DBLTX Commentary – Q4 2019
Thesis
DBLTX utilizes a top down-bottom up process that focuses on MBS and Agency bonds. When compared to the benchmark (Barclays U.S. AGG), the holdings have lower duration and exposure to corporate bonds, reducing their sensitivity to interest rate movements and credit spreads. We expect attractive risk-adjusted return characteristics over the long term from DBLTX, especially during periods when corporate bonds’ spread increase.
Overview
In the last quarter of 2019, DBLTX has underperformed the benchmark (Barclays U.S. AGG) by 38bps, largely due to asset allocation and yield curve exposure. Over the quarter, investment grade corporate bonds were the best performers which DBLTX had no exposure to; additionally, the U.S. yield curve sharply steepened, producing relatively inferior returns due to DBLTX’s longer-duration Agency RMBS compared to the benchmark. While Q4 underperformed relative to the benchmark, the fund was still able to return 5.81% for the year.
Q4 2019 Summary
– DBLTX returned (0.20)%, while the U.S. AGG returned 0.18%
– Year-end effective duration for DBLTX was 3.89 and 5.87 for the U.S. AGG
o Long-duration corporate bonds produced the strongest returns during all of 2019 in Fixed Income market
– CLOs and Non-Agency MCBS were top performers
o CLOs outperformed the index through their high level of interest income and minimal interest rate 1-year return sensitivity
o Non-Agency MCBS produced strong returns due to low delinquency rates and spread volatility
Optimistic Outlook
– We continue to hold this fund and believe in our thesis due to the fund’s approach and strong diversification factor within our core bond holdings, which we believe will continue to achieve consistent returns long-term
– Tightening corporate bonds and the reduction of interest rates are both cyclical factors that negatively effected DBLTX, yet long-term we expect DBLTX to pick up once the cycle reverses
o We expected DBLTX to lag the benchmark this past year due to the Fed decreasing rates
o In years where rates increase (such as 2018), DBLTX will outperform the benchmark
– Historically, DBLTX has displayed stronger returns and lower volatility than the index
– DBLTX has been consistent strategically, with allocation focus, and with sector distribution
[Category Mutual Fund Commentary]
Micah Weinstein
Research Analyst
Direct: 617.226.0032
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109