Fixed-income guru and DoubleLine CEO Jeffrey Gundlach has teamed with Nobel Prize winner and Yale economist Robert Shiller to launch a new mutual fund: The DoubleLine Shiller Enhanced CAPE Fund, based on sector selectivity and Shiller’s cyclically adjusted price-to-earnings ratio (CAPE).
But it’s not your “plain vanilla” CAPE fund—a la the Barclays ETN+Shiller CAPE ETN (CAPE), which began trading a year ago.
As the two financial experts described on a webinar late Thursday, the fund not only buys equity index futures of the four undervalued market sectors, it also uses some assets to build a fixed-income collateral portfolio.
The two experts say Barclays Bank approached them about work on the value-oriented product. “We looked into it … and we became convinced that there was an interesting idea here,” said Gundlach.
“It’s put together using a total-return swap,” Gundlach said of the fixed-income side of the fund. “Our goal [with the fixed-income holdings] is to outperform cash.”
Both strategies, he says, are value plays on their respective markets (and indexes). “There is sort-of a double value proposition, not just from a philosophical standpoint but from a total-return standpoint,” the DoubleLine executive said. “The ups and downs of the fund’s price will be driven very largely by beta in the equity market.”
“We are excited about this,” Gundlach said, because it complements DoubleLine’s existing equity products with a value twist and is not actively managed.
“We think it’s a better mousetrap,” he said, pointing to the fact that using CAPE as an investment strategy has shown lower volatility and a higher rate of return over time. Hopefully, the fixed-income expert says, it will result in “a tastes great, less filling type of investment experience.”
Shiller, who joined the call despite laryngitis, has spent years looking at the limitations of market measurement, like traditional price-to-earnings ratios. “They are rather volatile … and usually the denominator of 12 months of data does not average enough” information, he said.
“A better measure of value is price divided by a long average of earnings,” Shiller stressed, noting “I believe there is something fundamental here.”
Investors tend to be overly optimistic and overly pessimistic, the financial expert notes. “CAPE is a solid way of assessing value,” he said. “It’s deflated by the CPI and involves a 10-year average of earnings for a sector.” Barclays, Shiller adds, has ooked at data from the 1880s and “has shown it would have worked well for over a hundred years … as a backward-looking perspective on earnings.”
He admits that this analysis may seem counterintuitive to some investors, who prefer to focus on what’s happening now.
“Bubbles,” Shiller cautioned, “are caused by … New Era thinking. I don’t mean to dismiss it, but there is a theory that markets can overreact to such things. And you want to lean away from that. We are looking at true versus hypothetical earnings.”
Year to date, the Shiller Barclays CAPE ETN has risen about 31%, while the S&P 500 has improved roughly 24% and the Dow Jones Industrial Average some 17%.
A key difference between the ETN and the new fund, according to DoubleLine, is that the ETN’s Treasury bill holding is fully exposed to counterparty risk, while the DoubleLine product is protected against such risk through exposure to its fixed-income structure.
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