DBLTX – Q3 2017 Commentary
The DoubleLine Total Return Bond Fund outpaced the Agg during the quarter and is ahead by about 40 bps YTD. The fund has benefited from its positioning in RMBS and has been able to garner strong returns while taking on less risk than the benchmark. The team will monitor the effects of the Fed unwind but does not believe it will lead to a large spread widening due to the transparency set by the Fed.
Market Overview:
– DBLTX has outperformed the Agg year to date while taking on less risk
– At the beginning of 2017, DoubleLine predicted the following:
o Move lower in the 10-year Treasury,
o Two to three rate hikes during 2017,
o The possibility of a late year UST rally
– After two successful rate hikes this year, it appears that the Fed has finally been able to meet their own expectations
– According to Bloomberg’s predictive index, the probability of another hike in December is now around 70%
o The team believes that the true probability is accurately reflected in the futures market and the Fed will hike once more by year-end
Performance Overview:
– In the third quarter, DBLTX outperformed the Agg return by over 20 bps
– The UST curve flattened during the period with 2- year yields increasing greater than 10-year yields
– Both Agency RMBS and non-Agency RMBS contributed roughly evenly to returns
o Agency RMBS passthroughs were the highest contributors to performance in that sector as they benefited from price and modest income gains
o Non-agency RMBS returns were positive across the credit spectrum as prices increased
– Alt-A securities were the best performers as they experienced strong price appreciation and robust income during the period
– Other structured credit sectors such as CMBS, CLO, and ABS were also accretive to performance
o This was due primarily to interest income
Market Outlook:
– The team believes quantitative easing has been correlated with higher pricing of risk assets
o It would make sense to believe that, since QE was good for equities that the wind down of QE may be a negative for equities
– DoubleLine believes the beginning of a reduction of the Fed’s balance could raise some long term headwinds for risk assets
o Most likely to affect equities and credit
– For both UST and Agency MBS, the plan is to implement a redemption cap which should allow securities to roll off in the form of a “step function”
– DoubleLine believes the gradual reduction of both the Fed’s balance sheet is very transparent
o Potential of spread widening within UST and Agency MBS is minimal
– The team continues to monitor both lack of volatility and higher valuations among risk assets
Performance Review:
