DoubleLine: Even Greece Is In Economic Expansion And CAPE Points To Europe

On November 14, 2017, Portfolio Manager Jeffrey Sherman held a webcast discussing the DoubleLine Shiller Enhanced CAPE® (DSEEX/DSENX) & Shiller Enhanced International CAPE® (DSEUX/DLEUX).

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 www.doublelinefunds.com under the blue “Events” tab. You can use the “Jump To” feature to navigate to each slide.

DoubleLine Shiller Enhanced CAPE® & DoubleLine Shiller Enhanced International CAPE® Webcast Recap

The “Double Value” proposition in Shiller Enhanced CAPE (DSEEX) and Shiller Enhanced

International CAPE (DSEUX)

• DSEEX and DSEUX seeks to create “Double Value” for investors by combining two distinct sources of value investing and allowing investors to simultaneously access returns in the equity and fixed income markets
  • DSEEX
    • Shiller Barclays CAPE U.S. Sector Index (smart beta) attempts to shift portfolio exposures to the “cheapest” sectors of the large-cap equity market
    • DoubleLine actively manages the fixed income portfolio (smart alpha) which strives to shift its exposure to the “cheapest” sectors of the fixed income
  • DSEUX
    • Shiller Barclays CAPE Europe Sector net Index (smart beta) attempts to shift portfolio exposures to the “cheapest” sector of the large-cap equity market
    • DoubleLine actively manages the fixed income portfolio (smart alpha) which strives to shift its exposure to the “cheapest” sectors of the fixed income markets.

Macro

• Leading Economic Indicators still suggest we are at least six to nine months away from  a recession
• The current unemployment rate relative to its 12-month moving average points to economic expansion and at 4.2% is well below its historical average of 6%
• We are currently witnessing coordinated global expansion as measured by the Organization for Economic Co-operation and Development (OECD), which has only happened in five of the last 20 years

Smart Beta (Shiller Barclays CAPE U.S. Sector Total Return Index)

• A rules based- systematic process selects the five most undervalued sectors based on their relative cyclically-adjusted price-to-earnings CAPE ratio
• A momentum filter is applied by removing the sector with the lowest 12-month return
  • Helps avoid “value traps” or sectors that continue to get cheaper
• The four remaining sectors are equally weighted (25%)
  • Equal-weighting to each sector ensures an allocation on a market capitalization-weighted basis, thus preserving the large-cap nature of this portfolio
  • Current sectors as of November 2017: Industrials, Health Care, Technology, and Consumer Discretionary
• Sectors rebalance monthly
• The index has provided an annualized return of 14.63% since inception (10/31/2013 to 11/13/2017)

Why Shiller Barclays CAPE U.S. Sector Total Return Index?

• The Index identifies and invests in relatively undervalued equity sectors
• Does not rely on subjective forecasts
• Uses a long term estimate of value, avoiding short term bias
• Based on the rigorous research of Professor Robert Shiller and John Campbell, which in turn is based upon the value investing principles of Benjamin Graham and David Dodd
• We believe it is an intelligent alternative to the capitalization-weighted portfolio of the S&P 500 2

Smart Alpha (DoubleLine managed fixed income collateral portfolio)

• Asset allocation decisions determined by DoubleLine’s Fixed Income Asset Allocation Committee led by Jeffrey Gundlach
• Broadly diversified across fixed income sectors
• The fixed income portfolio has provided an annualized return of 3.03% since inception (10/31/2013 to 11/13/2017)

• Characteristics as of 10/31/2017
  • Portfolio Duration 1.5 years
  • Rating Distribution
    • Investment Grade: 50%
    • S. Government: 17.3%
    • o Agency: 1%
    • Below Investment Grade: 5%
    • Unrated: 3%
    • Cash: 7%
  • Sector Allocation
    • S. Government: 17.3%
    • Collateralized Loan Obligations: 2%
    • Non-Agency Residential Mortgage-Backed Securities (RMBS): 9%
    • Commercial Mortgage-Backed Securities: 8%
    • Investment Grade Corporate Credit: 9%
    • Emerging Markets: 7%
    • Bank Loans: 2%
    • Asset-Backed Securities: 6%
    • Agency RMBS: 1%
    • Cash: 4%

Performance of DSEEX

• From November 2013 – September 2017 DSEEX has outperformed the S&P by 3.85% annualized
• From November 2013 – September 2017 DSEEX ranks in the top 1.02% on a Sharpe ratio basis versus the Morningstar Large Cap Value category
• Worth noting that the S&P 500 ranks in the top 2% on a Sharpe ratio basis on the YTD, 1 1 quarter and 1 yr. 2 quarters.

European Markets

• DoubleLine likes EM and Europeans markets relative the U.S. today
• MSCI Europe CAPE ratio is 17.9 vs U.S. of 30+
  • Cheaper doesn’t necessarily mean buy, but think there is a lot of momentum within European market
• Very strong manufacturing recovery across the EU. Every part of the EU is listed, even Greece, shows expansion in manufacturing (above 50)

Smart Beta (Equity Index): Shiller Barclays CAPE Europe Sector Net Index

• Captures large and mid-cap companies across the 15 developed Market countries in the MSCI Europe
• Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK

Sector Selection Rules

• A rules based systematic process selects the five most undervalued sectors based on their relative cyclically-adjusted price-to-earnings (CAPE) ratio

• A momentum filter is applied by removing the sector with the lowest 12 month return
  • Helps avoid “value traps” or sectors that continue to get cheaper
• The four remaining sectors are equally weighted (25%)
  • Equal-weighting to each sector ensures an allocation on a market capitalization-weighted basis, thus preserving the large-cap nature of this portfolio
• This process is repeated monthly

Smart Alpha (DoubleLine managed fixed income collateral portfolio)

• Asset allocation decisions determined by DoubleLine’s Fixed Income Asset Allocation Committee led by Jeffrey Gundlach
• Broadly diversified across fixed income sectors
• The fixed income portfolio has provided an cumulative return of 2.03% since inception (12/31/2016 - 10/31/2017)

• Characteristics as of 10/31/2017
  • Portfolio Duration 1.4 years
  • Rating Distribution
    • Investment Grade: 9%
    • S. Government: 16.7%
    • Agency: 4%
    • Below Investment Grade: 4%
    • Unrated: 2%
    • Cash: 4%
  • Sector Allocation
    • U.S. Government: 16.7%
    • Cash: 16.4%
    • Non-Agency RMBS: 2%
    • Collateralized Loan Obligations: 9%
    • Asset-Backed Securities: 5%
    • Emerging Markets: 4%
    • Investment Grade Corporate Credit: 8%
    • Bank Loans: 6%
    • Agency RMBS: 4%

DSEUX Performance

• Since inception (12/23/2016 TO 10/31/2017) Shiller Enhanced International CAPE has posted cumulative returns of 22.91% versus the MSCI Euro Net USD of 89%.

Question and Answer

• “Is the International fund an all-equity European Large Cap Value fund? Should it be a large cap value international stock fund?”
  • I think the fund should be used as a complement or replacement to mid-large cap European equity exposure. Just like the S. version, we’re in the large cap value category, but we’re using the MSCI Europe as opposed to the S&P 500. Because we’re using that valuation metric you would compare it to something on the value side.
• “DSEUX, is it Europe or will it also include Asia?”
  • The fund is a European fund. The Asian markets have a little bit more problem when it comes to the accounting
• “Would we ever move to cash if valuations keep going up?”
  • Remember, this is supposed to be fully invested over all periods of time. So, for every full dollar of assets under management (AUM) in the fund we are going to attempt to have a full dollar of notional exposure to the equity market via the Shiller Barclays CAPE® Europe Sector Net Index. We’re not trying to time the market with asset
• “Should the fund be a stock replacement or a bond proxy?”
  • Both of these funds will have the majority of their risk, say 95 – 99%, come from the equity market. So, these are not balanced funds. Your zigs and zags will look like the equity market. The bond portfolio is supposed to be a kicker to try to generate incremental

See the full slides below.