DoubleLine Bond Fund Outperforms with 3.2% Return, Focuses on High-Quality Credit

Key Takeaway

• DoubleLine Opportunistic Bond ETF (DBND) outperformed with a 3.2% return over the past year, surpassing broader bond funds.
• The fund focuses on high-quality corporate credit and Treasurys, with 41% in investment grade bonds and minimal below investment grade exposure.
• DBND has a 30-day SEC yield of 5%, an expense ratio of 0.50%, and $270 million in assets, reflecting a defensive yet strategic approach to current market conditions.

DoubleLine's Defensive Strategy

The DoubleLine Opportunistic Bond ETF (DBND), managed by Jeffrey Sherman and Jeffrey Gundlach, has outperformed broader bond markets with a total return of 3.2% over the past year. This performance surpasses that of the iShares Core U.S. Aggregate Bond ETF (AGG) and other category indexes as determined by FactSet and Morningstar. The fund's 30-day SEC yield stands at approximately 5%. Sherman, the deputy chief investment officer at DoubleLine, highlighted that the team is cautious about an economic slowdown but does not foresee dramatic interest rate cuts from the Federal Reserve.

Sherman emphasized a defensive approach, focusing on high-quality investments. "You shouldn’t be betting on a massive expansion at this point. That means that you probably shouldn’t be delving down to the riskiest parts of the market. You should probably expect interest rates to stay at these levels for a period of time, which means high quality makes a lot of sense," Sherman told CNBC. The fund's portfolio includes Treasurys and agency mortgages, which are expected to perform well if the economy weakens, but it predominantly holds corporate credit with a tilt towards higher-rated issuers. Notably, 41% of the portfolio is in investment-grade credit, compared to less than 12% in below-investment-grade bonds.

Corporate Bonds' Appeal

High-grade corporate bonds are currently presenting a compelling value proposition compared to equities. According to data compiled by Bloomberg, the value gap between high-grade US debt and the S&P 500 is at its widest in over 20 years. This trend is reinvigorating the confidence of credit investors like Morgan Stanley Wealth Management and Tikehau Capital, who are dealing with risk premiums nearing post-crisis lows over sovereigns. Raphael Thuin, head of capital market strategies at Tikehau Capital, stated, "For the first time in years, you are now getting paid to be invested in quality credit. It’s a true alternative to lower-yielding equities, trading at or close to all-time highs."

Morgan Stanley's Chief Investment Officer, Lisa Shalett, noted that the 12-month returns from investment-grade credit could "rival those of equities" on a risk-adjusted basis. The S&P 500 has seen a near 30% rally since the end of 2023, while bonds have been constrained by expectations of prolonged high interest rates from the Federal Reserve. The earnings yield on the S&P 500 is now almost two percentage points below the average bond returns for triple-B rated firms, the weakest-rated segment of the high-grade market that Morgan Stanley focuses on.

Investment Strategies and Market Dynamics

The DBND fund, with an expense ratio of 0.50% and about $270 million in assets, is part of a growing trend of asset managers incorporating active investment strategies into ETFs. The fund has a duration of six years, with the weighted average life of the bonds exceeding seven years. Sherman mentioned that the fund will generally maintain this time exposure but will make active choices on different types of debt. "It should behave like any other intermediate fund. It should zig and zag like that part of the market. So it’s not one of those unconstrained funds or anything like that. And when there is something glaringly cheap, we’re going to try to overweight that and get exposure to that," Sherman said.

Despite the appeal of corporate bonds, some experts argue that other parts of the bond market offer even better value. Gene Tannuzzo, global head of fixed income at Columbia Threadneedle, pointed out that Treasuries are even cheaper than equities by the same metric. "The truth is that the ‘cheapness’ of IG bonds in that measure comes from elevated treasury yields, not the risk premium," he said. Fabrizio Viola, portfolio manager at Generali Asset Management, noted that investment-grade credit in Europe remains attractive to investors searching for yields around 4%.

Street Views

• Jeffrey Sherman, DoubleLine (Cautiously Optimistic on the bond market):

  "You shouldn’t be betting on a massive expansion at this point. That means that you probably shouldn’t be delving down to the riskiest parts of the market. You should probably expect interest rates to stay at these levels for a period of time, which means high quality makes a lot of sense."

• Jeffrey Sherman, DoubleLine (Neutral on below investment grade bonds):

  "Given where yield levels are, you’re paid relatively well just to be in the higher credit quality."
  "We’re not finding enough pick-up to really go down in quality."