Gundlach – “Small Change” – Low Vol Everywhere

On June 13, 2017, Chief Executive Officer Jeffrey Gundlach held a webcast discussing the DoubleLine Total Return Bond Fund (DBLTX/DLTNX) titled “Small Change”.

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 Mr. Gundlach’s views, please listen to the full version of this webcast on  www.doublelinefunds.com on the “Webcasts” tab under “Latest Webcast”. You can use the “Jump To” feature to navigate to each slide.

Will US Drillers Drive Oil Prices Into The Ground?

Global Economy

• Equities
  - Gundlach recommended investors to peel off a portion of their U.S. equity exposure in favor of Europe and/or Emerging Markets.
  • Europe is supported by low rates, quantitative easing and has a higher Manufacturing Purchasing Managers’ Index (PMI) than the U.S.
  • Financial Debt Crisis: Ten Years on What Have We Learnt?

    Europe Is Now Re-Leveraging

Volatility

• Gold, S&P 500® and Hang Seng are all very near their lowest volatility.
• Mr. Gundlach is watching for increasing volatility and softening equity prices with a leg up in interest rates as a catalyst for at some point during the second half of 2017.

Gross Domestic Product (GDP)

• 10-year GDP through 2016 was 1.33% real which is nearly identical to that of the 1930s; which was the slowest decade of growth over the past century. Keep in mind that we have added $10 trillion in debt, average dollar IT per year in oversimplified terms translates directly into GDP. With that trillion, GDP for the last 10-years would have been 0.7%. So half GDP might have been fueled by debt expansions.
• Nominal GDP was downgraded from 5.0% to 4.7%. Inflation or Headline Consumer

Price Index (CPI) has certainly had an impact on the figure.

U.S. Economy

• Economic indicators are not forecasting a recession at this time.
• Non-housing debt, particularly student and auto loans, has increased by over $1 trillion over the past eight years.

Fed Policy

• Rate hikes
• The market is pricing in a 50/50 chance of a third hike, according to the World Interest Rate Probability (WIRP) function on Bloomberg.
• One of the narratives heading into 2017 was that the Fed was going to hike and that you shouldn’t hold bonds. While the consensus was bearish on bonds at a 2.65% 10-year UST, Mr. Gundlach was calling for a rally in the bond market. We saw a 50 basis points (bps) rally.
• S. Treasuries (UST)
• The yield curve tends to flatten when the Fed hikes rates. Historically, the 10-year UST rallies following a hike.

Bloodless Verdict of the Market

• Bond Market
• Top performing sectors: Emerging Markets in local currency debt, High Yield and Global non-dollar bonds
• Laggards: Agency Mortgage-Backed Securities (MBS) and Treasuries
• DBLTX
• Outperformed the Bloomberg Barclays U.S. Aggregate Index (“the Agg”) by 162 bps net of fees since the bottom in rates last year.
• Outperforming the Bloomberg Barclays MBS Index as well as the Agg year-to-date (YTD) with less credit and interest rate risk.

The VIX

• The VIX ETF, VXX, has seen its share count increase massively. 95% of VXX shares outstanding are being used to short. Although the trade has been profitable, it is a very crowded trade.

High Yield

• For the first time in the last 10 years, the high yield bond market is negatively convex due to high prices and callability.

Interest Rates

• 2-year UST yields are not up much YTD.
• 5-year more off its high. Trade location from a technician’s perspective is terrible.
• 10-year trade location is poor here. Still 2.83-2.71 zone. It’s rallied.
• Mr. Gundlach would not be a buyer of bonds right now, but would rather let the market prove itself.
•   Mr. Gundlach continues to look at the copper/gold ratio against the 10-year UST yield.

When the 10-year went to a new low yield on about 2.14 close, taking out the 2.17

close from the month of May the copper/gold ratio did not go with it.

Total Return Bond Fund

• Performance
  - DBLTX has outperformed the Agg by nearly 300 bps per annum since inception.
  - DBLTX duration of 3.7 years and average life is shorter than that of the Agg.
  - Composition (As of May 31, 2017):
  • 51% Agency MBS
  • 23% Non-Agency MBS
  • 7% Commercial Mortgaged-Backed Securities (CMBS)
  • 4% Collateralized Loan Obligations (CLO)
  • 3% Asset-Backed Securities (ABS)
  • 4% UST
  • 1% Treasury Inflation-Protected Securities (TIPS)
  • 6% Cash

Question and Answer

• How can the short term real rates stay negative?
  - “Real rates are negative because at the short end, they're being nailed by the Fed, and most likely always will be. So the Fed determines short rates. The Fed Funds rate is less than 1%, and the inflation rate is greater than 2%.”
• Do you think non-U.S. stocks are good investments?
  - “Yes, I think non-U.S. stocks will outperform U.S. stocks in a secular sense. A lot of it's happened already, but the trade location is great right now. It makes sense of an investor not a speculator.”
• What are your thoughts on high yield spreads?
  - “I think to be worried, you need to be forecasting a recession. Since we don’t see one, they could continue to grind tighter. I think as a disciplined investor, you should be underweight in high yield, versus your normal weighting, just because you're playing with a risky situation.”

See the full webcast slides below.