Jeffrey Gundlach: Amount Of Bonds With Negative Yield Went From $3.5 To $1.5 Trillion

On July 7, 2015, Chief Executive Office and Chief Investment Officer Jeffrey Gundlach held a webcast discussing the DoubleLine Core Fixed Income Fund (DBLFX/DLFNX) and the DoubleLine Flexible Income Fund (DFLEX/DLINX) titled “Asset Allocation Webcast.”

This recap is not intended to represent a complete transcript of the webcast. It is not intended as solicitation to buy or sell securities. If you are interested in hearing more of Mr. Gundlach’s views, please listen to the full version of this webcast on www.doublelinefunds.com under the blue “Events” tab. You can use the “Jump To” feature to navigate to each slide. You can also learn more about future webcasts by viewing the 2015 webcast schedule at www.doublelinefunds.comunder “Events.”

Also see Gundlach vs Morningstar Blood Feud

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Jeffrey Gundlach: Global Overview

• Global Bond yields
  • Amount of bonds with negative yield has fallen from $3.5 trillion in January to about $1.25 trillion in June
  • 2015 German Bund is behaving very similar to the reversal in the U.S. Bond Market during 2013
• Gross Domestic Product (GDP) Projections
  • The Federal Reserve’s (Fed) growth assessment for 2015 is lower than any other over the past 2 years; this does not give the Fed a good reason to raise rates

• China
  • Shanghai Composite currently looks eerily similar to the 1999 NASDAQ Composite Index
  • Copper has plunged to a new low this year; most people believe copper is a harbinger of economic activity

Fixed Income Overview

• Winners
  • High Yield (HY) +2.8% year-to-date (YTD) as measured by the BoA/ML JOAO Index.
    – 3% Allocation has recently been cut from HY in favor of Investment Grade (IG) bonds
  • International Emerging +1.5% as measured by the BofA/ML IGOV Index
    – DoubleLine’s Emerging Markets (EM) allocation avoids local currency EM bonds
• Losers
  • Investment Grade corporate bonds -0.7% YTD as measured by the BofA/ML COAO Index
  • Higher-rated credit (AAA and AA-rated)

• Inflation
  • Wage inflation: Consumer expectations of median rate of income change over the next year have increased from 0.50% to 2.25%
  • Core Consumer Price Index (CPI)has been supported by the rise in shelter, year-over-year (YoY)
  • 5-year Treasury Inflation Protected Securities (TIPS) are basically paying you the CPI; Given the weak energy prices baked into CPI, that TIPS could have more upside than downside at this point
  • 30-year TIPS are now yielding 1.25% over CPI v. 0.50% at the beginning of the year
• U.S. Treasury (UST) Market
  • Mr. Gundlach believes the 10-year UST yield will end the year relatively unchanged
• Sector Valuations
  • IG corporate bonds
    – IG bonds entered the year the most over-valued in history, but have since cheapened. Acknowledging the relative performance accrued in HY, a decision was made to slightly reduce HY in favor of IG
  • HY bonds
    – Defaults remain historically low and are not a concern this year or even next.
  • Leveraged Loans
    – We believe these are about as over-valued as HY
  • Mortgage-backed securities (MBS)
    – Average valuation, no major concerns
  • Commercial MBS (CMBS)
    – We consider them a little over-valued, nothing to be concerned about
  • Convertible bonds
    – As overvalued now as they were in 1999; DoubleLine does not own any convertible bonds
  • Emerging Markets
    – Have appreciated this year and in our opinion are now fairly valued, EM appears to be one of the cheaper bond sectors
  • TIPS
    – Look at a little cheap but it is hard to make a strong valuation argument for them
  • Municipal bonds
    – Have reached one of the richer levels in recent years

Jeffrey Gundlach: Core Fixed Income Fund (DBLFX) as of June 30, 2015

• Fund Characteristics:
  • Duration: 5 years
  • Broadly diversified portfolio
  • Only 23% below investment grade
• Portfolio Composition
  • 30% MBS, 18% Government,12% IG corporates, 7% High Yield corporates, 5% CMBS, 4% Bank Loans and 4% Municipals (no Puerto Rican municipals)
  • UST exposure lengthened at the end of June when Jeffrey Gundlach felt appropriate

Jeffrey Gundlach: Flexible Income Fund (DFLEX) as of June 30, 2015

• Fund Characteristics
  • Duration: around 2.3 years, unchanged from earlier this year
  • DFLEX is designed for those scared of interest rate risk. It attempts to generates a decent yield by taking more credit risk while maintaining a low duration
• Portfolio Composition
  • 24.0% non-Agency MBS, 19% International EM (U.S. Dollar-denominated), 19% Collateralized Loan Obligations (CLO) and 11.7% HY corporates

Question and Answer with Jeffrey Gundlach

• Puerto Rico
  • Jeffrey Gundlach believes the Puerto Rico bonds are pricing in a default but are still making payments. They may go lower but Mr. Gundlach likens them to prime loan packages in 2008. At lower prices these bonds are trading with enough haircut to offer a potential cushion at which it might be time to start averaging into Puerto Rican municipals.
• Gold
  • Jeffrey Gundlach remains bullish on gold
• Greece
  • Jeffrey Gundlach believes Greece will leave the Euro eventually; but received their latest bailout
  • A Greece exit would be positive for the Euro
• China
  • Shanghai today looks very similar to the NASDAQ in 1999

See full PDF below.