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

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

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Their latest strategy in accomplishing this has been adding mortgage pools that are backed by Home Affordable Refinance Program (HARP) loans. These pools exhibit less negative convexity because the borrowers typically have a loan-to-value ratio in excess of 100% If interest rates were to fall again and hit new lows, mortgage pools such as these would become more valuable and would result in fewer prepayments than an average bond , since borrowers cannot reduce interest rates by refinancing into a conforming mortgage.

He's Reduced Exposure to Non-Agency MBS

Month over month, the allocation to non-agency MBS fell from 30.4% to 30.0%. There were inflows of ≈$1.7 billion into DBLTX during September 2012 and a net reduction in non-agency MBS. According to DoubleLine, this occurred because the firm diverted principal run-off and new cash inflows into other asset classes.

This change in allocation might seem small to people who aren't focused on this market, but I think it says a lot about Gundlach's current view on non-agency MBSs in general. A dramatic run-up in prices has occurred in 2012, and DoubleLine has been a huge beneficiary of it.

As quantitative easing has continued to push investors out of agency MBS and further down the credit risk spectrum, non-agency MBS have seen a surge of new interest from investors seeking yield, and consequently, the prices have risen dramatically. Many new entrants to the non-agency space have enjoyed strong returns by chasing the riskier subprime section of the market, but Gundlach by and large prefers the prime and Alt-A segments. I'd guess that Gundlach will continue to be cautious in adding incremental non-agency MBS given the recent run-up.

The Big Picture

The recent moves in DBLTX indicate that Gundlach is currently cautious on both credit and duration risks. Because the fund has a large cash allocation, it is well positioned to capitalize on a potential "risk-off" event in the markets or a rise in interest rates.

Overall, I like the positioning that DBLTX has at the current time. It hasn't chased yield in non-agencies and has kept a good balance by adding long government-backed MBS to hedge while keeping dry powder for opportunities that come up.

This story by David Schawel, CFA, originally appeared on the CFA Institute's Inside Investing blog.

See the other CFA Institute articles:

Are Structured Investment Products Right for You?

Mortgage REITs: Does Doubling the Leverage Make Them a Good Investment?

Are You an Unintentional Hedge Fund Investor?
No positions in stocks mentioned.
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