Jeffrey Gundlach , CEO & CIO, DoubleLine®
Jeffrey Gundlach: Flexible yield was designed about four, five years ago to offer investors a place where they could hopefully have some success even if interest rates rise, so it’s a relatively short maturity type of portfolio. It is invested primarily in the credit market, not so much in government bonds because government bond yields are so low, but we’re looking for absolute returns even if interest rates go up, so some of the portfolio, a significant piece of it actually, is floating rate, so if interest rates go up, you just get higher cash flows, which will support higher returns, and the rest of the portfolio is in relatively short maturity bonds, which will have some price volatility and if there’s bad market conditions, will have temporary losses, so the goal is to offer something that is absolute returns. It probably won’t do fantastically well while interest rates are rising but it will protect you more than traditional bond strategies if you’re fearful about interest rate increases looking out over a multi-year horizon.
I think the stability of the investment team – I don’t think it’s hyperbolic to say it’s unsurpassed. We have about a 65-person investment team, and no one has ever left. Usually something like 10 or 20% of an investment team leaves every year to find the grass greener on the other hill, but it must be something about the corporate culture of positivity and also the results have been largely good that the team stayed together. Also we use a longer investment horizon than just about any of our competitors that we can identify and I think that really helps. I think the trick in the investment business is to have a long enough investment horizon that you maximize your probability of success but not so long that there’s extended periods of poor performance that investors lose hope, and we found that about a two-year investment horizon achieves that balance of being able to maximize the probability of success while hopefully having only short periods of underperformance. Also we don’t use derivatives. We don’t use shadow finance products in our strategies so we don’t use swaps, or options or CDS or any of these things that I think just increase risk, so all of these things I think are beneficial for the success of the programs.
We have very broad flexibility across fixed income sectors. We can invest in just about any part of the global bond market but most of it is in credit so we subdivide the market into corporate credit and below investment grade corporate credit, emerging market debt. Most of that is dollar denominated but some of it isn’t. Non U.S. developed bonds which we own some of now because we are not that positive on the U.S. dollar. I think other currencies might do better. Mortgage backed securities, both guaranteed by the U.S. government and non-guaranteed. Also residential and commercial mortgage backed securities and then bank loans, which are floating rate in nature again as are many of the commercial mortgage backed securities, which are good for the rising interest rate environment, so we can go up and down with a great deal of flexibility in these types of instruments. We can also change the maturity structure of the fund, but starting out where we are in interest rates, we are unlikely to implement a very aggressive bet on falling interest rates. We think that investors in this flexible yield strategy are looking for something that is absolute return and will do better than traditional strategies should interest rates rise. For the time being we maintain about a two or three year maturity type of portfolio.
The flexible yield strategy certainly has the ability to take aggressively stance on interest rates so we could think that maybe under a certain environment it’s attractive to take a lot of interest rate risk but that type of environment hasn’t been around for long time. If treasury rates in the United States weren’t at one to two but were six or eight, we could make a good case for perhaps there’s times when you would want to make profits from falling interest rates but right now I think what our investors are looking for is to have a decent yield and be protected from their fear of rising interest rates, so until we get out of this context, I think that it’s unlikely that we will deviate much from a two or three year duration portfolio.