Momentum cuts both ways, and avoiding losers is just as important as picking winners. Mainstream thinking views momentum as finding hot stocks that are headed higher. But true risk management revolves around dodging the losers.
That skill has played a part in the impressive performance of the DoubleLine Shiller CAPE Enhanced Fund, which has finished in the top percentile, that’s 1 percent, of the large-cap value category for two consecutive years.
Jeffrey Sherman, who co-manages the fund with DoubleLine CEO Jeffrey Gundlach, admits that the fund’s goal was to provide superior risk-adjusted returns, not to generate the eye-popping returns it has for a value fund. The portfolio was designed to produce “above-market returns throughout the full cycle,” says Sherman, who will speak at the Investing In Smart Beta Conference in Fort Lauderdale, Fla., on March 22.
Using a proprietary system patented in conjunction with Nobel laureate Robert Shiller and Barclays, the methodology analyzes 10 different industry sectors within the S&P 500, ranking each by its Shiller CAPE ratio. Of the five identified sectors, the filter throws out the one with the worst total return over the past 12 months.
Significantly, the model’s big loser was the energy sector, which DoubleLine kicked out in September 2014. It remains kicked out. Sectors in the fund as of its most recent reporting include technology, health care and industrials.
Sherman maintains there is a huge difference between cheap stocks and value investments.
“In 2008, people doubled down on banks and home builders,” Sherman said. “They were cheap, but they didn’t have value.”