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333 S. Grand Ave., 18th Floor || Los Angeles, CA 90071 || (213) 633-8200
The Flexible Income Solution to the
“Unconstrained” Conundrum
December 2016
Hunter Downs, CFA
Ted Hospodar
2
Unconstrained Bond Strategies
Unconstrained Bond Strategies - December 2016
DoubleLine’s Approach to
Unconstrained Fixed Income
At Doubleline, we believe investors
should proceed cautiously when
considering an investment in
unconstrained bond strategies. That
does not mean these strategies should
be avoided entirely. Some of the
benefits of these products may
include better relative performance
over a gradually rising interest rate
environment, reduced correlation to
existing fixed income holdings, and an
ability to derive return from credit
premiums. When we launched the
DoubleLine Flexible Income Strategy
(the “Strategy”), we deliberately
avoided using the unconstrained
terminology. We believe that the
Strategy can be utilized in a well-
diversified portfolio to compliment
traditional core bond strategies
benchmarked against the Bloomberg
Barclays U.S. Aggregate Bond Index,
potentially providing a higher level of
income and taking advantage of
further opportunities with its flexible
mandate. The Strategy seeks long-
term total return through current
income and capital appreciation.
The Strategy is built upon four main
principles: the stability of our team,
active management, a longer-term
investment horizon and avoidance of
unnecessary risks.
Stability of Our Team
Asset allocation decisions within the
Strategy are made by DoubleLine’s
Fixed Income Asset Allocation
Committee (the “FIAA Committee”),
which is led by Jeffrey Gundlach and
includes senior portfolio managers
from each asset class. The FIAA
Committee meets monthly and has
worked together for over 16 years on
average. The goal is to provide better
risk-adjusted returns over a variety of
different interest-rate environments.
Active Management: Relative
Valuation Analysis
The global fixed income markets offer
a very diverse set of risk factors. Thus,
one of the key benefits of a more
flexible approach is the ability to
allocate capital to sectors of fixed
income with the most attractive risk-
adjusted return potential. We offer a
unique solution through our top-down
macro asset allocation framework in
differentiating between fixed income
subsectors to take advantage of
developing secular themes while
mitigating unnecessary risk taking.
This analysis is applied when
evaluating the diverse range of risk
factors, including market directional
risk in rates, sector spreads, relative
value risk and idiosyncratic (i.e. issuer
or bond specific) risk. The integration
of these risk factors offers greater
diversification benefits beyond
individual underlying allocations and
alleviates the duration risk factor that
is most prevalent in traditional core
bond strategies.
Benchmarking a portfolio to 3-month
LIBOR, which has a duration of about
0.25 years, rather than a traditional
fixed income index with a duration of
about five years, has the effect of
reducing the baseline for duration
exposure. Duration then becomes one
risk factor that can be employed to
generate returns, rather than the
dominant risk factor that drives
Figure 1: Traditional vs. Non-Traditional Sector Yields
As of September 30, 2016
Source: DoubleLine, Barclays Capital Index Data, S&P/LSTA Leveraged Loan Index Data, JP Morgan Research U.S. Government Securities = G0A0, International Sovereign Debt = N0G0, Agency Residential MBS = M0A0, Commercial MBS = CMBS, U.S. Investment Grade Corporates = C0A0, Emerging Markets Sovereign Debt = IGOV, Emerging Markets Corporate Debt Broad Diversified = JPM CEMBI BD, *Non-Agency RMBS = Calculated by DoubleLine, Bank Loans = S&P/LSTA, Global High Yield Corporate Debt = J0A0, **Collateralized Loan Obligations = JP Morgan Research CLO AA Post- Crisis Yield (JCLOAAYD Index). Yields may not be reached based on various factors. You cannot invest directly in an index. Past performance is no guarantee of future results.
“Non-Traditional Bond Sectors”
Sector Yield
U.S. Government Securities 1.13%
International Sovereign Debt 0.05%
Agency Residential Mortgage-Backed Securities 1.81%
Commercial Mortgage-Backed Securities 2.41%
U.S. Investment Grade Corporates 2.90%
Emerging Markets Sovereign Debt 5.15%
Emerging Markets Corporate Debt 5.38%
Non-Agency Residential Mortgage-Backed Securities* 4.25%
Bank Loans 6.01%
Global High Yield Corporate Debt 7.23%
Collateralized Loan Obligations** 3.58%
“Traditional Bond Sectors”(Barclays Capital
Aggregate Index sectors)
3
Unconstrained Bond Strategies
Unconstrained Bond Strategies - December 2016
returns and limits diversification
potential. With the yield on
government bonds and other core
bond sectors at record low levels, the
Strategy seeks to utilize a variety of
credit sectors to achieve its long run
goal. As such, cross-sector spread
analysis and deducing risk premia to
compare levels of volatility are ways
the team seek to evaluate risk factors
and time tactical shifts in the
portfolio’s risk exposures. Also, this
will allow the team to reduce the
concentration risks of unidirectional
sector or credit bets. This approach is
paramount, given credit sectors
themselves are less homogenous and
dispersion of credit value across the
sectors will present opportunities the
team can take advantage of.
Longer-Term Investment Horizon
The FIAA Committee uses a longer
time horizon when making
investment decisions, typically
between 18 and 24 months. We
believe a longer-term horizon can
increase the chance of success within
the Strategy and differentiates
DoubleLine from competing firms
that have become increasingly near
sighted leading to high portfolio
turnover. We historically will ease
into and out of the various sectors of
fixed income, making gradual
portfolio shifts, as illustrated by the
soil chart (Figure 2). This ultimately
helps reduces portfolio turnover
which helps to manage potential
liquidity risks.
No Unnecessary Risk Taking
Generally speaking the Strategy does
not use derivatives, including futures
and swaps. Unlike many of the
Strategy’s competitors in the
Nontraditional Bond Category who
use derivatives to make interest rate
bets and leverage in order to increase
exposure to certain areas of fixed
income, DoubleLine prefers investing
using CUSIP cash bonds.
Final Thoughts
At DoubleLine, we believe investors
should continue to use actively
managed intermediate-term bond
strategies as their core fixed income
holding and look to complement
those strategies with more flexible
solutions. In the past investors
believed these flexible income
solutions were unconstrained bond
strategies, but they have largely been
a failed experiment. The mangers of
unconstrained strategies have traded
one risk for another, increasing the
equity-like risk and reducing the
historical diversification benefits of
owning fixed income. However, we
believe some investors may benefit
from a strategy that utilizes active
management for top-down macro
asset allocation and bottom-up
security selection to manage duration
within a wide range, opportunistically
provide yield and truly complement
your core fixed income holding. Even
in a prolonged period of stable or
rising interest rates, we believe a
flexible portfolio can offer attractive
risk-adjusted return potential,
exposure to developing secular and
global macro themes and generate a
low correlation to the direction of
major rate markets.
Figure 2: Historical Sector Allocation for DoubleLine Flexible Income Representative Account
May 31, 2014 to September 30, 2016
Source: DoubleLine Portfolio Statistics as of September 30, 2016. Subject to change without notice and should not be considered a recommendation to buy or sell any security.
4
Definitions
Unconstrained Bond Strategies - December 2016
Bloomberg Barclays U.S. Aggregate Bond Index - An index that represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S.
investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securi-
ties. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis.
“U.S. Government Securities” BofA Merrill Lynch US Government Index (GOAO) - The Merrill Lynch US Government Index tracks the performance of US government (i.e.
securities in the Treasury and Agency indices.)
“International Sovereign Debt” BofA Merrill Lynch International Government Index (NOGO) - The Merrill Lynch International Index tracks the performance of Australia,
Canadian, French, German, Japan, Dutch, Swiss and UK investment grade sovereign debt publicly issued and denominated in the issuer’s own domestic market and cur-
rency. Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding.
“Agency Residential MBS” BofA Merrill Lynch Mortgage-Backed Securities Index (MOA0) - This index tracks the performance of US dollar denominated fixed rate and
hybrid residential mortgage pass-through securities publicly issued by US agencies in the US domestic market. 30-year, 20-year, 15-year and interest only fixed rate mort-
gage pools are included in the Index provided they have at least one year remaining term to final maturity and a minimum amount outstanding of at least $5 billion per
generic coupon and $250MM per production year within each generic coupon.
“Commercial MBS” BofA Merrill Lynch U.S. Commercial Mortgage-Backed Securities Index (CMA0) - The BofA Merrill Lynch US Fixed Rate CMBS Index tracks the perfor-
mance of US dollar denominated investment grade fixed rate commercial mortgage backed securities publicly issued in the US domestic market. Qualifying securities
must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), a fixed coupon schedule, at least one year remaining term to final maturity and
at least one month to the last expected cash flow.
“U.S. Investment Grade Corporates” BofA Merrill Lynch U.S. Corporate Bond Index (COAO) - The Corporate component of the U.S. Credit index. This index includes
publicly issued U.S. Corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds
must be SEC-registered.
“Emerging Markets Sovereign Debt” BofA Merrill Lynch US Dollar Emerging Markets Sovereign Plus Index (IGOV) - This index tracks the performance of US dollar
denominated emerging market and cross-over sovereign debt publicly issued in the eurobond or US domestic market. Qualifying countries must have a BB1 or lower
foreign currency long-term sovereign debt rating (based on an average of Moody’s, S&P, and Fitch).
“Emerging Markets Corporate Debt” JPMorgan Corporate EMBI Broad Diversified Index (JBCDCOMP) – This index tracks a broad basket of performance of investment
grade corporate debt, including smaller issues covering a wider array of publically issued across a range of emerging market countries.
“Bank Loans” - S&P/LSTA US Leveraged Loan 100 Index – An index designed to reflect the performance of the largest facilities in the leveraged loan market
“Global High Yield Corporate Debt” - BofA Merrill Lynch U.S. High Yield Cash Pay Index (J0A0) “Below Investment Grade” - The Merrill Lynch High Yield Index tracks the
performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period, that is publicly issued in the US domestic market.
Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Firth foreign currency long term sovereign debt ratings).
Must have one year remaining to final maturity and a minimum outstanding amount of $100MM.
“Collateralized Loan Obligations” JP Morgan Research CLO AA Post- Crisis Yield (JCLOAAYD Index) - An index that captures over 3000 floating rate instruments in the
U.S. Dollar-denominated CLO market.
Duration - A measure of the sensitivity of the price of a fixed income investment to a change in interest rates, expressed as a number of years.
Yield - The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on
the investment's cost, its current market value or its face value.
One may not invest directly in an index.
5
Disclaimers
Unconstrained Bond Strategies - December 2016
Important Information Regarding This Report
Issue selection processes and tools illustrated throughout this presentation are samples and may be modified periodically. Such charts are not the only tools used by the
investment teams, are extremely sophisticated, may not always produce the intended results and are not intended for use by non-professionals.
DoubleLine has no obligation to provide revised assessments in the event of changed circumstances. While we have gathered this information from sources believed to
be reliable, DoubleLine cannot guarantee the accuracy of the information provided. Securities discussed are not recommendations and are presented as examples of
issue selection or portfolio management processes. They have been picked for comparison or illustration purposes only. No security presented within is either offered for
sale or purchase. DoubleLine reserves the right to change its investment perspective and outlook, as well as portfolio construction, without notice as market conditions
dictate or as additional information becomes available. This material may include statements that constitute “forward-looking statements” under the U.S. securities laws.
Forward-looking statements include, among other things, projections, estimates, and information about possible or future results related to a client’s account, or market
or regulatory developments.
Ratings shown for various indices reflect the average for the indices. Such ratings and indices are created independently of DoubleLine and are subject to change without
notice.
Important Information Regarding Risk Factors
Investment strategies may not achieve the desired results due to implementation lag, other timing factors, portfolio management decision-making, economic or market
conditions or other unanticipated factors. The views and forecasts expressed in this material are as of the date indicated, are subject to change without notice, may not
come to pass and do not represent a recommendation or offer of any particular security, strategy, or investment. Past performance (whether of DoubleLine or any index
illustrated in this presentation) is no guarantee of future results. You cannot invest in an index.
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independent pricing services and fair value processes such as benchmarking.
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