Kiplinger 25 Update: Tepid Gains in a Hot Bond Rally
Jeffrey Gundlach says DoubleLine Total Return Bond has done well so far, but falling rates are causing slight bumps in the road.
The strategy behind DoubleLine Total Return Bond (symbol, DLTNX) fund is simple. The fund's managers, led by Jeffrey Gundlach, invest in a blend of government-agency mortgage-backed securities and non-agency mortgage-backed bonds. The two types of bonds balance each other in terms of risk: Government mortgage debt carries no default risk but a lot of interest rate risk (interest rates and bond prices tend to move in opposite directions); non-agency mortgage-backed bonds have little interest rate risk but higher default risk. Since it launched in April 2010, the fund has outpaced all but four of its peers—funds that focus on intermediate-term bonds—with lower volatility.
The past year has been business as usual for the fund, a member of the Kiplinger 25,with one small change. Gundlach and his comanager, Philip Barach, promoted analyst Andrew Hsu to comanager. Hsu has been a member of Gundlach's team for years. "Andrew knows the portfolio inside and out," says Gundlach.
But the bond market has been a bit unusual. High-quality corporate bonds, a sector Total Return Bond doesn't own, gained 13.7% through the first eight months of 2019, nearly as much as the broad U.S. stock market. "That's interesting and also weird," says Gundlach. Corporate debt makes up 25% of both the Bloomberg Barclays U.S. Aggregate Bond index and the typical intermediate-term bond fund. As a result, Total Return Bond's respectable 7.5% gain over the past 12 months lags the 10.1% gain in the Agg index and trails 88% of its peers.
Falling interest rates in 2019 posed another problem for Total Return Bond. By early September, the 10-year Treasury yield had dropped a whopping 1.14 percentage points. Falling rates have pushed bond prices higher—good news for bond investors, especially holders of government debt. But Gundlach likes to keep Total Return Bond's duration, a measure of interest-rate sensitivity, below that of the Agg index. In late summer, the fund had a 3.5-year duration; the Agg, by contrast, had a 5.3-year duration. "Given the Total Return construct, I think we've performed quite well," Gundlach says.