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Nobel Laureate + Bond Guru = The DoubleLine Shiller Enhanced CAPE Fund

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The DoubleLine Shiller Enhanced CAPE Fund is an equity fund that combines the investment strategies of both Jeff Gundalch and Robert Shiller. Witnessing a need for sector selectivity in the stock market, and basing this selectivity on Robert Shiller’s Cyclically Adjusted Price-to-Earnings Ratio (better known as CAPE), the fund’s primary objective is to purchase equity derivatives of the most undervalued sectors in the stock market, and park the net assets in debt instruments. This synergistic investment approach was first suggested to DoubleLine by Barclays.

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The fund opened up to the market on October 31st, 2013, under the symbols:

  • DSEEX –  I Shares

  • DSENX – N shares

 

How the Equity Investing For the DoubleLine Shiller Enhanced CAPE Fund Works

The fund will achieve stock market exposure through the purchasing of equity derivatives with the underlying products reflecting the performance of stock market sectors. The fund will only purchase four sectors at a time, and will purchase the most undervalued four sectors, based on the CAPE ratio. The fund, in effect, allows investors to purchase the Shiller Barclays CAPE® US Sector Index in a mutual fund layout, while providing investors with active inflation protection.

The CAPE ratio is basically a 10-year average of a price-to-earnings ratio, intended to smooth out the highs and lows of the business cycle with respect to earnings, and present a valuation multiple that is more accurate than the traditional price-to-earnings ratio. The CAPE ratio was invented by Nobel Laureate Robert Shiller, Economics Professor at Yale University.

How the Debt Investing For the DoubleLine Shiller Enhanced CAPE Fund Works

The debt investing portion of the fund will be actively managed by Jeff Gundalch, CEO & CIO of DoubleLine, and Jeffrey Sherman, an Asset Allocation Specialist at DoubleLine. Jeff Gundalch stated that the debt focus of the fund will be to outperform cash, so investors will effectively have a value-orientation through both the equity and fixed-income market. The debt instruments will also act as partial collateral against the equity derivatives purchased by the fund.

Performance Outlook

Based on the structure of the fund and the sterling reputations of both Gundalch and Shiller, I could see the DoubleLine Shiller Enhanced CAPE Fund having a very bright future. The Shiller Barclays CAPE® US Sector fund alone outperformed the Dow Jones Industrial Average by 11.2% since October 2012 (see graph below), so this figure would likely have been enhanced by the deployment of net assets into DoubleLine-selected debt instruments.

 

 

About Ali Beydoun

aliAli Beydoun graduated from Manhattan College with a Bachelor’s Degree in Finance. During college, Ali was appointed to manage the $17,000 business school student portfolio as a sophomore, where most of his free time was spent joyously reading annual reports, industry surveys, and other financial literature.

Immediately after college, Ali joined CBS News as an Analyst, where he advised on product strategy for the satellite news gathering service: CBS Newspath. After his tenure at CBS, Ali continued following his passion for investing and joined the Alternative Investments Department at Fidelity Investments (where he currently works). Ali is an avid reader of bond investing strategies and is always seeking ways to broaden his knowledge base.

Disclaimer: All views expressed in Ali’s articles are that of his own, and not of any of the companies at which he works.

 

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Aaron McLeish

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