July 24, 2013

DoubleLine Bucks Commodity Conventional Wisdom

The firm’s ‘other Jeff’ points to mistakes commodity managers too often make

Speaking with Jeff from DoubleLine Capital quickly gets intense. No, not CEO and CIO Jeff Gundlach (although he’s intense in his own right), rather Jeff Sherman, portfolio manager for the firm’s commodities-based strategies.

The first question is obvious—DoubleLine has a commodity play? The fixed-income powerhouse and star manager status of Gundlach make it easy to overlook. But Sherman’s laid back appearance and California attitude quickly fades when he gets talking, and it’s clear his expertise is there.

“We jumped on the Japan trade early,” Sherman begins. “We extrapolated that to the United States, but of course that means shorting the yen. We also shorted silver when it hit about $40, and we also shorted copper because we believe a global slowdown is expressed through copper.”

Taking specific aim at those that mention commodities as if it were a “monolithic asset class” that expresses the same level of volatility at any given time, he adds that in order to be successful, a manager has to dig deeper, and yes, time the market.

DoubleLine's Jeff Sherman“It’s what we get paid to do,” Sherman (left) argues. “Each is subject to its own supply-and-demand characteristics. Therefore a long/short strategy like we run is necessary.”

He mentions and dismisses Goldman Sachs’ notion of a commodity super cycle, a term widely discussed lately.

“They talked about a super cycle and diversification in the same breath,” he scoffs, before adding he doesn’t want to pick on Goldman specifically. “They are antithetical terms. Either you have a super cycle where all commodities move together, or they move independently and are diverse. You can’t have both.”

Calling it an “outright industrial metal revolution,” rather than a super cycle, he notes everyone is now flocking to agriculture due to “adverse weather extremes brought on by global warming, for lack of a better term.”

“You have to be opportunistic, therefore, with commodities,” before reiterating, “they must be timed.”

The long/short strategy to which he referred is dollar neutral, but not market neutral, because “we don’t know what ‘the market’ is, but the commodities performed exactly to what we expected with zero correlation.”

Ultimately, the goal of commodity-based investing is the same as anything else; to find different sources of return.

“Over the long term, do commodities provide a premium? No,” he concludes. “Long/short is the way to do it. Everyone now says they’re backing out of their long-only positions. With commodities, we don’t know what that means. We’re on the other side of those trades. It’s what we do.”

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