Quibble all you want about the modest results over the past year
of DoubleLine Total Return Bond (symbol
). But given the whipping many bond funds took in 2013, any fund in
the black is entitled to take a bow. Over the past year, Total
a member of the Kiplinger 25
, beat 89% of all taxable intermediate-term bond funds and outpaced
the Barclays Aggregate Bond index (symbol
), a proxy for the investment-grade segment of the bond market, by
1.5 percentage points.
What helped? Just the same barbell strategy that lead manager
Jeffrey Gundlach has honed for years. He invests in
government-backed mortgage bonds, which carry no default risk but
are interest-rate sensitive, and balances them with non-agency
mortgage bonds, which have higher default risk but are less
sensitive to interest-rate moves. The risks offset each other--as
does the performance of the bonds themselves, in many instances.
When the economy suffers, agency bonds do well; when the economy
thrives, non-agency debt does better.
Gundlach beefed up the fund's holdings of non-agency bonds over
the past year to 42% of assets--"our largest exposure ever," he
says. The fund's holdings in government-backed mortgage securities
edged higher, to 51% of assets. Over the past year, cash holdings
dropped from 16% of assets to less than 2%. Some of the cash was
used to buy ten-year Treasuries, which the fund picked up last year
when yields hovered near 3%. Gundlach says he prefers the ten-year
Treasury at 3% over a government-backed mortgage bond with a
similar yield partly because the Treasuries are less volatile than
the mortgage debt.
The moves have boosted the fund's yield to 4.8%, up from 3.6% a
year ago and 2.7 percentage points higher than the average yield of
its peers. That should help offset any drops in bond prices if
interest rates rise.
Contrarian bet. But unlike most of the rest of the world,
Gundlach isn't convinced that will happen. In fact, he has made his
fund more sensitive to swings in rates. Its duration, a measure of
rate sensitivity, has doubled over the past year, to 4 years. That
means that for every percentage-point rise in rates, the fund
should lose 4%. But for every point rates drop, the fund should
gain 4%. "Everybody believes with certitude that rates are going
higher," Gundlach says. "But that doesn't mean they're right."