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Fixed-Income Strategy: What's Jeffrey Gundlach Doing?


DoubleLine Capital's Jeffrey Gundlach has $45 billion in AUM. Here's his insight on positioning fixed income in an investor's portfolio.

Few bond fund managers attract as much attention as DoubleLine Capital's Jeffrey Gundlach. His firm has seen its assets under management grow to more than $45 billion in just over two years since its founding. Although these assets span a multitude of fund vehicles, by far the largest is the DoubleLine Total Return Fund (MUTF:DBLTX), which held almost $35 billion as of 25 October. I am always anxious to see portfolio changes made in this fund, and I recently had the opportunity to take a close look at the fund holdings as of 30 September, which can give some valuable insight into how fixed income investors might consider positioning their portfolios.

He's Made a Bigger Move into CMBS

During the month of September, DBLTX's percentage allocation to commercial mortgage-backed securities ("CMBS") rose to 4.5%, up from 3.6% in August. That means he bought almost $300 million of CMBS.

CMBS are also a favorite in the DoubleLine Low Duration Bond Fund (MUTF:DBLSX); they make up 19.7% of the fund. The rally in CMBS has been strong, particularly since QE3 (the third round of "quantitative easing"). Annaly Capital Management wrote a summary of market action that describes it clearly:
During the quarter ended September 30, 2012, 10-year AAA new issue spreads have rallied from swaps +150/160 basis points (bps) to a level of swaps +85/95 bps. 10-year AAA legacy CMBS have likewise benefited, rallying from approximately swaps +230/235 bps to swaps +155/160 bps. Mezzanine bonds rated BBB and BBB- have seen spread tightening on the magnitude of 125 bps and 200 to 225 bps, respectively. . . . Commercial mortgages, even at current historically low rates, still exhibit good relative value against other fixed income alternatives.
Remember that bond yields move inversely with bond prices, so a fall in yield from a spread of +150/160 bps to +85/95 bps corresponds to a price increase of about 5%.

His Portfolio Is Low Duration with Plenty of Cash

It is no secret that Gundlach believes yields on US Treasury bonds offer a poor risk–return proposition. With a modified duration of 1.59 (i.e., the fund would lose 1.59% in value during an instantaneous 100 bp rise in interest rates), DoubleLine is exposed to much less interest rate risk than its peers.

The PIMCO Total Return Fund, for instance, has a modified duration of 4.02 and would thus likely perform better if Treasury yields were to reach new lows.

Given the significant rally in both agency and non-agency MBS, it appears that Gundlach is keeping a healthy cash allocation (≈16% as of 30 September 2012) to deploy if either U.S. Treasury yields quickly rise or non-agency MBS prices fall. In short, the combination of a high cash balance and low modified duration leaves him both more flexible for future opportunities and less sensitive to changes in rates.

He's Bought Some Long Duration to Hedge

As I mentioned earlier, the aggregate portfolio of DBLTX has a modified duration of only 1.59. However, when Gundlach and his team do buy bonds with high duration, they buy extremely long and less negatively convex MBS.
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