Tag Archives: david-fabian

Why I Still Like DoubleLine Total Return As A Core Bond Holding

Summary Certain bond funds, and fund managers, have proven to be successful navigators in the complex environment of security selection, duration, and risk management. I am a staunch advocate of ETFs and believe that they are one of the best tools in an investors’ arsenal. However, you simply can’t find this unique bond strategy in an ETF at this time, which is why we have continued to stick with the marginally more expensive mutual fund. Long time readers of our blog know that we are proponents of active management in the fixed-income world . Certain funds, and fund managers, have proven to be successful navigators in the complex environment of security selection, duration, and risk management. For that reason, we continue to recommend to our clients that they step outside the confines of a benchmark index to seek greater returns or reduced volatility as a result of interest rate fluctuations. One long-term core holding in our Strategic Income portfolio has been the DoubleLine Total Return Bond Fund (MUTF: DBLTX ). This actively managed mutual fund is governed by Jeffrey Gundlach, who has risen to fame as one of the premiere fixed-income experts in the world. DBLTX invests more than 50% of its portfolio in mortgage-backed securities, but can also hold assets like Treasuries, corporate bonds, and cash when needed. Over the last year, Gundlach and his team have added a significant measure of alpha over a diversified bond index such as the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ). For an accurate comparison, I have also over laid a sector-specific mortgage index in the iShares MBS ETF (NYSEARCA: MBB ) as well. DBLTX has returned nearly double the gains of AGG and has also significantly outperformed the dedicated mortgage index over the last 52-weeks. If we widen the time frame to 3 years, you can see how substantial this performance gap has become. I am a staunch advocate of ETFs and believe that they are one of the best tools in an investors’ arsenal. However, you simply can’t find this unique bond strategy in an ETF at this time, which is why we have continued to stick with the marginally more expensive mutual fund strategy . The manager has earned that higher fee through superior performance, which is just what you want to see when you are paying a premium versus cheaper passively managed indexes. Now the question becomes – how much more juice can a fund like DBLTX squeeze out in relative performance versus its benchmark moving forward? It’s important to remember that DBLTX is not a “go anywhere, do anything” strategy. It’s going to behave like a bond fund, not like a stock fund or alternative investment strategy. The manager has guidelines that allow a certain degree of flexibility, but it is ultimately going to be directed by the interest rate and credit environment in any given year. While the timing is difficult to ascertain, there will almost certainly be periods of sharply rising interest rates on the horizon. I believe that this is where the managers of active mutual funds such as DBLTX can add the most value versus passive indexes. Treasury and investment grade-heavy benchmarks with intermediate term durations are going to underperform in a rising rate environment. The longer the duration or higher quality the bonds, the greater volatility that index will endure. However, an actively managed fund that can lower its duration and adjust its holdings to coincide with pockets of value or momentum will likely continue to earn its keep and outpace the competition. The Bottom Line Doubleline has been in the right places at the right times over the last several years. However, that doesn’t make them infallible to an incorrect call on interest rates or underperformance as bond market trends change. As with any active strategy, it’s important to regularly monitor the fund’s performance versus its peer group and benchmark to ascertain that they are achieving returns in line with your goals and realistic expectations.

Getting Out In Front Of The Next Bear Market

Summary Anyone that has been investing for any reasonable length of time knows that bear markets are inevitable. Most of the financial media and experts agree that the definition of a bear market is a drop of 20% or more from the high water mark. Keep an open mind to multiple scenarios and avoid becoming overly confident in a specific outcome. Anyone that has been investing for any reasonable length of time knows that bear markets are inevitable. It’s just part of the normal cycle of capital flows that swing from risk to safety with little dependable timing or logic. Most of the financial media and experts agree that the definition of a bear market is a drop of 20% or more from the high water mark. Of course, there is no way to accurately forecast when or where the next bear market will appear. They simply come and go with only hindsight as our guide as to what perceived causes led to the pernicious drop in your portfolio. Right now the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is approximately 11% off its all-time high. I think that most people would probably put that number next to “correction” in the dictionary rather than bear market. Nevertheless, many experts are already saying this is the big one. The first bear market since the 2008-2009 financial crisis. It’s already here and you better prepare yourself for Armageddon. If you bear with me for a moment (no pun intended), I want to lay down some thoughts as to the motivations for this sentiment. This may very well be the start of the next bear market, but no one knows with absolute certainty where the bottom might be or how the pattern will play out. My advice is to keep an open mind to multiple scenarios and avoid becoming overly confident in a specific outcome . Everyone wants to be the guy or gal who “called it”. They knew from the beginning that this time was different, and after a half-decade run, that the probabilities are favoring a down cycle. This is probably more driven by ego and self-satisfaction than trying to guide your hard earned nest egg or protect capital. Be wary of those who scream the loudest on the way down, for they are likely the ones who will be left on the sidelines as the market heads higher. Changes to your portfolio during a correction or bear market should be made with calculated steps. This may include selling into rallies or making subtle changes to your asset allocation in order to reduce your overall risk profile. That also means fighting the urge to capitulate on big down days or making drastic changes at inopportune times. Nothing goes straight up or straight down in a perfect sequence. The market does move fast, but you have to pick your spots in order to avoid making a big mistake born out of short-term panic rather than sound logic. The Bottom Line I find myself fighting the same cycles of fear and greed that everyone else does. It’s simply a natural psychological reaction to get more pessimistic on the way down and more optimistic on the way up. Yet, letting those impulses translate to big shifts in your portfolio may result in taking too much risk near a top and being too conservative near a bottom. In addition, I always find it helpful to tune out the noise of the financial pundits who thrive on this emotional roller coaster. They don’t know anything more than you do with respect to where the market is headed and they certainly don’t know anything about your personal needs. You should be working with an advisor or managing your own portfolio with well-defined parameters that relate to your specific situation. Share this article with a colleague

This ETF Will Tell You A Lot About Inflation Expectations

Summary Inflation is a scary word, as it generally presages effects like rising interest rates, higher costs of living, and climbing commodity prices. Based on widely accepted measures such as the Consumer Price Index (CPI), inflation has been kept in check or steadily trending downward over the last several years. Another way to gauge inflation expectation is by taking the temperature of the fixed-income markets. Inflation is a scary word, as it generally presages effects like rising interest rates, higher costs of living, and climbing commodity prices. This has been one of the expected outcomes from the Fed’s implementation of quantitative easing during the course of the last half decade. Yet, despite their best efforts, inflation has been a non-event in the economic recovery from the 2009 lows. Based on widely accepted measures such as the Consumer Price Index ((NYSEARCA: CPI )), inflation has been kept in check or steadily trending downward over the last several years. Obviously the decline in traditional commodity and agriculture prices has helped keep input costs in check, which have in turn carried forward to products and services we consume. Another way to gauge inflation expectation is by taking the temperature of the fixed-income markets. One of my preferred methods for this task is monitoring the price trend of the iShares TIPS ETF (NYSEARCA: TIP ). This ETF has $13.5 billion dedicated to a portfolio of 39 Treasury Inflation Protected Securities. TIP has an expense ratio of 0.20% and an average duration of 7.71 years. Most investors incorrectly assume that something with “inflation protection” in the name must mean it works well in a rising interest rate environment. However, TIPs function by readjusting their coupon payments based on the movement in CPI. Essentially they offer an insurance component that makes them attractive to own when inflation measures are on the move higher. A look at the chart of TIP below shows how fixed-income investors perceive the likelihood of true inflationary pressures creeping up. Not only is the price of TIP trending lower, but the short and long-term moving averages are also sloping down as well. Of course, it’s important to consider the price trend of TIP in context of the wider bond market as well. When you compare this index against a basket of traditional intermediate-term Treasury bonds, it makes the divergence even more pronounced. Below is a 1-year performance comparison between TIP and the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ). The spread between these two indexes shows a big separation since mid-July, when the talk about the Fed raising interest rates really started to gain some traction. So what does this mean for your portfolio? The primary reason for owning TIPs is to gain a hedge against inflationary pressures. Right now there isn’t any evidence to support this thesis. One day that will probably change, but for the time being I am avoiding any significant ownership of this sector. It makes more sense to stay focused on areas of the bond market that offer higher yields, solid trends, or a compelling advantage for your specific portfolio . One such fund that I own for clients in my Strategic Income Portfolio is the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ). This actively managed ETF owns a variety of quality and credit securities across multiple attractive sectors of the bond market. TOTL eschews any TIPs exposure for greater focus on mortgage backed securities, emerging market bonds, and a mix of corporates. This ETF has a 30-day SEC yield of 3.18%, average duration of 4.25 years, and charges an expense ratio of 0.55%. The Bottom Line TIP is a solid index to monitor for a sense of where the market perceives inflation to be headed over the short and intermediate-term time frames. However, I would prefer to own this ETF in the midst of a strong price trend and more supportive fundamentals for inflationary statistics.