Deutsche’s Kremenstein: Building The Brand


Martin Kremenstein, the Chief Investment Officer at DB Commodity Services, is keen on making investors aware that Deutsche Bank aims to become a bigger player in the U.S. ETF market. Truth be told, Deutsche Bank is already among the top 10 players. But most of its assets are folded into those of Invesco PowerShares, which markets Deutsche products under the “PowerShares DB” brand.

Kremenstein isn’t taking sides when it comes to discussing how the recent U.S. rollout of Deutsche’s db-X ETF brand will affect the PowerShares DB product line. Instead, he told Managing Editor Olivier Ludwig he’s equally excited about both the new lineup of db-X currency-hedged equity funds and the new PowerShares DB ETNs that give investors access to single-country sovereign debt.


Ludwig: What does the db-X product line mean for your relationship with PowerShares? The last time I looked at the numbers, I think PowerShares had around $55 billion under management, and about a quarter of that is actually Deutsche Bank’s assets.

Kremenstein: We wanted to expand our product lineup. We’ve done well in the commodities, currencies and alternative spaces, but we wanted to break into a more mainstream marketplace. We decided to launch a securities-based platform, and at the same time thought that it would be a good opportunity to launch the db-X brand in North America. Given the strengths of the brand in Europe and its success there, we thought this would be a good opportunity to bring this to the U.S. market.

Ludwig: So, how is the U.S. db-X rollout going?

Kremenstein: It’s going well. We re-branded the TDX Independence funds to be the db-X Target Date funds. We’ve launched the five MSCI currency-hedged funds. We're getting a lot of interest in those from investors. [(NYSEArca:DBJP), (NYSEArca:DBBR), (NYSEArca:DBCN), (NYSEArca:DBEF), (NYSEArca:DBEM)].

It’s a complex story to get out there and tell people. Not a lot of investors were aware that they are running currency risk in their international equity portfolios. People have been buying international equities because of their outperformance over the U.S. market. If you look at the EAFE Index, all of its outperformance over the S&P 500 over the last 10 years has come from the currency component; that is, being short the U.S. dollar and long on foreign currencies.

It’s the same thing with Japan. In Canada, half of the outperformance over the S&P has come from the Canadian dollar strength over the U.S. dollar. Currency movements have also been a big contributor to the outperformance of Brazilian and emerging markets equities over domestic equities over the last 10 years.

If you look at dollar trends over the last 40 or 50 years, they’ve tended to move in six- to 10-year bands, the average being seven years at a time. We had a seven-year band from 2001 to 2008, when the dollar declined by 40 percent, and it’s been trading sideways ever since.

We brought these products to give investors an opportunity to manage the returns that they’re getting from the currency exposures, within their equity portfolio.



Ludwig: Are people even aware that the “DB” in the PowerShares DB products you sponsor with PowerShares has anything at all to with Deutsche Bank?

Kremenstein: I think the market is well aware of the PowerShares DB lineup, and people are aware that Deutsche Bank is the fund manager there. Our track record in the commodity and currency ETF space serves in our favor. When we launched (NYSEArca:DBC) five years ago, from the start we were talking about roll yield and how it can affect your returns. Most investors had not heard about roll yield, and just knew they wanted to be in commodities. Now, five years later, everybody seems to know the words “contango” and “backwardation.”

Ludwig: Can you elaborate at all as to how you might delineate the PowerShares DB and the db-X product lines? I presume you don’t want to be launching competing products under both brands, right?

Kremenstein: We won’t be competing. I think we have a well-defined theme under the PowerShares DB brand, and so we’re going to keep that.

But we have other products and other things that we want to launch, which we’re going to launch under the db-X brand. The bank has no interest in competing with itself.

Ludwig: Is it fair to say that there may be more emphasis on one than the other? I presume that, from a financial perspective, that db-X is probably going to be more profitable to Deutsche Bank than the PowerShares DB, simply because you don’t have to give up any basis points to cover those marketing costs that PowerShares now performs under that agreement.

Kremenstein: We have a strategic vision about where we want to go, but I don’t see us favoring one brand over the other. They’re both very distinct. And I think, to a certain extent, you bring out what you think the market wants and what you think is going to work well in the market. If that turns out to be products that would fit much better under the PowerShares DB brand, then that’s what we’re going to be launching. If it turns out that it would be products that would fit better under the db-X brand, then that’s what we’ll be launching.

Ludwig: And what would be a measure of success for db-X products as far as assets under management that you’re willing to discuss?

Kremenstein: We want to get a platform out there that is self-sustaining and is accepted by the marketplace. No one launches an ETF platform looking to get a few million dollars of assets. You are generally looking to get your assets into the billions. Where that actual number is, I couldn’t actually say, for sure.



Ludwig: You spoke a bit about the optimal yield roll of the DBC. Can you speak a little bit to that product’s methodology, as it relates to the ETFs United States Commodity Funds is serving up now? The obvious two in the space to compare at this juncture are DBC and (NYSEArca:USCI). Or, if it’s just oil, (NYSEArca:DBO) vs. (NYSEArca:USL)? Perhaps DBO and USL are more interesting to compare, because those exposure schemes are quite different, right?

Kremenstein: I can’t comment on other products, but DBO only selects one contract. It uses the optimum-yield methodology, when it’s time to roll exposure, to find the futures contract over the next 12 months, with the best implied roll yield. And it’s worked well. DBO is the best-performing West Texan crude product both year-to-date and over the longest time period that you can compare all of the products out there in the marketplace. Clearly, optimum yield has done a good job in terms of mitigating roll costs when the curve is contangoed, and profiting from backwardated curves.

Ludwig: I understand that you don’t want to talk too much about other products, but in the case of DBC vs. USCI, it’s hard not to see those as direct competitors. You have multicommodity funds that own different contracts based on a rules-based system that chooses contracts with the least contango or the most backwardation, as it were. I’ve looked at the return numbers and, in the recent past, DBC has done relatively well. Is it because of crude oil?

Kremenstein: I think there are a couple more variables. DBC is up 9 percent year-to-date. It’s actually outperformed all the other broad commodity products available, whether they’re following front-month indices or they’re rebalancing monthly or some other methodology. I don’t think it’s the energy exposure, because if you look at, say, the GSCI, it’s flat year-to-date, so it can’t be just the energy exposure.

Ludwig: GSCI being the quintessence of a heavy energy exposure for an index?

Kremenstein: Exactly. So, it’s not just the energy component. I think optimum yield has worked very well year-to-date. From a long-term, buy-and-hold perspective, DBC has shown its worth over the five years since it was launched. It has massively outperformed the benchmarks. And it’s able to do that at very high asset levels. We’re not doing this at a few hundred million dollars in size. We're doing this at a $6 billion asset level.

Ludwig: Let’s turn our attention to the sovereign debt ETNs you’ve rolled under the PowerShares DB brand. You have German bonds, Italian, Japanese and U.S. Can you speak to how those products might be used, given the current environment? There’s obviously a lot going on right now.

Kremenstein: We launched the leveraged U.S. Treasury, ultra-long Treasury bond products first. We saw use of those in a couple of ways. One was for traders who wanted to trade on U.S. rates at the far end of the curve.

The duration of the ultra-long bond future is about 16 years, and the ETNs are leveraged three times. So, you’re looking at 48-year duration. That makes it a targeted way to take a concentrated view on where rates are going to be. And we’ve seen a reasonable amount of interest in the triple short. We’ve used monthly rebalancing, which has served it very well. We use monthly rebalancing in all of our leveraged products rather than daily, and that’s why you’ve seen (NYSEArca:SBND) outperforming competitor products that have daily rebalancing built into them.



Ludwig: It’s short with regard to the price. So if you’re short on SBND, you’re looking for rates to rise and the price to get crushed.

Kremenstein: That’s correct. And it can be used to hedge out the interest-rate risk in your bond portfolio. Let’s say you’ve got a portfolio of corporate bonds, and you like the credit, but you don’t like the rates environment. You can use a small amount of SBND to try to hedge out some of that interest rate risk in your portfolio. So, it’s a capital-efficient way to hedge your portfolio.

Ludwig: How about some of the other products? What are some of the ways they can be used?

Kremenstein: With regard to the European and Japanese products, there aren’t any other ways to get exposure to single-country government debt markets. These are good tools for people to use. There’s a single-long Germany (NYSEArca:BUNL) that’s up 13.5 percent since it was launched about four months ago. The triple long is up 45.25 percent. And then if you look at the Italian single long, that’s down 3.20 percent since it was launched at the same time.

Now, you could’ve taken a position in long Germany, saying you want to have a safe haven or another way to diversify your portfolio, buying German government debt. Or you could have tried to do some kind of pairs trade, going long BUNL and short (NYSEArca:ITLY). You would have picked up about 15 percent there.

So, again, we’re looking at tools to enable investors to start to take a more precise view on things. There are a lot of single-country equity funds out there. There are a lot of bond funds out there. And over the last years, two big trends have been toward single-country equities and towards bond funds. And we thought we’d try and put those two trends together with single-country bond products.

Ludwig: Can you speak to the Japanese product for a moment? The Japanese yen is one of these wild cards, right? The currency isn’t really behaving in a way that reflects “QE25,” or whatever they’re up to now after 20 years of quantitative easing.

Kremenstein: The single Japanese product is up 2 percent since it was launched, and it has moved with fairly low volatility. So, again, it can be a nice diversifier in a portfolio and useful for investors who want to do some asset allocation.

The leveraged product has a bit more volatility. And, again, if investors want to express a view at some point, such as Japan having to raise rates, then shorting these products could be a very good way to do it.

Ludwig: What’s your macro view at this juncture? There are a lot of crosscurrents that have a lot to do with debt, yes?

Kremenstein: I can’t give investment advice, but volatility has been fairly pronounced. Investors need to pay attention to what’s going on, and if the market changes, so should your strategy. Investors need to adapt to the market environment.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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