DoubleLine: “Smart Beta, Meet Smart Alpha” [SLIDES]

DoubleLine Shiller Enhanced CAPE Strategy

What is Double Value?

• The DoubleLine Shiller Enhanced CAPE Strategy creates “Double Value” for investors when combining two unique sources of value:
  • The Shiller Barclays CAPE® U.S. Sector Index attempts to shift portfolio exposures to the “cheapest” sectors of the large cap equity markets
  • DoubleLine’s Fixed Income strategy strives to shift its exposures to the “cheapest” sectors of the fixed income markets.
• Both strategies attempt to offer a value play in their respective markets, and when combined investors have the potential to receive “Double Value.”

DoubleLine Shiller CAPE Structure

• The distinct structure of the DoubleLine Shiller Enhanced CAPE® Strategy allows investors to simultaneously access returns of the equity markets and fixed income markets. By using an equity index swap, $1 invested in the strategy provides approximately $1 of exposure to each market.

What is the CAPE Ratio?

• Acclaimed value investors Benjamin Graham and David Dodd noted in Security Analysis that equity valuations tend to follow a business cycle of 3-7 years
• The CAPE® Ratio was formulated in the seminal 1988 piece1 from Professor Robert Shiller and John Campbell.
• CAPE® = Cyclically Adjusted P/E (Price?to?Earnings)

• The CAPE® ratio seeks to assess longer term equity valuation by using an inflation adjusted earnings horizon that is 10 times longer than the traditional P/E measure
• Similar to the traditional P/E the CAPE® can be applied to a single equity, a portfolio of equities, a sector or a broad based index

CAPE Ratio for Value Investing – Sectors

• By applying the CAPE® ratio, equity sectors showing a lower CAPE® ratio have tended to have higher subsequent returns

Relative CAPE Indicator

• To account for idiosyncratic differences between sectors where CAPE® ratios have historically been of different magnitudes one can construct a Relative CAPE® ratio
• This may allow investors to compare sector valuations on a level playing field

DoubleLine: "Smart Beta, Meet Smart Alpha"