Monthly Commentary
October 2016
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Monthly Commentary 10/31/16
Monthly Commentary
During October, global markets were
focused on the U.S. Presidential
Election as the race tightened
significantly late in the month with
polls showing Hillary Clinton’s lead
over Donald Trump narrowing. The
campaign trail took an unexpected
turn on October 28th when FBI
Director James Comey notified
Congress that his bureau had learned
of new emails that could be pertinent
to their previously completed
investigation of Hillary Clinton’s use of
a private server when she was
Secretary of State. Following the
announcement, financial markets
experienced a bout of volatility that
continued through the end of the
month.
Regardless of the outcome of the U.S.
Presidential Election, we maintained a
cautious stance toward U.S.
Government bonds. First and
foremost, we believe that inflation
expectations are likely to increase
over the next several months
especially if energy prices stabilize and
healthcare costs continue to rise.
Although it may take a few months for
the base effects to roll off, the
Consumer Price Index (CPI) is likely to
push toward 2% over the next several
months which make Treasury Inflation
-Protected Securities (TIPS) an
attractive alternative.
In addition to rising inflation
expectations, both candidates are
likely to bring massive infrastructure
plans to the White House that will
likely be financed by additional debt
which is exclusive to the longer-term
issue of ballooning entitlements.
Foreign holders of U.S. Treasuries
(UST) have been net sellers over the
past several months. According to the
last two Treasury International Capital
(TIC) reports, foreign investors have
been net sellers of UST in favor of
other higher yielding investments.
Although UST offer an attractive yield
profile relative to many low to
negative yielding sovereigns, the yield
pickup has eroded thanks to rising
LIBOR and other costs associated with
hedging currency risk (see below).
As we expected, rates continued to
move higher during October as the
benchmark 10-year UST ended the
month up 24 basis points (bps) to
close at 1.83%. By month end, the
World Interest Rate Probability (WIRP)
function on Bloomberg implied just a
16% chance of a rate hike at the
November meeting while the U.S.
Dollar (USD) rallied in line with
expectations for the U.S. Federal
Reserve (Fed) to hike interest rates at
their December meeting. According to
the implied futures market, there is a
71% chance of a hike at the December
14th meeting. With a November hike
virtually off the table, the market will
have its eye on the Federal Open
Market Committee (FOMC) to see if
they can hold on to any credibility of
their interest rate forecasts.
Overview
Yield Pickup for European Investor Buying 10-Year U.S. Treasury (FX Hedged) vs. 10-Year Bunds
Source: Bloomberg
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
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Monthly Commentary 10/31/16
Monthly Commentary
Prepayment speeds were faster
this month than expected, making
it the third month in a row where
speeds printed higher than market
consensus estimates. Aggregate
speeds declined by about 5% with
Fannie Mae printing 17.9, Freddie
Mac printing 17.7, and Ginnie Mae
printing 21.7. Higher coupons did
not see much change in speeds but
production coupon paper did see
some minor declines, attributed to
lower day count for this period.
Lags continue to be cause of
higher than expected prepayment
activity. Due to a lower day count,
negative seasonality factors, and a
higher mortgage rate, it’s
anticipated that speeds will drop
further in November.
Total gross issuance for the month
of October was approximately
$154 billion, bringing year-to-date
(YTD) volumes to approximately
$1.25 trillion. Based on current run
rates, we may surpass 2015 total
gross issuance volumes by
November month-end most likely
due to higher than expected
prepayment activity for the third
and fourth quarter of this year.
The mortgage basis was near its
tightest levels since the end of
2014 by October month-end. The
Collateralized Mortgage Obligation
(CMO) side of the market in
particular has been on the tighter
end of their spread range for the
trailing 12-month period. This has
largely been supported by healthy
demand both domestically from
banks and from overseas investors
as the mortgage sector continues
to provide more attractive yields
relative to local yields since in
other markets such as Japan and
Taiwan.
Trading volume was $5.7 billion in
October, which was higher than
the previous month. However,
year over year, trading volume was
down from $8.3 billion in October
2015, primarily due to the
amortizing nature of mortgage
loans. As we approach year end, it
remains to be seen if trading
volume will continue to pick up
due to volatile political
environment in the United States.
In the October remittance reports,
prepayments speeds for legacy
non-Agency slowed. The decrease
in speeds was attributable to a
lower day count in September.
Liquidation speeds were slightly
lower and severities improved in
September. Specifically, liquidation
timelines seem to be improving in
non-judicial states, which have
resulted in improving severity
prints.
October private-label issuance
consisted of 10 deals totaling $6.8
billion, a decrease of $1.3 billion
from September. The transactions
consisted of four conduit deals
totaling $3.8 billion and six single-
asset single-borrower (SASB) deals
totaling $3.0 billion. While conduit
issuance was 35% lower than
September, SASB issuance was
62% higher and included the first
Risk Retention compliance deal.
Conduit issuance is expected to
pick-up in November as dealers
are assembling a robust pipeline
before Risk Retention takes effect
in December.
Agency Mortgage-Backed Securities
Non-Agency MBS
Conditional Prepayment Rates (CPR)
2015 - 2016 Nov Dec Jan Feb Mar Apr May Jun July Aug Sept Oct
Fannie Mae (FNMA) 10.5% 11.9% 9.3% 10.1% 14.7% 14.2% 15.0% 16.3% 15.0% 20.0% 18.9% 17.9%
Freddie Mac (FHLMC) 10.5% 11.6% 9.3% 10.0% 14.6% 14.1% 15.0% 16.1% 14.8% 19.8% 18.6% 17.7%
Ginnie Mae (GNMA) 13.8% 15.6% 13.4% 14.2% 19.3% 18.5% 19.6% 21.5% 19.9% 23.8% 22.5% 21.7%
Barclays Capital U.S.
MBS Index 8/31/2016 9/30/2016 10/31/2016 Change
Average Dollar Price $106.34 $106.44 $105.39 -$1.05
Duration 2.40 2.50 3.09 0.59
Barclays Capital U.S.
Index Returns 8/31/2016 9/30/2016 10/31/2016
Aggregate -0.11% -0.06% -1.10%
MBS 0.12% 0.28% -0.56%
Corporate 0.20% -0.28% -1.44%
Treasury -0.55% -0.13% -1.28%
source: eMBS, Barclays Capital
Commercial MBS
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Monthly Commentary 10/31/16
Monthly Commentary
The CMBS Delinquency Rate
continued to rise in October and
closed the month at 4.98%, a 20
bps increase from September. The
CMBS Delinquency Rate increased
seven of the last eight months as
loans from 2006/2007 deals
continue to reach their maturity. It
is important to note, however, the
percentage of delinquent or
specially serviced loans among post
-crisis conduit deals stands at a
mere 0.60%, up only 21 bps since
January.
The Moody’s/RCA Commercial
Property Price Indices (CPPI)
National All-Property Composite
Index has gained 101% since its
financial crisis trough in January
2010. Prices are now 21% above
their pre-crisis peak in November
2007. Both major and non-major
markets have exhibited
comparable growth at
approximately 8% year-over-year
(YoY).
The UST market continued to be in
the sell-off mode in October and
the 10-year UST yield was pushed
up to 1.87 towards end of the
month. According to the Barclays
U.S. Government Index, treasuries
as a whole retracted by 1.06%
compared with last month, making
October the worst month of the
year so far. Yields have been
steadily rising for the last three
months, which confirmed our
thoughts that the Treasuries
market bottomed out around early
July.
The yield curve continued the
steepening trend in October. The
short end of the curve was still held
down by the Fed’s low rate
policies, but the long end kept
rising. Specifically, compared to
September, the 10-year yield
increased 23 bps in October while
the 30-year yield increased over 26
bps.
A big portion of the rise in nominal
yield can be attributed to mounting
inflation expectations, which can
be observed through breakeven
rates. The 10-year breakeven rate,
which is the difference between
nominal yield and real yield,
climbed 12 bps during the month.
In the mid-to-long term, our base
case is still a rising rate
environment regardless of the
election’s outcome. Among many
emerging signs of inflation, we’d
like to point out that wage growth,
a reliable harbinger of inflation
historically, has been on the
upward trend. We expect inflation
linked bonds to outperform in the
mid-term.
While spreads touched a 12-month
low of 123 bps intra-month, the
Barclays U.S. Credit Index ended
October at 125 bps posting 47 bps
of excess return.
Yield Curve
Source: Bloomberg
9/30/2016 10/31/2016 Change
3 month 0.27% 0.30% 0.03%
6 month 0.43% 0.49% 0.06%
1 year 0.59% 0.64% 0.05%
2 year 0.76% 0.84% 0.08%
3 year 0.88% 0.99% 0.11%
5 year 1.15% 1.31% 0.16%
10 year 1.59% 1.83% 0.24%
30 year 2.32% 2.58% 0.26%
U.S. Government Securities
Investment Grade Credit
Barclays U.S. Credit Index Yield-to-Worst As of October 31, 2016
Source: Bloomberg
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Monthly Commentary 10/31/16
Monthly Commentary
Higher beta sectors once again
outperformed, with Metals &
Mining and Energy posting excess
returns of 2.03% and 1.55%,
respectively. The worst performing
sector, Wirelines, returned -2.43%
of excess return and was negatively
impacted by the large ATT/Time
Warner deal announcement.
Fund flows continued to be positive
and supported a strong technical
bid for bonds. The new issue
market remained active with
$126.2 billion of new issuance
compared to $111.7 billion in
October 2015. The strong demand
was evident in aggressive new issue
pricing with some new issues
coming tighter than the
outstanding paper.
October was a hectic month in the
new issue and refinancing markets
of U.S. Collateralized Loan
Obligations (CLOs). October new
issuance was the highest the CLO
market has seen in 2016 with $8.41
billion of new issuance across 17
deals. October outpaced
September by $170 million in new
issue. Year-to-date (YTD) issuance
now stands at $54.49 billion which
exceeded the revised expectation
of $45 billion.
In addition to the 17 new deals that
came to market, 21 seasoned deals
refinanced the AAA through A or
reset the entire tranche. With Risk
Retention becoming effective in
December, CLOs that wanted to
refinance or reset had to do so on
their last payment date before the
Risk Retention effective date. Since
a majority of CLOs last chance to
refinance was during this October
pay period, there was a flurry of
refinancing activity during October.
We expect CLO refinancing and
reset activity to continue through
November, albeit at a slower pace.
The secondary market saw
decreased activity this month
because of the flood of new issue
and refinancing activity in the
primary market. This decrease in
secondary market activity left
prices relatively unchanged for the
month of October.
The S&P/LSTA Leveraged Loan
Index returned 0.83% in the month
of October, bringing the YTD total
return to 8.61%. The lower range of
the credit curve continued to
outperform, with CCCs, Bs and BBs
returning 3.43%, 0.85%, and 0.30%,
respectively during the month.
Similarly, cyclical commodity
sectors outperformed the broader
market, with Metals & Mining and
Oil & Gas returning 8.68% and
6.15%, respectively. The average
bid of the Index jumped 2.05 points
to $97.17. The exceptionally large
price move was due in large part to
an Index rebalance that removed
$22.7 billion of Texas Competitive
Electric Holdings (TCEH) pre-
petition debt from the index
following the company’s exit from
bankruptcy. The average
discounted spread to maturity fell
19 bps last month to LIBOR +461
bps, the lowest level since August
2014.
With the removal of TCEH loans,
the par value outstanding of the
Index contracted 1.7% to $866.8
billion. October continued to be a
busy month for loan arrangers with
$46.1 billion of new loan issuance
following September’s $58.2
billion, which was the second
highest monthly amount on record.
Much of the new issue activity has
been attributable to refinancing as
issuers opportunistically brought
deals given the favorable market
conditions. The net effect of new
issuance and repayments was
positive $4.7 billion during
September.
Demand for leveraged loans
continues to increase moderately.
The leveraged loan market
experienced $10.7 billion of inflows
Source: S&P Capital IQ
U.S. CLO Monthly Issuance January 2016—October 2016
Collateralized Loan Obligations
Bank Loans
0
2
4
6
8
10
12
14
16
18
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16
# o
f D
ea
ls
Issu
an
ce (
$B
illi
on
s)
Number of Deals
Issuance
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Monthly Commentary 10/31/16
Monthly Commentary
in October, composed of $8.4
billion of CLO issuance and the
largest prime fund inflow since
February 2014 at $2.3 billion.
The lagging 12-month loan default
rate rose slightly during the month
to 2.35% from 2.23% as there was
one new default in October.
During October, High Yield (HY)
bond yields declined to a YTD low
and then rose late in the month
amid increasing treasury rates,
weaker oil prices, election-related
concerns and heavy ETF outflows.
Still, the Citi HY Cash-Pay Capped
Index managed to return 0.27% for
the month, bringing the yield-to-
worst to 6.27% and spread-to-
worst to 5.02%. Despite the late-
month sell-off, CCC-rated bonds
outperformed while Bs and BBs
lagged.
One supportive factor during the
first three weeks was that high
yield bond new issue supply totaled
only $6.5 billion, according to
Barclays. Then, as earnings season
slowed, the primary market saw
$7.0 billion during the final week.
U.S. issuance in 2016 through
October was $184.0 billion, down
18.5% from the same period last
year. JP Morgan estimates 60% of
the $126 billion of new issuance
since May has been used to
refinance existing debt, resulting in
limited net new securities brought
to market.
In October the broad commodity
market declined by 0.52% and
1.53%, as measured by the
Bloomberg Commodity Index
(BCOM) and the S&P Goldman
Sachs Commodity Index (S&P GSCI),
respectively.
Sector performance was mixed
during the month of October with
three sectors gaining while two
sectors declined. The best
performing sector was Livestock,
which gained 4.16% as Lean Hogs
rallied 9.04% with Live Cattle and
Feeder Cattle increasing 3.20% and
0.16%, respectively. The Industrial
Metals sector increased by 1.11%
in October, with the best and worst
sector performers being Aluminum
and Lead, with returns of 3.61%
and -3.12%, respectively.
Precious Metals fell by 3.82% with
Gold declining 3.34% and Silver
declining over twice that amount
with a return of -7.38%. The
Agriculture sector rallied 2.40% in
October as Corn and Soybeans
rallied over 5%, with returns of
5.35% and 5.23%, respectively.
Sugar was the worst performer for
the month declining 6.22%. The
Energy sector declined 3.51% with
every commodity in the sector
declining. Brent crude (-4.31%) fell
the most with a return of -4.31%
while Natural Gas had the smallest
decline with a return of -1.68%.
Emerging markets (EM) were not
immune to the back up in global
market yields and rising volatility.
October saw the weakest monthly
performance in EM external
sovereign debt in 2016. Credit
spreads were relatively unchanged
month-over-month (MoM), but the
rise in U.S. Treasury yields led to
High Yield
Commodities Emerging Markets
JP Morgan Emerging Markets Bond Index Performance October 31, 2015 to October 31, 2016
Source: JP Morgan
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
JPM Emerging Markets Bond Global Diversified Index (EMBI)
JPM Corporate Emerging Markets Bond Broad Diversified Index (CEMBI)
JPM Government Bond Emerging Markets Broad Diversified Index (GBI EM)
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Monthly Commentary 10/31/16
Monthly Commentary
negative total returns for the asset
class.
EM external corporate debt
outperformed its sovereign
counterpart, in part due to its
shorter duration relative to the
sovereign index, and modest credit
spread tightening during the
month.
For the month of October,
infrastructure-related bond issues
financed through the IG Corporate
bond market lagged as rising rates
and marginal spread widening led
to slight underperformance in both
the Utility and Transport sectors.
The strongest performers in this
space were Energy distribution
assets (midstream), while regulated
Utilities saw the most spread
widening.
Within EM, infrastructure assets
fared much better as broader
spread tightening was able to
overcome the steepening yield
curve. Assets in Latin America
performed especially well as
spread tightening in this region was
amongst the most pronounced for
EM.
ABS issues secured by
infrastructure assets also rallied
during October. Investor demand
was brisk and lead to tighter
spreads in almost all sectors. Clean
Energy, Aircraft and Container
transactions were especially well
bid with strong demand on both
the primary and secondary fronts.
With both U.S. Government bond
yields and Donald Trump’s poll
numbers rising during the October,
U.S. equity markets ended the
month lower. In October, the
benchmark S&P 500 Index lost over
1.8%. Smaller capitalization stocks
suffered more, with the Russell
2000 Index losing 5%.
The best performing sector within
the S&P 500 was Financial Services,
with the steepening yield curve
improving future earnings
prospects. Real Estate, Telecom
and Healthcare were all quite weak
in the month, losing 5.5%, 6.5%
and 6.5%, respectively.
October also marked the beginning
of the third quarter earnings
release season. At the beginning of
the month, consensus expectations
gave a sixth consecutive quarter of
YoY earnings declines for the S&P
500 according to FactSet. By the
end of the month, over 58% of S&P
500 companies had reported their
third quarter earnings. With
earnings reports slightly better
than expected, estimates for S&P
500 earnings stood at a positive
1.6% at month-end. If this trend
holds, the losing streak of shrinking
earnings may be over.
At month-end, third quarter
revenue growth estimates stood at
2.7% YoY, little changed during the
month. Consensus estimates
continue to look for a sharp fourth
quarter acceleration in S&P 500
revenue and earnings to 5.2% and
4.6%, respectively. Absent
accelerating GDP, these estimates
may prove tough to achieve.
Global equities sold off in October
with the Morgan Stanley Capital
International All Country World
Index (MSCI ACWI) down 1.67%
during the month as global risk
sentiment declined heading into
the U.S. presidential election. U.S.
equities retreated with the S&P
500 and Dow Jones returning -
1.82% and -0.79%, respectively.
The Nasdaq and Russell 2000
Indices fared worse returning -
2.26% and -4.75%, respectively.
In Europe, equities outperformed
the broader market with the
Eurostoxx 50 up 1.91% during the
month. Regional equities climbed
with the DAX up 1.47% and CAC up
1.45%. In the periphery, equities
strengthened with the FTSEMIB up
4.41% and IBEX up 4.64%. During
October, the European banking
sector rebounded with the
Eurostoxx Banks Index up 13.18%
during the month while the euro
declined. U.K. equities, as
measured by the FTSE 100, rallied
1.03%.
Asian equities performed well in
October with Japanese equities, as
Global Equities
Infrastructure
U.S. Equities
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Monthly Commentary 10/31/16
Monthly Commentary
measured by the Nikkei, up 5.93%.
Chinese equities, as measured by
the Shanghai Composite, returned
3.19%. Japanese equities
rebounded as the Japanese Yen
weakened alleviating pressure on
Japanese exporters.
EM equities managed small
positive returns with the MSCI
Emerging Markets Index up 0.25%.
Brazil’s Ibovespa was up 11.23%.
Russian equities, as measured by
MSCI Russia, returned 0.67%.
9
Quarterly Commentary 10/31/16
Definitions
Barclays U.S. Corporate Index -An index designed to be a broad-based measure of the global investment-grade, fixed rate, fixed income corporate markets outside the
United States.
Barclays U.S. Credit Index—The US Credit component of the U.S. Government/Credit Index. This index consists of publically-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. The US Credit Index is the
same as the former US Corporate Investment Grade Index.
Barclays U.S. Government Index - An index that measures the performance of all public U.S. government obligations with remaining maturities of one year or more.
Bloomberg Commodity Index (BCOM) - An index calculated on an excess return basis that reflects commodity futures price movements. The index rebalances annually
weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period
typically occurs from 6th-10th business day based on the roll schedule.
Citi High-Yield Cash-Pay Capped Index -This index represents the cash-pay securities of the Citigroup High-Yield Market Capped Index, which represents a modified
version of the High Yield Market Index by delaying the entry of fallen angel issues and capping the par value of individual issuers at $5 billion par amount outstanding.
Cotation Assistee en Continu 40 (CAC 40) - The CAC 40 Index which is a French stock market index. It tracks 40 of the largest French stocks on the Paris Bourse, or
stock exchange.
Consumer Price Index (CPI) - A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, fo od and
medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to
their importance. Changes in CPI are used to assess price changes associated with the cost of living.
Credit Suisse High Yield Index - The index reflects a trader-priced portfolio constructed to mirror the global high-yield debt market.
Deutsche Borse AG German Stock Index (DAX) - The German stock index, which represents 30 of the largest and most liquid German companies that trade on the
Frankfurt Exchange.
Dow Jones Industrial Average (DJIA) - A price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.
ECB Corporate Sector Purchase Program - A program established by the European Central Bank with the goal of strengthening financing conditions. Six national
central banks will coordinate to purchase IG Euro-denominated bonds issued by non-bank corporations established in the euro area.
Eurostoxx 50 Index - A stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Borse Group and SIX group, with the goal of
providing a blue-chip representation of Supersector leaders in the Eurozone.
Financial Times Stock Exchange 100 (FTSE 100) - A capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange.
Financial Times Stock Exchange Milano Italia Borsa (FTSE MIB) - The benchmark stock market index for the Borsa Italiana, the Italian national stock exchange, which
superseded the MIB-30 in September 2004. The index consists of the 40 most-traded stock classes on the exchange.
S&P Goldman Sachs Commodity Index (GSCI) - Standard & Poor’s Goldman Sachs Commodity Index, or GSCI, is a composite index of commodity sector returns which
represents a broadly diversified, unleveraged, long-only position in commodity futures. The index’s components qualify for inclusion in the index based on liquidity
measures and are weighted in relation to their global production levels, making the Index a valuable economic indicator and commodities market benchmark.
Hang Seng Index - A free-float capitalization-weighted index of a selection of companies from the Stock Exchange of Hong Kong. The components of the index are divided
into four subindices: Commerce and Industry, Finance, Utilities, and Properties.
Ibovespa - This accumulation index represents the present value of a portfolio begun on 2 January 1968, with a starting value of 100 and taking into account share price
increases plus the reinvestment of all dividends, subscription rights and bonus stocks received.
Indice Bursatil Espanol (IBEX) - The official index of the Spanish Continuous Market. The index is comprised of the 35 most liquid stocks traded on the Continuous
market. It is calculated, supervised and published by the Sociedad de Bolsas.
JP Morgan Corporate Emerging Markets Bond Broad Diversified Index (CEMBI) -This index is a market capitalization weighted index consisting of US-denominated
Emerging Market corporate bonds. It is a liquid global corporate benchmark representing Asia, Latin America, Europe and the Middle East/Africa.
JP Morgan Emerging Markets Bond Global Diversified Index (EMBI) -This index is uniquely-weighted version of the EMBI Global. It limits the weights of those index
countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. The countries covered in the
EMBI Global Diversified are identical to those covered by EMBI Global.
An investment cannot be made in an index.
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Quarterly Commentary 10/31/16
Definitions
JP Morgan Government Bond Emerging Markets Broad Diversified Index (GBI EM) -This index is the first comprehensive, global local Emerging Markets index, and
consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure.
Korea Composite Stock Price Index (Kospi) - A market capitalization weighted index of all common stocks traded on the Stock Market Division—previously, Korea
Stock Exchange—of the Korea Exchange. It is the representative stock market index of South Korea, similar to the Dow Jones Industrial Average or S&P 500 in the United
States.
London Interbank Offered Rate (LIBOR) - An indicative average interest rate at which a selection of banks known as the panel banks are prepared to lend one another unsecured funds on the London money market.
Moody’s/RCA Commercial Property Price Indices (CPPI) National All-Property Composite Index - The Moody's/RCA Commercial Property Price Index (CPPI) describes various non-residential property types for the U.S. (10 monthly series from 2000). The Moody's/RCA Commercial Property Price Index is a periodic same-property round-trip investment price change index of the U.S. commercial investment property market. The dataset contains 20 monthly indicators.
Morgan Stanley Capital International All Country World Index (MSCI ACWI) -A market-capitalization-weighted index designed to provide a broad measure of stock
performance throughout the world, including both developed and emerging markets.
MSCI Emerging Markets (MSCI EM)- An index that covers 23 Emerging Market countries and is designed to capture the large and mid-cap representation across those
countries.
MSCI Emerging Markets Latin America - A subindex of that MSCI Emerging Markets Index that covers 5 EM countries in Latin America and is designed to capture large
and mid cap representation from 119 constituents.
MSCI Russia Index - An index that includes 85% of the free float-adjusted market capitalization of Russia. It is designed to measure the performance of the large and
midcap segments of the Russian market.
NASDAQ - A stock market index of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the NASDAQ stock
market with over 3,000 components. This index is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth
companies. Since both U.S. and non-U.S. companies are listed on the NASDAQ stock market, the index is not exclusively a U.S. index.
Nikkei 225 Index - A price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones
Industrial Average Index in the U.S.
Russell 2000 Index - A subset of the Russell 3000 Index representing approximately10% of the total market capitalization and measuring the perform ance of the small-
cap segment of the U.S. equity universe.
Shanghai Composite Index - A capitalization-weighted index that tracks the daily performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The
index was developed on December 19, 1990 with a base value of 100.
S&P Goldman Sachs Commodity Index (GSCI) - An index that measures investment in the commodity markets and commodity market performance over time.
S&P 500 Index - Standard & Poor’s US 500 Index, a capitalized-weighted index of 500 stocks.
S&P/LSTA Leveraged Loan Index - An index designed to track the market-weighted performance of the largest institutional leveraged loans based on the market
weightings, spreads and interest payments.
World Interest Rate Probability (WIRP) - A Bloomberg function used as a measure of the likelihood of a Fed rate move using the Fed Funds futures and options
contracts.
An investment cannot be made in an index.
11
Quarterly Commentary 10/31/16
Disclaimers
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.
Important Information Regarding DoubleLine
In preparing the client reports (and in managing the portfolios), DoubleLine and its vendors price separate account portfolio securities using various sources, including
independent pricing services and fair value processes such as benchmarking.
To receive a complimentary copy of DoubleLine’s current Form ADV (which contains important additional disclosure information), a copy of the DoubleLine’s proxy voting
policies and procedures, or to obtain additional information on DoubleLine’s proxy voting decisions, please contact DoubleLine’s Client Services.
Important Information Regarding DoubleLine’s Investment Style
DoubleLine seeks to maximize investment results consistent with our interpretation of client guidelines and investment mandate. While DoubleLine seeks to maximize
returns for our clients consistent with guidelines, DoubleLine cannot guarantee that DoubleLine will outperform a client's specified benchmark. Additionally, the nature
of portfolio diversification implies that certain holdings and sectors in a client's portfolio may be rising in price while others are falling; or, that some issues and sectors
are outperforming while others are underperforming. Such out or underperformance can be the result of many factors, such as but not limited to duration/interest rate
exposure, yield curve exposure, bond sector exposure, or news or rumors specific to a single name.
DoubleLine is an active manager and will adjust the composition of client’s portfolios consistent with our investment team’s judgment concerning market conditions and
any particular security. The construction of DoubleLine portfolios may differ substantially from the construction of any of a variety of bond market indices. As such, a
DoubleLine portfolio has the potential to underperform or outperform a bond market index. Since markets can remain inefficiently priced for long periods, DoubleLine’s
performance is properly assessed over a full multi-year market cycle.
Important Information Regarding Client Responsibilities
Clients are requested to carefully review all portfolio holdings and strategies, including by comparing the custodial statement to any statements received from
DoubleLine. Clients should promptly inform DoubleLine of any potential or perceived policy or guideline inconsistencies. In particular, DoubleLine understands that
guideline enabling language is subject to interpretation and DoubleLine strongly encourages clients to express any contrasting interpretation as soon as practical. Clients
are also requested to notify DoubleLine of any updates to Client’s organization, such as (but not limited to) adding affiliates (including broker dealer affiliates), issuing
additional securities, name changes, mergers or other alterations to Client’s legal structure.
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