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10 Frequently Asked Questions: DoubleLine Shiller Enhanced CAPE®
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By Jeffrey J. Sherman, CFA
Portfolio Manager, Macro-Asset Allocation
Question 1: DoubleLine has recently partnered with Professor Robert Shiller to create a new offering in the equity space. Can you describe the motivation for the new strategy and how the DoubleLine Shiller Enhanced CAPE® Strategy enhances DoubleLine’s current offerings?
Answer: First off, CAPE® stands for Cyclically Adjusted Price-to-Earnings. The DoubleLine Shiller Enhanced CAPE® Strategy extends and complements our current product suite by offering what we believe was a previously unavailable large-cap equity strategy while pairing it with our core competency as fixed income managers. The DoubleLine Shiller Enhanced CAPE® Strategy gives investors access to a unique source of equity alpha, which we seek to enhance by pairing the portfolio with a fixed income collateral pool that seeks to outperform cash. The primary generator of potential return will be the value approach to large-cap stocks, implemented via the Barclays Shiller CAPE® U.S. Sector Total Return Index (the “CAPE® Index”), but the strategy will also earn potential return from the fixed income collateral. This “double-value” proposition allows an investor to obtain exposure to equities while hopefully generating positive return on the invested cash simultaneously. The concept is that $1 worth of the fixed income collateral roughly backs $1 exposure via swaps to the CAPE® Index. ¹
Question 2: How did DoubleLine Capital come to partner with Professor Robert Shiller?
Answer: A combination of factors brought the partnership together. In particular, I would emphasize a shared philosophy toward value as an investment discipline and the robustness of Professor Shiller’s pioneering research on long-term equity returns and market mispricings. Let me elaborate on those points.
For more than two decades, while endeavoring to construct portfolios to mitigate downside risk, the investment team at DoubleLine has worked to identify fixed income securities generating what we believe are the cheapest cash flows. That’s the essence of “value investing,” although the phrase is rarely heard in the fixed income lexicon. We apply this pursuit of value not only to individual security selection but also to our sector allocations.
Over the years, I had followed Professor Shiller’s academic work on both the behavioral aspects of the financial markets as well as asset pricing. I consider the CAPE® ratio as one of the better predictors of future stock market returns over an intermediate- to long-term time horizon. Professor Shiller partnered with Barclays to create an index, the Barclays Shiller CAPE® U.S. Sector TR Index, which implements the philosophy behind the CAPE® ratio to deploy capital across the large cap equity space. We found a lot of similarities between the value mechanics at work in the CAPE® Index and our own relative value-driven approach to the active management of the sector allocations in our multi-sector bond portfolios.
After exhaustive research into the historical behavior of Professor Shiller’s CAPE® metric, we concluded that the CAPE® Index methodology provides a better exposure to the relatively
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