I've been looking at both funds to round out my bond portfolio and noticed a few things:
DBLTX seems like a mortgage fund disguised as a total return fund. Essentially, Gundlach must have at least 50% of assets invested in mortgages. Thus far, he's been very successful. What happens when that sector hits the skids?
DFLNX has been slightly less successful with Gundlach at the helm when he spreads out to treasuries and corporates. Again, this fund has a large part dedicated to mortgages, but not as much as Total Return.
Do you consider DBLTX a true "Total Return" bond fund or just a mortgage fund? Also the AUM for DBLTX is enormous compared to DFLNX. Do you think that will hurt performance in the future? It doesn't seem to have been an issue thus far.
Thoughts and input/suggestions?
Thanks.
Comments
Both are good funds, but I prefer DBLTX because it has a superior year-to-date, 1-year, and 3-year returns, while having a lower Standard Deviation.
Mona
Gundlach was asked to compare/contrast these when they opened the 2 funds. DLFNX has a broader palette of choices (corps, sovereigns, etc). Supposedly, DLFNX provided a (paraphrasing Jeff) a more fuller expression of Doubleline's outlook on various fixed income sectors. Whereas DBLTX (again, paraphrasing) would be a less volatile fund which would focus on mortgages.
Keep in mind, Gundlach's history is with mortgages. That was his charge at TCW,when he managed TGLMX. That is where his deepest expertise is. DBLTX (like many bond managers) consciously employs a "barbell" strategy with DBLTX ---owning non-agency (higher yield, higher-risk) paper for income, but also agency paper -- the prices of which often run counter to the non-agency stuff. The former provides "credit" exposure; the latter interest-rate exposure. He then changes the weightings of these based on his assessment of risk vs. price/value. The active changing of the weightings mean that DBLTX, limited though it is, to mortgages, seems to work in most environments -- as well or better than most more diversified "core" bond funds.
Yes, DLFNX has more options. But more options doesn't necessarily mean better performance. -- Take a look at PAAIX as an example of a fund with essentially unlimited choices, whose performance continually stinks. Or PTTRX, which is the PIMCO fund most analogous to DLFNX. --- DBLTX, "handicapped" as it is by being limited to mortgages, has trounced PTTRX. What DBLTX has demonstrated, is that for a skilled manager, the "handicap" of being limited to mortgages, can in fact be a virtue Too many choices, for many (not all) professional bond managers may have the effect of impairing alpha.
If you can pick up DBL at a discount to NAV, I would expect it to outperform DBLTX over a market cycle.
Its easy to market a new sexy "alternative" product --- much harder to deliver consistent results. Its hard enough for the best of managers to make money by 'simple' security selection and asset/sector allocations. -- Much, much harder to do by giving these people too many choices.
Yet these fund companies know they can market this stuff (yes, I fell for it too, early on). In almost all cases the "conventional core fund" of these fund sponsors has beaten the "unconstrained" offering. More choices effectively means TOO MANY choices for the "professional managers" to handle.
I will again offer as Exhibit A, PAAIX -- "unconstrained" is not in the fund's name, but certainly it is "unconstrained" in its ability to go anywhere, and short assets. The manager is very articulate, his company sponsor (Pimco) has immense organizational resources. --- How is that working out? Ditto SUBFX, and PFIUX, etc. etc.
For investors who want an alternative to stocks AND bonds, I suggest holding some cash.
Signed,
----The MFO resident Rank Amateur.
Meanwhile on most of that pre-crisis vintage mortgage paper, any debtor who was going to stop paying, long ago has since stopped paying, and housing prices have recovered. So generally, there may be a lot of lousy-rated paper which 'ain't so lousy'..
But again, you and I are not buying the paper, we pay pros to do that type of analysis -- pros (like Gundlach) who have a long track record in up and down markets.
JF talks about differences among TOTL, DBLTX, Core (DBLFX), and Flexible.
FWIW, I own DBLTX which is the best antidote for equity risk.
https://prnedelivery.morningstar.com/Average_credit_Quality_Methodology_Change_2010.pdf
Since highly rated bonds have a miniscule chance of default, you have to move fairly far down the credit scale (AAA, AA, A, ...) to find a bond that has the same small (but not insignificant) default rate as the portfolio weighted average.
Mona
I like to keep 1/2 of my fixed income to diversify the equity risk. DBLTX is negatively correlated with equity. See here. FWIW, In taxable space, I own 1 OEF and 3 CEF muni funds.
What those rates are, I don't know. As I think about it, I can't say what period these rates are computed over. Is M* using a one year default rate (percent of BBB bonds that default within a single year), or more likely a cumulative default rate (percent of BBB bonds that default at one or more points over their lifetime)? "Default" almost certainly includes any bond that misses a payment; but does it include technical defaults (see Meridith Whitney), where some condition of the bond is violated even if all payments are made?
The NRSROs publish figures on defaults vs. ratings, so mappings from credit ratings to default rates are known. Here's a paper on defaults from S&P:
2014 Annual Global Corporate Default Study And Rating Transitions
P.S. Don't sell yourself short. It's not a stupid question, and I initially wondered about that 100 also. Below B bonds are either in risk of imminent default (C range) or in default (Ds); still some of these bonds don't default.