If you fell into a long slumber at the end of 2014, awoke in early August and immediately checked out the Treasury bond market (yes, we know that's a long shot; just pretend you're a bond geek), you'd probably conclude that not much had happened over the period. The benchmark 10-year Treasury closed 2014 yielding a hair under 2.2%, and in early August it was yielding a hair over 2.2%. In between, however, bonds exhibited a lot of choppiness, says Jeffrey Gundlach, lead manager of DoubleLine Total Return Bond ( DLTNX ). Over the seven-month period, the 10-year bond yielded as little as 1.65% and as much as 2.5%.
Total Return Bond has held up well. In the first seven months of 2015, the fund returned 1.8%, beating the Barclays U.S. Aggregate Bond index by 1.2 percentage points and outpacing 97% of taxable intermediate-term bond funds.
Gundlach and comanager Philip Barach balance government-backed mortgage securities (53% of the fund's assets) with non-government-agency mortgage bonds (35%). The former carry no default risk but a lot of interest-rate risk; the latter have little interest-rate risk but a greater risk of default. Treasuries and cash make up the rest of the portfolio. The result is a low-volatility fund that yields 3.6%.
It seems as if other fund managers could easily copy the fund's methods, but few have done so successfully. "There's no template," says Gundlach. "It's not a paint-by-numbers strategy." Rather, Gundlach says, he and Barach actively manage the fund in an attempt to boost results. For instance, Gundlach says that earlier this year, as the 10-year Treasury yield started to close in on 2.5%, he and Barach bought medium-maturity government bonds. That helped stretch the fund's average duration, a measure of interest-rate sensitivity, from 2.5 years in January to 4.0 years in early August. The figure implies that the fund's share price would drop by 4.0% if rates rose by one percentage point (bond prices and rates move in opposite directions). But everything's relative, says Gundlach. His fund's duration still falls below that of the Aggregate Bond index, which has a duration of 5.7 years.
Gundlach says he expects the yield on the 10-year Treasury to end 2015 largely where it was at the start of the year--but with more choppiness along the way, of course.