http://www.forbes.com/sites/danielfisher/2012/01/25/recession-scares-doublelines-gundlach-more-than-rising-rates/print/Excerpt:
Gundlach insists most money managers misunderstand junk bonds, comparing them to 5-year Treasurys to determine how rich their yields are, when the correct comparison should be to 30-year Treasurys. How can Gundlach compare junk bonds, which do better when the economy heats up, with long-term Treasurys, which get killed when the economy revs up and the Fed raises interest rates?
That’s irrelevant, he responds. The thing to look at is volatility, because that tells you the odds you will have to sell at a loss when you need to raise cash in an emergency. On that basis, junk bonds that were trading at a seemingly reasonable spread of 5 percentage points, or 500 basis points, to 5-year Treasurys in mid-2011 were actually trading at an intolerably low 250-basis-point spread to the proper bond. (By then DoubleLine had cut its junk bond allocation from 10% to 1%.) Sure enough, junk fell 12% as the year went on, and the spread to 30-year Treasurys has doubled since mid-2011.
Comments
"Gundlach acknowledges rates could rise. He shields investors by purchasing discounted mortgage-backed securities and pairing them with government-guaranteed mortgage securities. This creates a so-called barbell portfolio, in which the high-yielding discounted securities complement the long-dated guaranteed ones, for a higher overall yield. If the economy rebounds and interest rates rise, the government-guaranteed securities will suffer, but the discounted bonds will soar as default risk dwindles.
That’s a better way to protect against rising rates and inflation than Treasury Inflation-Protected Securities, or TIPS, Gundlach says. With 30-year TIPS currently yielding less than 1%, he says, investors will lose money in the gap between when rates begin to rise and the government increases the value of principal to reflect higher consumer prices. So TIPS present the rarest of inflation hedges—one you can buy after inflation heats up.
“You know with almost mathematical certainty that if rates go up to 4%, you will be able to buy them cheaper,” Gundlach says."
Question:
His funds are not available through my brokerage so what other funds might follow this approach?
Strategy:
Hold discounted MBS paired with GMNAs until interest rates rise and then TIPS after rates move back above 4%.
DoubleLine Launches DoubleLine Opportunistic Credit Fund
LOS ANGELES, Jan. 27, 2012 /PRNewswire/ -- The DoubleLine Opportunistic Credit Fund (the "Fund") has completed an initial public offering of common shares and has listed on the New York Stock Exchange, Fund adviser DoubleLine Capital LP ("DoubleLine") announced today. Organized as a non-diversified, closed-end management investment company, the Fund trades under the symbol DBL.
The Fund raised approximately $326.5 million in proceeds (before deduction of the sales load and offering expenses and exclusive of the underwriters' overallotment) in the initial public offering of 13,060,000 common shares at $25 per share. The Fund has granted the underwriters an option to purchase additional common shares at the public offering price less the sales load within 45 days of the date of prospectus, solely to cover overallotments, if any. Assuming full exercise of the underwriters' overallotment option, which may or may not occur, overall sales totaled approximately $375.25 million.
{...}
The Fund does not intend to employ investment leverage initially. Subject to DoubleLine's determination that the then-current market conditions are favorable, the Fund intends, at a future date, to add leverage to its portfolio by using reverse repurchase agreements, dollar roll transactions or similar transactions, and/or borrowings, such as through loans or lines of credit from banks or other credit facilities. The Fund will, however, limit its use of leverage from reverse repurchase agreements, dollar roll transactions or similar transactions, and/or borrowings, such that the assets attributable to the use of such leverage will not exceed 33 1/3% of the Fund's total assets (including the amounts of leverage obtained through the use of such instruments).