I don’t spend a lot of time writing to you about my mutual fund and other diversified holdings in my portfolio, many of which are effectively indexed to the S&P 500, but I wrote to you a little over a year ago about the “better mousetrap” fund from DoubleLine that tries to provide a “double value” proposition — and that has, over the past year, become one of my larger mutual fund holdings, so I thought I’d check in on the progress.
Which has been, frankly, a little stunning. 2016 was a year of huge outperformance for DoubleLine Shiller Enhanced CAPE (DSEEX), enough so that it led to an introduction late in the year of a European version of the strategy. Here’s what the chart looks like for DSEEX since inception, compared to the Vanguard S&P 500 Index fund:
You can see that what was already looking like a promising trend of outperformance in the Spring of 2016, when I decided to begin allocating cash to this fund, has widened considerably. So where’s that outperformance coming from?
Well, as the efficient market hypothesis folks will tell you, if they’re earning better returns then they must be taking on more risk — and that’s true, in the sense that the volatility is a little bit higher and the standard deviation is a bit higher than the benchmark (the S&P 500)… but they’ve also been more than rewarded for that relatively small additional risk, as evidenced by the Sharpe Ratio that’s well above the S&P’s. So on that basic mathematical level, it makes sense (in the limited extent to which I understand the math). They are taking some risk — and there’s an extra dollop of risk beyond their market exposures, since they incur some counterparty risk by using swaps instead of direct equity exposure.
But what are they actually doing with investor funds? Well, this is effectively a combination of a value-based sector rotation strategy that has a long history of beating the market, with a value-based short-term bond portfolio that is diversified and aims for annual returns that outperform cash and are likely to fall in the 2-3% neighborhood. This is how they describe it in the recent fact sheet:
“The Fund gives investors access to a distinct source of equity exposure via the Barclays Shiller CAPE U.S. Sector Total Return Index, which we seek to ...