DoubleLine’s Long Duration Total Strategy – February 2016 Webcast Recap

DoubleLine’s Long Duration Total Strategy – February 2016 Webcast Recap

DoubleLine long duration total return webcast recap.

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About this Webcast Recap

On February 23, 2016, Portfolio Managers Joseph Galligan & Vitaliy Liberman held a webcast discussing the Long Duration Total Return Strategy.

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This recap is not intended to represent a complete transcript of the webcast. It is not intended as solicitation to buy or sell securities. If you are interested in hearing more of the team’s views, please listen to the full version of this webcast on under the blue “Events” tab. You can also learn more about future webcasts by viewing the 2016 webcast schedule at under “Events.”

DoubleLine Webcast Recap – The Long Duration Mortgage Market

  • Opportunity set
    • Inefficiencies exist in the long duration part of the mortgage market; these inefficiencies are opportunities which have been a major source of performance over the years
  • CMO/REMIC market
    • DoubleLine prefers to invest in long duration CMOs.
    • There is currently $125 billion of long duration CMOs outstanding. Approximately 10% of these securities exhibit neutral or positive convexity. If rates rise, the opportunity set may increase.
  • Common concerns related to mortgages
    • Duration changes with interest rates, which brings change in prepayment speeds.
      — The DoubleLine team has been successfully managing mortgage portfolios over the past couple of decades through a variety of different market scenarios and environments.
    • Negative convexity
      — DoubleLine has been able to accurately estimate the convexity of securities in the mortgage market by calculating the falling and rising rate durations of a security. This is important in understanding how the security will behave with a given change in interest rates.
      — DoubleLine limits the securities in the portfolio to long duration securities with neutral or positive convexity.

Current Long Duration Investors

  • Institutional investors with pension plans/Defined benefit plans with long liabilities
    • These portfolios have been historically invested in long duration corporate bonds and Treasuries. Many plans use liability-driven investing (LDI) to match long duration assets with liabilities.
  • Macro hedgers, crisis management investors and other risk parity managers
    • These investors want/need something that will offset the expected poor performance of their credit assets in this risk-off environment
  • By adding mortgages, investors may diversify a portfolio, reduce credit exposure and add incremental yield & total return.
  • In two decades of managing mortgages, we believe our consistent process can add alpha and is repeatable.

Historical Performance

  • Long Duration MBS v. Long Corporates
    • Long Duration CMO Index has historically outperformed and provided protection during periods when corporate spreads widen (i.e. 2007-2008). The Barclays CMO Index outperformed the Barclays U.S. Long Corporate Index during this period.
  • Long Duration MBS v. 10+ Year Treasuries
    • Long Duration CMO Index has outperformed US. Treasuries with lower volatility over the past 10 years.

Advantages of using MBS in Long Duration Strategies

  • Diversification benefits
    • Provides a benefit particularly for traditional long duration portfolios consisting of corporates and Treasuries
  • Statistical advantage
    • MBS may provide additional yield compared to Treasuries and often increases yield relative to Treasuries
  • Credit advantage
    • MBS do not have the same credit and spread risks that are apparent in corporate bonds

DoubleLine’s Long Duration Mortgage Strategy

  • Performance
    • DoubleLine’s Long Duration strategy has outperformed the Barclays U.S. Long Government/Credit Index by over 500 bps per annum since inception
    • The Strategy has also exhibited lower volatility since its inception

Question and Answer

  • What role do Treasuries play in the portfolio?
    • The fund will be allocated to Treasuries when the Long Duration market does not have attractive value.
    • Currently the fund has a 25% allocation to Treasuries.
  • What adds to the volatility?
    • The duration or interest rate sensitivity of the portfolio accounts for a majority of the volatility. Currently the fund has a duration between 13-16 yrs.
  • Any comments regarding the convexity of corporates?
    • During periods of financial stress corporates can actually exhibit periods of negative convexity. Take a look at August-September of last year and even the more recent months of December and January.
  • What if the Fed completely stopped reinvesting the proceeds from their MBS holdings?
    • Spreads may widen by 10 bps based on our estimation. We do not expect this to occur any time soon.
  • Are there any liquidity issues with the fund?
    • During risk-off or “flight-to-quality” environments, investors flock to Government guaranteed assets. These environments are potentially very positive for the performance of the portfolio.
  • What is the worst environment for the fund?
    • Stagflation with rising rates
  • What happens if rates go negative?
    • If this did happen, we believe it would happen on the short end of the curve. While we don’t believe this would happen, the fund would rebalance the composition of securities from a position of strength.

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