Friday File: Checking in on a “Smart” Fund

By Travis Johnson, Stock Gumshoe, April 19, 2019


I’ve been meaning to check in on one of the few mutual funds that I’ve written in detail about for you, so in the absence of any other big portfolio moves we’ll take a minute for that today.

DoubleLine Shiller Enhanced CAPE (DSEEX) is a “better mousetrap” kind of fund, which should make us start out with a little skepticism. They backtested Robert Shiller’s CAPE ratio to judge whether buying just the cheapest sectors and avoiding the priciest ones would work out better than owning the whole market, and determined that it would, indeed, be effective… and partly because DoubleLine is primarily a bond shop, they implemented this strategy not by buying the sectors themselves, but by using derivatives (swaps) to get that exposure and investing their collateral in a lower-risk bond portfolio, hoping to beat a cash return with the bond portfolio to provide a little bonus return on top of the historically market-beating return of the CAPE strategy.

So it’s a little too tricky, probably, and that provides some cause for concern. But it looked like it should work well, given the backtesting on CAPE and DoubleLine’s long record of success in managing bond funds, and is relatively inexpensive — it is priced similarly to low-cost actively-managed mutual funds, with a management fee of about 0.5%, so it’s far pricier than the plain vanilla S&P 500 index funds that are all but expense-free right now from Vanguard and others, but it’s not so high as to be egregious.

That was what I was thinking back in 2016, at least, when I introduced these funds to you, and when I updated my thoughts a year later, after the fund had crossed the three-year mark as the best-performing mutual fund in its class and gotten those coveted five stars from Morningstar. By the time 2017 rolled around, the attention was really blossoming and the outperformance had gotten even more dramatic, helping to boost the assets under management considerably.

If you aren’t familiar with those funds, I went into more detail in those older articles — but the basic idea is that they use sector rotation to buy undervalued sectors and avoid overvalued sectors. Relatively speaking.

The market is divided up into 11 sectors, and the index rotates among those sectors to choose those that are relatively undervalued based on their Shiller CAPE ratio ...

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