Financial advisors and representatives from Los Angeles-based DoubleLine Capital convened at the Beverly Hills Montage Hotel two weeks ago. The gathering was partly to celebrate DoubleLine’s high-flying stock fund, DoubleLine Shiller Enhanced CAPE (DSEEX), and partly to roll out its new sibling DoubleLine Shiller Enhanced International CAPE (DSEUX).
The DoubleLine Shiller Enhanced CAPE Fund is a unique value fund because its strategy doesn’t limit it to a part of the stock market that can get overvalued from undue attention. Using the theories of Nobel Laureate Robert Shiller, the fund gains exposure to four of the five cheapest sectors of the index on a CAPE, or cyclically adjusted, PE basis. Each sector is evaluated against its own history of price relative to inflation-adjusted average earnings over the past 10 years. Those that score cheapest relative to their own histories make their way into the fund. That means the fund can own classic value sectors such as energy and financials or classic growth sectors such as technology and health care.
But before all this happens the fund invests its capital in a short-term bond portfolio. Then it uses that portfolio to collateralize or gain access to a derivative on a Barclays index that tracks four of the five cheapest S&P 500 sectors. In other words, the fund puts your investment in bonds, and then, through a derivative, overlays exposure to the stock market equal to your investment on the bond portfolio.
After isolating the five cheapest sectors of the index on a CAPE basis, the derivative tosses out the sector with the worst one-year price momentum, leaving it with four of the five cheapest. That momentum filter helped the fund avoid the energy meltdown in 2015.
Despite the portfolio being invested in bonds to collateralize the derivative exposure, the fund will behave like a stock fund and should be considered a stock fund for asset allocation purposes. The bond portfolio is supposed to overcome the cost of the derivative and add a little return on top of that.
DoubleLine says the bonds have added around 2 percentage points of return on an annualized basis for the fund’s existence. That extra kick, combined with the derivative’s performance, have propelled the fund to a 15.37 percent annualized return for the 39 months of its existence through January. This compares favorably to the 10.64 percent annualized return of the S&P 500 Index, including dividends. The fund has also outpaced the 10.34 percent, 9.89 percent and 10.86 percent annualized returns of the Russell 1000, Russell 1000 Value and Russell 1000 Growth indexes, respectively, for the same period.