Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
@davidmoran and @vintagefreak, and any others who have commented on this fund and DSEUX: I had not seen any discussion on the board about availability and just checked out of curiosity. TDA does not offer DLEUX at all. Now the question is, who wants to buy Europe?
Yeah, thanks much, I just today happened to recheck at Fido and ML, and one is avail for a fee and the other not. It trails FOSFX (e.g.) but may outpace soon enough. May. I am going to stop waiting w/ the spare cash I have and stick it in DSENX instead. Will be interesting to see how that goes with the market so high.
I confess that I do not see anything attractive about this offering or DSENX. It is based on a ton of derivatives, futures, swaps, cash, U.S. govt and corporate bonds, all squished together to beat a created index, MSCI Europe Net Return USD. There are no actual European stocks or bonds that I could find. DSENX is very similar in its makeup. This is an example of how bizarre the investment world has become, where a company creates a fund to beat a mythological index, but owns nothing you would think should be in the fund, and then charge 0.9% to 1% annually for their mumbo-jumbo. So we now have actively managed funds, index funds, and funds created in a lab. I realize this is not altogether new, but I would wager the average investor in these things has no clue how they are managed, does not understand the inherent risks (and conflicts of interest), and for sure has not read the prospectus, let alone understand the mumbo-jumbo. For me, the very simple SPHD and EFAV will do the trick, and at least I know what I am getting, for 60% less cost.
I agree. Not only is this a black box, but it is a lack box that is not even in a traditional alternative category or trying to beat a traditional type index. The Upside seems pretty positive but it also generally looses more than the SP500 especially for the last year.
I find investing hard enough without owning something I can't define, even if it is run by two very smart guys
I see @Charles's points. Other recent threads or at least posts speak of ETFs that "change stripes" or purport to follow an index no one has ever heard of. The same could be said of DSENX and DLEUX. Are these funds the equivalent of what in my field used to be called "the latest crazy idea from France"? Needless to say, France has declined in more ways than one and it certainly is not generating any new intellectual fervor. Marine Le Pen is a throwback to populist movements that have often shaken France. Will the CAPE/Schiller craze prove to be no more than the latest crazy idea from Wall Street? As for investments I don't understand, which seem to be the brain children of financial engineering, I'm leery but fascinated. As for genetic engineering, I'm generally OK but my wife bombards me with links to anti-GMO sites and won't allow GMO food in the house. I mention this because I own DSENX even though I can't fathom the managers' methods and I think GMO products improve the world, all the while not understanding the science. What's a humanities guy to do in this world? Go around the neighborhood and buy shares in businesses I like à la Peter Lynch? I can hear the answer already: buy index funds and keep your nutty ideas to yourself (LOL).
I'm not really following the "black box" concept being applied to DSENX. It's pretty straight forward it invest in the S&P 500 sectors deemed to have the most value and along with that a fixed income allotment that are swaps and/or derivatives. Heck, most PIMCO funds do that and possibly many other of your favorite fund families. I may not understand the exact formula for DSENX, but I can see the result over the past year+ that I've owned it. Apparently the concept is not for everyone, but that's ok by me. I'm good until the day it doesn't out-perform.
That said, I wouldn't touch the European version now. It would need some kind of track record for me. We can call it 'the same' and "should" have the same edge as the domestic version of CAPE if we want, but prove it first is my philosophy to any brand new fund.
I tend to agree with MikeM that the "black box" thesis is overblown, though with different details.
If you look at DSENX's portfolio, it has full exposure to the Schiller CAPE US sector index by buying total return equity swaps on the index. If you're spooked by all derivatives (including options like covered calls), then by all means stay away. As far as derivatives go, equity swaps seem pretty tame, especially as the counterparty can hedge away the equity risk on its side.
Basically, DSENX pays Barclays and BNP Paribas (two huge investment banks) a large enough cash stream to cover the cost of borrowing money to buy the index equities (should they choose to hedge). The banks can make a profit on their ability to actually raise that money at lower cost, on lending the securities, etc. In exchange for that cash stream, these banks pay DSENX the total return on those equities. (If the portfolio loses money, DSENX has to cover the loss). Alternatively, the banks can use this to reduce their exposure to equities they already have in their portfolio, while simultaneously pocketing that cash stream.
Pretty basic stuff as far as derivatives go. Since DSENX has to put up virtually $0 cash for its equity exposure, it can simultaneously be 100% long in bonds. It uses some of the fixed income to pay the cash stream to the banks, and holds the rest as profits for the fund's investors.
Therein lie the risks. The first risk is in the fact that this is a highly leveraged fund. Not in the traditional sense of investing, say 150% in the market by borrowing, but by investing 100% in equities and 100% in bonds. The prospectus even says this, emphatically (in italics) and explicitly:
The Fund uses investment leverage in seeking to provide both the Index return and the return on a portfolio of debt securities; it is likely that the Fund will have simultaneous exposures both to the Index and to debt securities, in each case in an amount potentially up to the value of the Fund’s assets.
Fidelity recognizes this, going so far as to require you to sign a declaration form before it allows you to invest in DSENX. You have to state that you're a sophisticated investor, that you know what you're doing, that you can afford losing 100% of your investment, etc.
The second risk is with Doubleline's style of bond investing. IMHO that's where the black box is. I can't tell you what's going on in their bond funds any more than I can tell you what PIMCO is doing. If you want to trust Gundlach with bonds that's fine, you're buying into his black box.
What I normally expect from this kind of strategy is 100% exposure to the index being tracked, plus a small alpha from a conservatively managed bond portfolio. But what this fund is doing is investing aggressively on the bond side. Hence the outsized returns since inception, a period when both equities and bonds have done well.
Unfortunately, if you buy into the CAPE sector index thesis, there's not a "safe" vehicle to get exposure. You've got this fund which has the risks above, and you have CAPE, which as an ETN has single creditor risk. (You risk your principal if an ETN defaults; you risk only your profits if a total return swap counterparty defaults.)
>> in each case in an amount potentially up to the value of the Fund’s assets. >> ... You have to state ... that you can afford losing 100% of your investment, etc.
Can you describe a scenario where this would happen but TWEIX plus DODIX (say) do not decline similarly precipitously? That's a key question in my mind.
Assuming that Doubleline bond funds behave similarly to DODIX (far from a sure bet, they're more like black boxes), the difference between a 50/50 combo of TWEIX (or CAPE) and DODIX would be due primarily to leverage.
Effectively, $100 of DSENX buys you the movement of $100 of TWEIX and $100 of movement in DODIX. So when both are doing well, you add the two and do better. (BTW, I tried combining CAPE and various Doubleline bond funds to find a Doubleline bond fund that approximated the bond portion of DSENX, but none matched well on a year by year basis).
Likewise, when both TWEIX and DODIX are doing poorly, you add their returns and that's more or less what you'd expect to get from this fund. Suppose TWEIX dropped 20% and DODIX dropped 10%. Your $100 investment in DESNX would move like $100 in TWEIX (dropping $20) and also move like $100 in DODIX (dropping $10).
Because of 100% exposure to each of the funds (thanks to leverage) you'd lose $30, or 30% of your investment. 20% (TWEIX) + 10% (DODIX). If it helps, just think this as a 2x leveraged fund.
Of course there's always slop when leveraging, and the exposure is only up to 100% on the equity and fixed income sides. So this is just a crude approximation. But I think it shows how this fund can amplify simultaneous drops in equity and fixed income.
What you hope is that equity and bonds are out of sync, so that you get some protection. Since equity and bonds are closer to uncorrelated than negatively correlated, sometimes you get that protection, sometimes you don't.
Comments
"They're altogether ooky, the Addams family."
I am going to stop waiting w/ the spare cash I have and stick it in DSENX instead. Will be interesting to see how that goes with the market so high.
I really need this available at Merrill where I own DSENX. My Schwab portfolio has enough international. I will give it some time.
I agree. Not only is this a black box, but it is a lack box that is not even in a traditional alternative category or trying to beat a traditional type index. The Upside seems pretty positive but it also generally looses more than the SP500 especially for the last year.
I find investing hard enough without owning something I can't define, even if it is run by two very smart guys
As for investments I don't understand, which seem to be the brain children of financial engineering, I'm leery but fascinated. As for genetic engineering, I'm generally OK but my wife bombards me with links to anti-GMO sites and won't allow GMO food in the house. I mention this because I own DSENX even though I can't fathom the managers' methods and I think GMO products improve the world, all the while not understanding the science. What's a humanities guy to do in this world? Go around the neighborhood and buy shares in businesses I like à la Peter Lynch? I can hear the answer already: buy index funds and keep your nutty ideas to yourself (LOL).
That said, I wouldn't touch the European version now. It would need some kind of track record for me. We can call it 'the same' and "should" have the same edge as the domestic version of CAPE if we want, but prove it first is my philosophy to any brand new fund.
If you look at DSENX's portfolio, it has full exposure to the Schiller CAPE US sector index by buying total return equity swaps on the index. If you're spooked by all derivatives (including options like covered calls), then by all means stay away. As far as derivatives go, equity swaps seem pretty tame, especially as the counterparty can hedge away the equity risk on its side.
Basically, DSENX pays Barclays and BNP Paribas (two huge investment banks) a large enough cash stream to cover the cost of borrowing money to buy the index equities (should they choose to hedge). The banks can make a profit on their ability to actually raise that money at lower cost, on lending the securities, etc. In exchange for that cash stream, these banks pay DSENX the total return on those equities. (If the portfolio loses money, DSENX has to cover the loss). Alternatively, the banks can use this to reduce their exposure to equities they already have in their portfolio, while simultaneously pocketing that cash stream.
Pretty basic stuff as far as derivatives go. Since DSENX has to put up virtually $0 cash for its equity exposure, it can simultaneously be 100% long in bonds. It uses some of the fixed income to pay the cash stream to the banks, and holds the rest as profits for the fund's investors.
Therein lie the risks. The first risk is in the fact that this is a highly leveraged fund. Not in the traditional sense of investing, say 150% in the market by borrowing, but by investing 100% in equities and 100% in bonds. The prospectus even says this, emphatically (in italics) and explicitly:
The Fund uses investment leverage in seeking to provide both the Index return and the return on a portfolio of debt securities; it is likely that the Fund will have simultaneous exposures both to the Index and to debt securities, in each case in an amount potentially up to the value of the Fund’s assets.
Fidelity recognizes this, going so far as to require you to sign a declaration form before it allows you to invest in DSENX. You have to state that you're a sophisticated investor, that you know what you're doing, that you can afford losing 100% of your investment, etc.
The second risk is with Doubleline's style of bond investing. IMHO that's where the black box is. I can't tell you what's going on in their bond funds any more than I can tell you what PIMCO is doing. If you want to trust Gundlach with bonds that's fine, you're buying into his black box.
What I normally expect from this kind of strategy is 100% exposure to the index being tracked, plus a small alpha from a conservatively managed bond portfolio. But what this fund is doing is investing aggressively on the bond side. Hence the outsized returns since inception, a period when both equities and bonds have done well.
Unfortunately, if you buy into the CAPE sector index thesis, there's not a "safe" vehicle to get exposure. You've got this fund which has the risks above, and you have CAPE, which as an ETN has single creditor risk. (You risk your principal if an ETN defaults; you risk only your profits if a total return swap counterparty defaults.)
>> ... You have to state ... that you can afford losing 100% of your investment, etc.
Can you describe a scenario where this would happen but TWEIX plus DODIX (say) do not decline similarly precipitously? That's a key question in my mind.
Effectively, $100 of DSENX buys you the movement of $100 of TWEIX and $100 of movement in DODIX. So when both are doing well, you add the two and do better. (BTW, I tried combining CAPE and various Doubleline bond funds to find a Doubleline bond fund that approximated the bond portion of DSENX, but none matched well on a year by year basis).
Likewise, when both TWEIX and DODIX are doing poorly, you add their returns and that's more or less what you'd expect to get from this fund. Suppose TWEIX dropped 20% and DODIX dropped 10%. Your $100 investment in DESNX would move like $100 in TWEIX (dropping $20) and also move like $100 in DODIX (dropping $10).
Because of 100% exposure to each of the funds (thanks to leverage) you'd lose $30, or 30% of your investment. 20% (TWEIX) + 10% (DODIX). If it helps, just think this as a 2x leveraged fund.
Of course there's always slop when leveraging, and the exposure is only up to 100% on the equity and fixed income sides. So this is just a crude approximation. But I think it shows how this fund can amplify simultaneous drops in equity and fixed income.
What you hope is that equity and bonds are out of sync, so that you get some protection. Since equity and bonds are closer to uncorrelated than negatively correlated, sometimes you get that protection, sometimes you don't.