David Fabian: Long time readers of our blog know that we are proponents of active management in the fixed-income world. Certain funds, and fund managers, have proven to be successful navigators in the complex environment of security selection, duration, and risk management. For that reason, we continue to recommend to our clients that they step outside the confines of a benchmark index to seek greater returns or reduced volatility as a result of interest rate fluctuations.
One long-term core holding in our Strategic Income portfolio has been the Doubleline Total Return Fund (DBLTX). This actively managed mutual fund is governed by Jeffrey Gundlach, who has risen to fame as one of the premiere fixed-income experts in the world. DBLTX invests more than 50% of its portfolio in mortgage-backed securities, but can also hold assets like Treasuries, corporate bonds, and cash when needed.
Over the last year, Gundlach and his team have added a significant measure of alpha over a diversified bond index such as the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG). For an accurate comparison, I have also over laid a sector-specific mortgage index in the iShares MBS ETF (NYSEARCA:MBB) as well.
DBLTX has returned nearly double the gains of AGG and has also significantly outperformed the dedicated mortgage index over the last 52-weeks. If we widen the time frame to 3 years, you can see how substantial this performance gap has become.
I am a staunch advocate of ETFs and believe that they are one of the best tools in an investors’ arsenal. However, you simply can’t find this unique bond strategy in an ETF at this time, which is why we have continued to stick with the marginally more expensive mutual fund strategy. The manager has earned that higher fee through superior performance, which is just what you want to see when you are paying a premium versus cheaper passively managed indexes.
Now the question becomes – how much more juice can a fund like DBLTX squeeze out in relative performance versus its benchmark moving forward?