the portfolio.

We assess and continually monitor the overall liquidity of the portfolio in order to ensure that, regardless of the market environment, we can liquidate our position, when necessary.

In terms of measuring how well we’ve done, overall we’re focused on generating return. We want to see a higher Sharpe ratio. We also want to see a better Sortino ratio. It’s about seeking to minimize the drawdowns so that investors are in a better position to continue accumulation moving forward.

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