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Would someone please explain the use of derivatives in DSEEX. Why invest this way to gain exposure to S&P sectors? Why not just invest directly in the stock? Does this make the fund more or less risky? Thank you!
The fund currently has $5.2 BN of assets. I think the costs involved in buying and selling the actual stocks or an etf that holds the stocks would most likely exceed the "cost" of the swaps when you'd have to buy and sell more than $1.25 BN at month-end. The swaps also rebalance with no activity because they're based on Barclay's index and that helps keep costs down as well.
The most important aspect I think is that the swaps let Doubleline invest that $5.2 BN in bonds to generate income which has historically more than offset the cost of the swaps and therefore has added to the return.
I certainly don't think the fund is made less risky by using the swaps but I don't think it's made a lot more risky either. In my opinion they do a good job with the ladder of swaps and the liquidity of the bonds so I don't have a lot of concern but without knowing the terms of the swaps I don't think we can be sure.
If the fund experienced very large redemptions in a short period of time and if they weren't able to redeem swaps before their maturity then the fund could end up over-invested in stocks. Presumably the reason for a run would be stocks going down so that would make the fund riskier. I'd hope they have a clause in their swaps that allows them to redeem them before they mature, maybe with a penalty, and that would mostly address the problem. They also have to be able to liquidate bonds to deal with redemptions. Anytime I've looked at the portfolio I've been comfortable that they have enough highly liquid bonds to deal with anything normal, but in an extreme case, especially one where the bond market dried up, then I guess that could be a problem but they'd probably just give shareholders the actual bonds to meet redemptions rather than cash.
In general I don't think the structure of the fund creates more risk than most other funds but some of the details I don't think we know could sway me if they had overlooked the potential need for flexibility with maturities of the swaps.
This is very helpful @LLJB. There are two ways to invest in the CAPE strategy, through the OEF or through the Barclays ETN, CAPE. I don't think I understand fully why there are warnings about investing in ETNs; it seems to boil down to assessing the stability of the issuer of the debt instrument (Barclays). For the investor, there is an essential difference, in my opinion. ETNs pay no income or capital gains, but OEFs do. In the case of DSEEX/DSENX, distributions are monthly and there are annual CG payouts. I don't see any notable difference in the overall returns of the two instruments. The ETN acts like a growth stock that pays no dividend, but CAPE is not that. Trading CAPE can be a bit of a challenge as the spreads are wide and the bid/ask prices reflect current market sentiment and are often at variance with the last price quoted. Maybe others know more about the ETN structure as it pertains to this strategy. I like it for a taxable account if I don't need regular income from it.
Dseex is a fantastic fund that I've been in since it opened. That said, it will always be just a supporting member of my portfolio rather than a core holding precisely because of derivatives. All of us know there is no such thing as a free lunch. At best this will show itself as lackluster performance some day, but at worst there could be some unforeseen disaster lurking that was caused by the derivatives. I'm not smart enough to know as it's a black box to me. As to ETNs, I avoid them always since there is a default risk just like any other note. It's probably small, but who wants to even think about that. Not I.
@LLJB has done a great job in describing DSEEX, both here and in earlier threads such as this one.
I agree that the use of swaps doesn't significantly affect the risk in and of itself. I believe that the swaps used by the fund involve only net performance. (See, e.g. equity swap into here.) That is, the fund gets an income stream equal to the performance of the index (if the index goes up 1% it gets 1% of the swap value) while it pays the counterparty a fixed rate.
So if the index goes up more than the cost of the swap (usually the case) the fund nets some income. If the index goes up less than the cost of the swap (or even goes down), then the fund owes the other side some money, net.
All that is at risk with the swaps is the net income since the last time the two sides settled their debts (called a "reset"). These resets happen periodically so there's just a limited amount of income at risk should the other side default.
IMHO the fund's added risk comes from its use of leverage. Not in the traditional sense of borrowing money to invest, but in using $1 of investor's cash to gain $1 of exposure to the index and $1 exposure to the bond market. That's where the derivatives come in. The risk is from the leverage, not the derivatives. The derivatives are simply a means to that leverage.
Almost no cash is needed to own or service the derivatives; the vast majority of the cash is used to invest in a bond portfolio. Should both equity and bond markets drop, this 2x exposure can hammer the fund. (Should both go up, the fund can soar.) As wxman123 noted, TANSTAAFL.
As DoubleLine writes:
Each $1 investment seeks to obtain $1 of exposure to the CAPE® Index via swaps and $1 of exposure to the underlying portfolio of bonds managed by DoubleLine. ... This portoflio has no financial leverage because no money is borrowed .... There is implicit economic leverage due to the use of unfunded swaps ....
>> Should both equity and bond markets drop, this 2x exposure can hammer the fund.
Do you think that the reason this has not happened in its lifetime (meaning it tracks SP500 except for the mostly steady outperformance) is that the two markets have not both dropped?
Yes. For instance, while the S&P 500 was busy dropping 10% between Jan 26 and Feb 8, CAPE dropped 9.07% (from 125.85 to 114.44), AGG (pick your own proxy for DSEEX's bonds) fell 1.06% (using Yahoo's adjusted closing prices of 107.98 and 106.84).
In that same stretch, DSEEX fell 10.04% (using Yahoo's adjusted closing prices of 16.54 and 14.88). That's about as close to an exact sum of the two markets (using CAPE, not S&P 500) as you can get. Both markets dropped and DSEEX dropped accordingly.
Since the stock market has until recently gone straight up during DSEEX's lifetime, there aren't many stretches where both bonds and stocks have fallen together.
Right, tnx; I was misunderstanding (misreading) "2x" as something more than, or at least other than, double-whammy. So are you thinking that double-drop would mean necessarily greater DSEEX hammering than OAKBX / FPACX / DODBX / PRWCX? I am over half in DSEEX and 25% in PONDX and other Pimco, and am ever curious about lack of true diversification.
I would think that investing in DSEEX would give similar diversification to a vanilla hybrid fund that had a roughly 50/50 stock/bond mix. The difference is one of magnitude of performance (i.e. getting hammered harder).
In DSEEX, you get full exposure to CAPE. That means that if $10,000 invested in CAPE were to drop 10%, losing $1,000, then you'd expect a $10,000 investment in DSEEX to similarly lose $1,000 before even looking at the gains or losses on the bond side.
That $10,000 investment in DSEEX, aside from getting you stock exposure, buys nearly $10,000 worth of bonds in the fund's portfolio. If bonds drop 4%, your $10,000 worth of bonds lose $400.
So the $10,000 investment loses $1,000 + $400 = $1400. This is as one would expect:
100% stock exposure x $10,000 x 10% loss + 100% bond exposure x $10,000 x $4% loss = $1,000 + $400 = $1400 = (10% + 4%) x $10,000 = 14% x $10,000.
In the vanilla 50/50 hybrid fund, that $10,000 invested buys $5,000 worth of "real" stock and $5,000 of bonds. When stocks decline by 10%, the $5,000 worth of stocks drops $500 in value. When bonds decline by 4%, the $5,000 worth of bonds drops $200 in value.
So the $10,000 investment loses $500 + 200 = $700. This too is as one would expect:
50% stock exposure x $10,000 x 10% loss + 50% bond exposure x $10,000 x 4% = $500 + $200 = $700 = (50% x 10% + 50% x 4%) x $10,000 = 7% x $10,000.
Note that DSEEX is likely not providing the full 200% exposure (100% to CAPE, 100% to bonds), but it's still a reasonable approximation. DoubleLine writes that while: "Each $1 investment seeks to obtain $1 of exposure to the CAPE® Index ... and $1 of exposure to the underlying portfolio of bonds ... market fluctuations likely will preclude full $1 for $1 exposure between the swaps and the fixed income portfolio.
Didn't Warren Buffett make an investment in derivatives and wish he hadn't? If memory serves me, he had a difficult and costly experience trying to unwind it.
I think I'll stick with the mutual funds that actually own the stocks they invest in. When the next crash occurs, my funds may be bruised, but they won't look like naked swimmers when the tide goes out.
CAPE cannot be traded at ML and maybe not at some other brokers, not sure, which irks me.
Looking at comments on other boards, it seems that Merrill Edge generally blocks online trades of any ETN. Nevertheless, you can trade ETNs there, or so says a poster in this M* thread.
The catch is that you have to call a Merrill broker to do it. Or you can go elsewhere to buy the ETN for a few bucks, such as $4.95 at Schwab or Fidelity. CAPE is available online at both.
>> investing in DSEEX would give similar diversification to a vanilla hybrid fund that had a roughly 50/50 stock/bond mix. The difference is one of magnitude of performance (i.e. getting hammered harder).
I now see where you get this notion from, it is a fascinating idea, and their language does seem to encourage that. So why does M* not classify it differently? And why does it not show significantly greater swings, outperformance aside, than say PRWCX?
(Or maybe it does; am just now trying to compare it with w/ PRWCX, FBALX, ICMBX, and other of the more aggressive balanced entities.)
With all the people here who are skeptical of M*'s classifications, I think you just lobbed everyone a softball
More seriously, it might depend on how the bond portfolio is being used. Also, DoubleLine and PIMCO tend to be especially opaque, and in DoubleLine's case somewhat unresponsive to M*. So it's not easy to pidgeonhole the bond side of the fund.
One way to use the bond portion of the portfolio is to eek out a little higher return. If the objective is to simply generate enough income to cover the ongoing expenses of owning the swaps plus a little more, you've basically got an equity fund with a small twist. On the other hand, if the objective is to manage the bond side as, say, a full blown total return portfolio, then the fund looks more like a leveraged balanced fund.
For example, MWATX invests in short term bonds (average duration under three years). It's just trying to beat the S&P 500 index, hence the name AlphaTrak 500. Somewhat in contrast, DoubleLine says that DSEEX is invested in bonds for "additional long term total return" (from prospectus).
Regardless of what the prospectus says, the fund in fact might be investing more conservatively, closer to the AlphaTrak model. A year ago, LLJB commented that the bond portfolio was (then) shorter duration and higher credit quality than DBLTX.
A typical balanced fund holds a bond portfolio that aims for higher return than that. It will use a longer (intermediate term) duration or lower credit quality, or both. So DSEEX may not resemble balanced funds so much as equity funds with "a little extra".
Or, M* may just have gotten lazy. Your guess is as good as mine.
M*'s analysis of MWATX (the last one they did was in 2009) said that the bond portion added to its pain, as it was forced to sell deep into its bond portfolio including illiquid holdings. Above, LLJB expressed a concern about something similar happening with DSEEX in an extreme case. I suppose 2008 might fit that description.
Thanks for the comparison. I think it might be one way of evaluating DSEEX potential downside risk. Not sure I could have held onto MWATX through that downdraft.
investing in DSEEX would give similar diversification to a vanilla hybrid fund that had a roughly 50/50 stock/bond mix. The difference is one of magnitude of performance (i.e. getting hammered harder).
You know @msf, when I made the statement that I look at DSENX as a kind of balanced fund a couple years ago, I was hammered pretty good here with "no it is not, you can't think of this fund that way". So I'm glad that you investigated enough to say yeah, maybe it is, albeit a more volital hybrid than what we think of as a typical balanced fund. You explained it very well.
Even if one knows exactly what these funds are doing, it really is hard to call this sort of fund one thing or another. So one makes a best guess and explains it. And when they don't make it clear quite what they hold, well ...
>> So DSEEX may not resemble balanced funds so much as equity funds with "a little extra"
Yes, this not-really-like-hybrid take is the nut I return to, and always underlies my original bond queries. To return, empirically, to performance: since DSEEX inception, it is close to impossible to find any period where a combo of any proportion of CAPE and PDI (to choose probably the most aggressive and successful of the opaque Pimco offerings, although it is CEF with a premium) does as well as DSEEX. As puzzling, the last year-plus its bond portion has "detracted," meaning that since 4-5/17, CAPE has marginally outperformed DSEEX. Also not seeing that it is truly more volatile; as I noted earlier, its swings do not to me appear to be more dynamic, and its UI per MFO Premium is the same as steady TWEIX.
I've tried to describe the fund conceptually in terms of major building blocks. To come up with an explanation of its performance entails starting with a much more detailed model and then using trial and error to find a proxy bond fund that might adequately match the performance of the bonds in the portfolio.
I'm not going to go through that exercise. But I will give you some idea of other factors involved.
According to a page on DoubleLine's company website (I haven't found this detail on the DoubleLine fund site or in the fund's prospectus), the swaps used require collateral. (Generically speaking, some swaps do, others don't.) Here's the image from that site showing the need for collateral Contrast that with the image on the fund's fact sheet that omits mentioning the need for collateral. Contrary to the image above the fact sheet states that 100% of the money invested (not just a remainder) goes into the fixed income portfolio. Since the prospectus also omits anything about using collateral, it obviously doesn't say how much collateral is needed.
So now there's a new factor (collateral) to include, one that comes alone with an unknown value (collateral percentage). FWIW, MWATX, which uses futures not swaps, typically puts up 4%-5% of the value of the derivatives as collateral (according to its prospectus). If DSEEX is using 5% collateral, then the remaining 95% of the amount invested is being invested in bonds. So one would multiply the performance of the proxy bond fund by 95%. In reality, we not only don't know an appropriate bond fund to use as proxy, but what scale factor should be used.
Then there are the carrying costs for simply holding the swaps. That appears to be the "financing rate", which is different for each swap, but tends to run in the 0.40% - 0.47% range. At least those are the rates shown for the swaps in the latest semiannual report, which is now almost six months old. So some average rate in that range needs to be subtracted from the CAPE (swap) rate of return.
Next up are the costs of acquiring the swaps. Some, like brokerage fees, can be extracted from the financial statements. Others, according to the prospectus, are simply not disclosed:
investment-related expenses not shown in the [fund expense] tables include brokerage commissions and undisclosed markups on principal transactions, which reduce the return on your investment in a Fund and may be significant. ... In cases where a Fund enters into a swap transaction or certain other transactions based on an index, the transaction pricing will typically reflect, among other things, compensation to the counterparty for providing the investment exposure. The transaction pricing also may reflect charges by the Index sponsor for the use of the Index sponsor’s intellectual property and/or index data (“Intellectual Property”) in connection with the transaction. These investment-related costs may be significant and will cause the return on a Fund’s investment in a swap transaction or other transaction based on the index to underperform the index. The terms of these transactions may change over time, potentially in response to market conditions, without notice to shareholders.
As with the carrying costs, simple subtraction is the best way to account for these other expenses. Say they totaled 2%/year, then 2% would be subtracted from the fund's expected return. I pulled that 2% figure out of the blue for a placeholder; I've no idea what these other costs total at any given point in time (the prospectus says they vary over time as well).
Finally, I'm not clear why you elected to use a PIMCO fund as a bond proxy; I might have tried out some DoubleLine funds first.
Personally, I'm content with my level of understanding of this fund, though I can appreciate the interest in proving out a model by getting numbers to match.
I chose PDI not only because I have long owned it (enjoyably) but also because I wanted the most aggressive / successful noncrazy bond entity I could find, and DFLEX would have been waay farther from the bond component of DSEEX, it seems.
Yes, I have long been interested in counterparty compensation and the like, perhaps thanks to you for pointing to it in earlier posts. Very intriguing documentation discrepancies you found. Even more that the prospectus now omits collateral mention. I have always assumed collateral, again perhaps thanks to something I read here earlier.
Being all in, not really all but such a significant portion of the total nut, I too am content with my level of understanding, I think, yet have always wanted to "use trial and error to find a proxy bond fund that might adequately match the performance of the bonds in the portfolio" --- and not just uncover such but understand the details, such as financing rate. It all seems remarkable to me, and I am curious about my risk and (lack of) diversification. I am surprised there is not some spinoff small mimicking bond fund from DL. And finally I would like to know better why and how it (the bond portion) has slightly detracted since last spring.
Comments
The fund currently has $5.2 BN of assets. I think the costs involved in buying and selling the actual stocks or an etf that holds the stocks would most likely exceed the "cost" of the swaps when you'd have to buy and sell more than $1.25 BN at month-end. The swaps also rebalance with no activity because they're based on Barclay's index and that helps keep costs down as well.
The most important aspect I think is that the swaps let Doubleline invest that $5.2 BN in bonds to generate income which has historically more than offset the cost of the swaps and therefore has added to the return.
I certainly don't think the fund is made less risky by using the swaps but I don't think it's made a lot more risky either. In my opinion they do a good job with the ladder of swaps and the liquidity of the bonds so I don't have a lot of concern but without knowing the terms of the swaps I don't think we can be sure.
If the fund experienced very large redemptions in a short period of time and if they weren't able to redeem swaps before their maturity then the fund could end up over-invested in stocks. Presumably the reason for a run would be stocks going down so that would make the fund riskier. I'd hope they have a clause in their swaps that allows them to redeem them before they mature, maybe with a penalty, and that would mostly address the problem. They also have to be able to liquidate bonds to deal with redemptions. Anytime I've looked at the portfolio I've been comfortable that they have enough highly liquid bonds to deal with anything normal, but in an extreme case, especially one where the bond market dried up, then I guess that could be a problem but they'd probably just give shareholders the actual bonds to meet redemptions rather than cash.
In general I don't think the structure of the fund creates more risk than most other funds but some of the details I don't think we know could sway me if they had overlooked the potential need for flexibility with maturities of the swaps.
Fwiw, DSEEX / DSENX profile is interesting to compare w/ say TWEIX (MFO Premium), and they have the same UI....
I agree that the use of swaps doesn't significantly affect the risk in and of itself. I believe that the swaps used by the fund involve only net performance. (See, e.g. equity swap into here.) That is, the fund gets an income stream equal to the performance of the index (if the index goes up 1% it gets 1% of the swap value) while it pays the counterparty a fixed rate.
So if the index goes up more than the cost of the swap (usually the case) the fund nets some income. If the index goes up less than the cost of the swap (or even goes down), then the fund owes the other side some money, net.
All that is at risk with the swaps is the net income since the last time the two sides settled their debts (called a "reset"). These resets happen periodically so there's just a limited amount of income at risk should the other side default.
IMHO the fund's added risk comes from its use of leverage. Not in the traditional sense of borrowing money to invest, but in using $1 of investor's cash to gain $1 of exposure to the index and $1 exposure to the bond market. That's where the derivatives come in. The risk is from the leverage, not the derivatives. The derivatives are simply a means to that leverage.
Almost no cash is needed to own or service the derivatives; the vast majority of the cash is used to invest in a bond portfolio. Should both equity and bond markets drop, this 2x exposure can hammer the fund. (Should both go up, the fund can soar.) As wxman123 noted, TANSTAAFL.
As DoubleLine writes: https://doubleline.com/dl/wp-content/uploads/6-30-2016_CAPEStrategy-10FAQ_JSherman.pdf
Do you think that the reason this has not happened in its lifetime (meaning it tracks SP500 except for the mostly steady outperformance) is that the two markets have not both dropped?
In that same stretch, DSEEX fell 10.04% (using Yahoo's adjusted closing prices of 16.54 and 14.88). That's about as close to an exact sum of the two markets (using CAPE, not S&P 500) as you can get. Both markets dropped and DSEEX dropped accordingly.
Since the stock market has until recently gone straight up during DSEEX's lifetime, there aren't many stretches where both bonds and stocks have fallen together.
So are you thinking that double-drop would mean necessarily greater DSEEX hammering than OAKBX / FPACX / DODBX / PRWCX? I am over half in DSEEX and 25% in PONDX and other Pimco, and am ever curious about lack of true diversification.
In DSEEX, you get full exposure to CAPE. That means that if $10,000 invested in CAPE were to drop 10%, losing $1,000, then you'd expect a $10,000 investment in DSEEX to similarly lose $1,000 before even looking at the gains or losses on the bond side.
That $10,000 investment in DSEEX, aside from getting you stock exposure, buys nearly $10,000 worth of bonds in the fund's portfolio. If bonds drop 4%, your $10,000 worth of bonds lose $400.
So the $10,000 investment loses $1,000 + $400 = $1400.
This is as one would expect:
100% stock exposure x $10,000 x 10% loss + 100% bond exposure x $10,000 x $4% loss
= $1,000 + $400
= $1400
= (10% + 4%) x $10,000 = 14% x $10,000.
In the vanilla 50/50 hybrid fund, that $10,000 invested buys $5,000 worth of "real" stock and $5,000 of bonds. When stocks decline by 10%, the $5,000 worth of stocks drops $500 in value. When bonds decline by 4%, the $5,000 worth of bonds drops $200 in value.
So the $10,000 investment loses $500 + 200 = $700.
This too is as one would expect:
50% stock exposure x $10,000 x 10% loss + 50% bond exposure x $10,000 x 4%
= $500 + $200
= $700
= (50% x 10% + 50% x 4%) x $10,000 = 7% x $10,000.
Note that DSEEX is likely not providing the full 200% exposure (100% to CAPE, 100% to bonds), but it's still a reasonable approximation. DoubleLine writes that while: "Each $1 investment seeks to obtain $1 of exposure to the CAPE® Index ... and $1 of exposure to the underlying portfolio of bonds ... market fluctuations likely will preclude full $1 for $1 exposure between the swaps and the fixed income portfolio.
I think I'll stick with the mutual funds that actually own the stocks they invest in. When the next crash occurs, my funds may be bruised, but they won't look like naked swimmers when the tide goes out.
I'd think that situation would depend a lot on who the swimmers were...
The catch is that you have to call a Merrill broker to do it. Or you can go elsewhere to buy the ETN for a few bucks, such as $4.95 at Schwab or Fidelity. CAPE is available online at both.
Note that brokers often block sales of a few higher risk securities. Here's a 2016 article talking about restrictions imposed by Fidelity, Vanguard, and TD Ameritrade:
http://www.investmentnews.com/article/20160623/FREE/160629978/fidelity-blocks-opening-trades-on-several-etf-products-citing
>> investing in DSEEX would give similar diversification to a vanilla hybrid fund that had a roughly 50/50 stock/bond mix. The difference is one of magnitude of performance (i.e. getting hammered harder).
I now see where you get this notion from, it is a fascinating idea, and their language does seem to encourage that. So why does M* not classify it differently? And why does it not show significantly greater swings, outperformance aside, than say PRWCX?
(Or maybe it does; am just now trying to compare it with w/ PRWCX, FBALX, ICMBX, and other of the more aggressive balanced entities.)
More seriously, it might depend on how the bond portfolio is being used. Also, DoubleLine and PIMCO tend to be especially opaque, and in DoubleLine's case somewhat unresponsive to M*. So it's not easy to pidgeonhole the bond side of the fund.
One way to use the bond portion of the portfolio is to eek out a little higher return. If the objective is to simply generate enough income to cover the ongoing expenses of owning the swaps plus a little more, you've basically got an equity fund with a small twist. On the other hand, if the objective is to manage the bond side as, say, a full blown total return portfolio, then the fund looks more like a leveraged balanced fund.
For example, MWATX invests in short term bonds (average duration under three years). It's just trying to beat the S&P 500 index, hence the name AlphaTrak 500. Somewhat in contrast, DoubleLine says that DSEEX is invested in bonds for "additional long term total return" (from prospectus).
Regardless of what the prospectus says, the fund in fact might be investing more conservatively, closer to the AlphaTrak model. A year ago, LLJB commented that the bond portfolio was (then) shorter duration and higher credit quality than DBLTX.
A typical balanced fund holds a bond portfolio that aims for higher return than that. It will use a longer (intermediate term) duration or lower credit quality, or both. So DSEEX may not resemble balanced funds so much as equity funds with "a little extra".
Or, M* may just have gotten lazy. Your guess is as good as mine.
Not the case during the this 2.5 year time frame (Mar 2008 - Sept 2010) when MWATX experienced a 16 percent deeper trough than the S&P 500 TR:
Seems like MWATX's alpha can and did go awry. DSEEX may possess similar characteristics.
Even if one knows exactly what these funds are doing, it really is hard to call this sort of fund one thing or another. So one makes a best guess and explains it. And when they don't make it clear quite what they hold, well ...
Yes, this not-really-like-hybrid take is the nut I return to, and always underlies my original bond queries. To return, empirically, to performance: since DSEEX inception, it is close to impossible to find any period where a combo of any proportion of CAPE and PDI (to choose probably the most aggressive and successful of the opaque Pimco offerings, although it is CEF with a premium) does as well as DSEEX.
As puzzling, the last year-plus its bond portion has "detracted," meaning that since 4-5/17, CAPE has marginally outperformed DSEEX.
Also not seeing that it is truly more volatile; as I noted earlier, its swings do not to me appear to be more dynamic, and its UI per MFO Premium is the same as steady TWEIX.
I'm not going to go through that exercise. But I will give you some idea of other factors involved.
According to a page on DoubleLine's company website (I haven't found this detail on the DoubleLine fund site or in the fund's prospectus), the swaps used require collateral. (Generically speaking, some swaps do, others don't.) Here's the image from that site showing the need for collateral
So now there's a new factor (collateral) to include, one that comes alone with an unknown value (collateral percentage). FWIW, MWATX, which uses futures not swaps, typically puts up 4%-5% of the value of the derivatives as collateral (according to its prospectus). If DSEEX is using 5% collateral, then the remaining 95% of the amount invested is being invested in bonds. So one would multiply the performance of the proxy bond fund by 95%. In reality, we not only don't know an appropriate bond fund to use as proxy, but what scale factor should be used.
Then there are the carrying costs for simply holding the swaps. That appears to be the "financing rate", which is different for each swap, but tends to run in the 0.40% - 0.47% range. At least those are the rates shown for the swaps in the latest semiannual report, which is now almost six months old. So some average rate in that range needs to be subtracted from the CAPE (swap) rate of return.
Next up are the costs of acquiring the swaps. Some, like brokerage fees, can be extracted from the financial statements. Others, according to the prospectus, are simply not disclosed: As with the carrying costs, simple subtraction is the best way to account for these other expenses. Say they totaled 2%/year, then 2% would be subtracted from the fund's expected return. I pulled that 2% figure out of the blue for a placeholder; I've no idea what these other costs total at any given point in time (the prospectus says they vary over time as well).
Finally, I'm not clear why you elected to use a PIMCO fund as a bond proxy; I might have tried out some DoubleLine funds first.
Personally, I'm content with my level of understanding of this fund, though I can appreciate the interest in proving out a model by getting numbers to match.
I chose PDI not only because I have long owned it (enjoyably) but also because I wanted the most aggressive / successful noncrazy bond entity I could find, and DFLEX would have been waay farther from the bond component of DSEEX, it seems.
Yes, I have long been interested in counterparty compensation and the like, perhaps thanks to you for pointing to it in earlier posts. Very intriguing documentation discrepancies you found. Even more that the prospectus now omits collateral mention. I have always assumed collateral, again perhaps thanks to something I read here earlier.
Being all in, not really all but such a significant portion of the total nut, I too am content with my level of understanding, I think, yet have always wanted to "use trial and error to find a proxy bond fund that might adequately match the performance of the bonds in the portfolio" --- and not just uncover such but understand the details, such as financing rate. It all seems remarkable to me, and I am curious about my risk and (lack of) diversification. I am surprised there is not some spinoff small mimicking bond fund from DL. And finally I would like to know better why and how it (the bond portion) has slightly detracted since last spring.