DoubleLine Strategic Commodity Fund – “Time To Revisit?” [Slides]

DoubleLine Strategic Commodity Fund Webcast Recap “Time To Revisit?”

About this Webcast Recap

On April 26, 2016, Portfolio Manager Jeffrey Sherman, Jeffrey Mayberry & Samuel Lau held a webcast discussing the DoubleLine Strategic Commodity Fund (DBCMX/DLCMX) titled “Time To Revisit?”

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 “Webcasts” tab. You can use the “Jump To” feature to navigate to each slide. You can also learn more about future webcasts by viewing the 2016 webcast schedule at www.doublelinefunds.com under “Webcasts.”

DoubleLine Strategic Commodity Fund Webcast Recap – Rationale For Investing In Commodities

• Potential to dampen overall volatility to a portfolio with a small allocation:
  • Diversification benefits relative to traditional asset classes.
    – Potential low-to-uncorrelated return source to traditional asset classes.
  • Potential to hedge against unexpected inflation.
    – Physical assets have historically tended to move in line with broad inflation measures.
  • Potential incremental returns from each individual commodity’s market structure.
  • Commodity supply and demand is generally correlated to the cyclicality of the global economy.

Commodity Market as Measured by the UBS Bloomberg Constant Maturity Commodity (CMCI)

• Relative low during financial crisis of 582.4 on February 28, 2009.
• Level as of March 31, 2016 was 482.3.

DoubleLine Strategic Commodity Fund’s Structure

• DoubleLine Strategic Commodity Fund is a long-biased commodity fund that tactically allocates to a long-short dollar neutral commodities strategy when a 100% long commodity allocation is unattractive. However, the strategy always maintains a 50% exposure to long-only.
• Tactical allocation to beta and alpha baskets determined by an internal model developed by the Commodities team with discretion to override the model when warranted.
• Strategic Commodity’s Long-Only Beta (50%-100% allocation).
• Strategic Commodity’s Long-Short Alpha (0-50% allocation).

What is Commodity Beta?

• Traditional asset classes define beta using market capitalization, or a similar price-based metric, as the basis for determining the weighting scheme.
• Since commodity investments are typically obtained via commodity futures there is a challenge with defining commodity beta in a similar vein.
  • For each futures contract outstanding there is one entity which is long the exposure and one offsetting entity that is short the exposure.
  • Therefore the market capitalization of each futures market is zero.
• Index providers have turned to other factors to determine how to allocate capital across various commodities.
  • These include, but are not limited to open interest, volume, production and fixed weights.
• Since there is no agreeable definition of how to define the market weights of various commodities, all commodity indices are actually rules-based commodity strategies.

Strategic Commodity’s Long-Only Beta (50% – 100% Allocation)

• Long-only commodity basket that allocates across 3 broad market sectors in roughly equal weights.
• Commodity selection is based on those that have historically exhibited the highest degree of backwardation and that have active liquid future markets.
• Future contract selection is unique to each commodity based on historically term structure and liquidity.
• The basket rebalances annually each January.
• Allocations as of March 31, 2016:
  • 5 Energy Positions (34.4%)
    – Oil: West Texas Intermediate (WTI) Crude (10.2%) and Brent Crude (10.4%)
    – Distillates: Gasoil (5.5%), Unleaded Gasoline (5.1%) and Heating Oil (3.2%)
  • 2 Metals Positions (32.2%)
    – Copper (20.1%), Nickel (12.1%)
  • 4 Agriculture and Livestock Positions (33.4%)
    – Grains: Soybeans (19.6%)
    – Softs: Sugar (5.5%) and Cotton (3.6%)
    – Livestock: Live Cattle (4.8%)

Strategic Commodity’s Alpha (0% – 50% Allocation)

• Dollar-neutral commodities strategy comprised of futures contracts selected from the universe of commodities in the S&P GSCI.
• Monthly trading signals derived from rules-based calculation methodology built around global and demand fundamentals.
  • Utilizes key metrics such as:
    – Degree of contango or backwardation
    – Price momentum
• DoubleLine has been running a similar strategy since 2012.
• Allocations as of March 31, 2016:
  • Long (5): Cocoa, Cotton, Gold, Zinc, Copper
  • Short (5): Crude Oil, Brent Crude, Gasoil, Heating Oil, Natural Gas

Making the Tactical Allocation Decision

• A timing single developed by DoubleLine uses a rules-based approach to assess the relative attractiveness of investing in long-only commodities.
  • Determines if the allocation mix between the Long-Only Beta allocation and the Long-Short Alpha.
• Created using a rules-based calculation methodology that looks at and analyzes the fundamental global supply and demand picture. Some of the metrics the model analyzes are degree of contango, backwardation and price momentum.
• The signal is generated monthly; the output is a dollar-neutral commodity strategy that invests equally, based on a notional amount, across long and short baskets.

Question and Answer

• Silver
  • Trying to forecast 16 months in the future, given the intervention of central banks around the world, is a useless exercise.
  • Mr. Sherman see silver going higher over the next 12 months. Some estimates have the fair value on silver closer to $20/ounce.
• Oil
  • Oil may have reached a bottom. We may see it trade sideways.
• Commodities Investing
  • Mr. Sherman believes commodities can make a significant move up and that investors in commodities must remain patient. That is why we’ve introduced this idea of tactically allocating away from the beta when things aren’t as attractive.
• Rebalancing
  • DoubleLine rebalances the Long-Short Alpha basket on a monthly basis.

See full slides below.