As an individual investor without the worldly means to use complex derivative or hedging strategies, fixed-income is one of the single best ways to control currency risk within your portfolio. In fact, a new offering from DoubleLine has shown that you don’t have to be a currency or interest rate expert to capitalize on these recent trends.
Beginning in 2014, the U.S. dollar index (DXY) rallied significantly against its weighted basket of other global currencies. This well-established trend was undoubtedly the result of the end of the Federal Reserve’s quantitative easing policy and the beginning of a new fiscal tightening cycle. At the same time, other central banks around the world still largely grappled with slow growth and persistent easing.
While the dollar’s trend leveled off during the duration of 2015, cracks have begun to form in the thesis that the dollar would continue to rise indefinitely against Eurozone and Asian currencies. As a result of these longer term shifts, DoubleLine introduced their first DoubleLine Global Fixed Income Fund (DBLGX).
I’ve been enthusiastically watching the daily fluctuations of this actively managed mutual fund since its introduction. My initial observation is that this fund has already added a lot of value to early investor’s portfolios when compared to investing in domestic fixed-income alone.
The fund is unique from DoubleLine’s other offerings since it doesn’t place an emphasis on intermingling quality and credit securities. Although it can place up to 25% of the assets in below investment grade debt, the fund is primarily designed to capitalize on interest rate and currency shifts in sovereign bonds of developed foreign nations.
As of the most recent fund commentary letter, the assets are roughly 70% non-U.S. Dollar denominated. With Eurozone, Japanese Yen, and British Pound holdings rounding out the largest share of the fund. Furthermore, the fund’s duration is also much longer when compared to DoubleLine’s other offerings, with an average maturity in the 7-10-year range. This is not uncommon for this type of portfolio strategy, primarily because yield curve positioning in that specific range typically maximizes liquidity.
Other notable factors of the fund are the complete lack of corporate debt, and the general avoidance of emerging market sovereign debt. Furthermore, the fund is not a yield or income-focused strategy, so the SEC yield will likely be relatively low as a result of the portfolio’s primary focus in government debt. While the fund is still new and ramping up its accruals, given the global interest rate environment, investors shouldn’t expect more than a 1-1.5% yield per year from the fund.
The real alpha opportunity is in the funds’ ability to capitalize on interest rates and currency trends, which DoubleLine has shown a penchant for in the past with their other strategies. On a year-to-date basis, the fund is up 5.63%, which is a solid start overall. More importantly, on a risk adjusted basis, DBLGX exhibited far less volatility than other international bond indexes that we track.
Risk management and low volatility have always been a hallmark of the DoubleLine brand. We have been long been fans of the DoubleLine Total Return Bond Fund (DBLTX), which we own for nearly every client of the firm in some capacity.
From a strategy perspective, I view the new fund as a unique way to hedge a falling dollar, but to also capitalize on foreign interest rate trends. It’s the type of holding that is likely suitable as a tactical position, but could ultimately transition to a core holding under the right circumstances.
Although the fund has a limited history, I look forward to following the composition and price action closely for potential admission into our client’s portfolios.
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