In response to a continuing trend toward passive strategies — and amid the current low interest rate environment — managers are continuing to look for any available cost-cutting avenues to juice returns.
Bonnie Baha, the global developed credit director at DoubleLine, warns that as managers focus on passive tactics, "it's easy to get lulled into a sense of security."
"As we are currently in a low interest rate environment, which investors would love to see change, we're not going to go out on a limb and take outside risks in order to earn more if it's simply not a prudent thing to do," Baha said in an interview with Money Management Executive, adding that, "We believe our outperformance justifies our fees. For those managers who haven't had that outcome, they may have to rethink their fee structures."
How do you see the future of fixed income unfolding?
We have a seen a large interest that has grown exponentially since 2008 in ETFs and ETF constructs. On the equity side, we have also seen large growth in what are loosely called robo advisors, where you have technology, which plays a much larger role in the decision-making for your clients. Interestingly, those are trends that have been pervasive over the last couple of years and will likely continue until there is some sort of a hiccup in the market, and that goes for fixed income as well.
We've been in an environment, post-March 2009, where basically many risk assets in fixed income have performed exceptionally well, simply because they got so cheap. In an environment like that (with more passive, or indexation-type strategies that investors are very comfortable with) once we get a dislocation in the market — and I'm certainly not predicting anything today or tomorrow, but it will come — I think there will be a movement back to active asset allocation and active security management.
With regard to technology, certainly in fixed-income, price discovery is much better now than it has been in the past. It's still not perfect and still not on par with the equity market, but there are systems now that have taken away some of the over-the-counter-aspect to price discovery in fixed income, and I think that has really benefitted investors as well.
What types of ETFs and other products should managers consider?
We have an actively managed ETF — SPDR DoubleLine Total Return Tact ETF — at DoubleLine, and it has done very well. I think passive ETFs could be a strategy option for advisors too, but it has to be done very carefully. What concerns me is when I see investment advisors who are relying solely on passive ETFs to gain fixed income market exposure. The whole idea of mimicking an index is certainly something that came from the world of equities.
In equities when you mimic an index, you are looking at the biggest most capitalized companies to put in your portfolio, as per the index. In fixed income, it's the largest most indebted companies that are having outside positions put on in a passive ETF.
Are alternatives or smart-beta vehicles something that managers should consider?
I kind of think that's a tired idea. Some things in this industry tend to be a little bit faddish. We do have a smart beta fund that has done very, very well, and there have also been trends toward unconstrained bond funds, for example. But I'm not sure unconstrained is anything more than an oxymoron. In terms of alternatives, it seems, at least from a credit perspective, that we're a little long-in-the-tooth in the credit cycle, so to go out on a limb for a high-risk, high-rewards strategy... I'm not sure that would be something I would advocate at this point in time.
What's DoubleLine's position on fee compression?
I think there are plenty of instances that all of us can point to, like professional investors getting fees for underperforming funds. Our whole gig is outperformance. We justify the fees that we charge because we have top-performing funds.
The whole goal at DoubleLine is not just to produce the highest returns, but to produce the highest risk-adjusted returns we can in any given environment, and that's an important distinction.
As we are currently in a low interest rate environment, which investors would love to see change, we're not going to go out on a limb and take outside risks in order to earn more if it's simply not a prudent thing to do. We believe our outperformance justifies our fees. For those managers who haven't had that outcome, they may have to rethink their fee structures.
Aside from the power of star managers, what points do you feel have also contributed to DoubleLine's large inflows?
I think, first and foremost; it's performance. We have performed well and in contrast to other active managers out there in the space right now, we have been seeing a nice inflow because of that.
Second of all, you used the term star manager — and Jeffrey Gundlach is a star, make no doubt about it — but he has a lot of starlets in his orbit. When we started DoubleLine, there was a team of 45 of us that left TCW, and it's a group that has worked together of a long time. I have worked for Jeffrey for 25 years. I think the average number of years of experience among the team's senior members have together is around 17 or 18 years. You just don't find that everywhere.
When considering the current low interest rate environment, what are DoubleLine's main performance challenges?
I think where investors have gotten into trouble in this market is probably stepping out over this scheme to reach for yield. We've been doing this as a team for almost three decades, so we have seen this movie before. What makes this a little different, and challenging, is certainly the rate environment. Throughout all of our lives we have grown up with inflationary expectations. If someone had asked you seven or eight years ago, where the 10-year treasury would be, you would not have said 1.7%.
We are all pattern-seeking, story-telling creatures, but I think what makes us different is we are looking ahead and we tend to see more disinflationary pressure than inflationary pressure, and have invested our clients' funds accordingly. Now, we don't make unidirectional sector bets. Certainly we look at the portfolio in context, not just to one particular asset class, but all of them working in tandem.
Do you see problems metastasizing if this period were to continue for another two to five years?
I would say the low-rate environment is another reason to be careful about overuse of passive aggregate index tracking trust funds. I think it's easy to get lulled into a sense of security. Certainly the low-growth environment we're in now is worrisome in it of itself.
There's a great website; it's the Atlanta Fed (Federal Reserve Bank of Atlanta). It's called GDPNow, and they track GDP estimates in real time. The latest print on that came out at 0.1% for the next quarter. It's hard to see how rates can rise, let alone how the Fed can hike rates when you're looking at a 0.1% GDP growth rate.
The problem is that it's not just here, but globally. Look at Europe. Actually most developed economies including Japan are in the same boat that we're in — they (Japan) have actually gone into negative interest rates.
Japan has been at the QE thing for quite some time now and it doesn't seem to work. So, again in terms of forecasting how long this goes on, it's tough to say, but it's also tough to find a catalyst for the, ‘How are we getting out of it?'
From a product standpoint, what will DoubleLine do next?
I used to work for a gentleman named Jim Goldberg. He used this great expression all the time: "Bears make money, bulls make money, and pigs make bacon."
If we have any kind of a credit correction in corporate bonds or loans, there will be a way to play that. I think a lot of our competition out there thought that perhaps the bottom had been hit in energy credits last fall, and they got in a little too early. We've openly talked about doing some sort of, what can be considered distressed credit fund, but that could not be for quite some time.
There are other delivery mechanisms that take our same platform, which is very scalable, and deliver it oversees such as UCITS; basically European mutual funds that use the same process, philosophy, etc., as our flagship DoubleLine core fixed income fund. We're also doing more in the variable annuity space. Certainly as we come along as a firm, we're building our separate accounts management base.
The Wall Street Journal called DoubleLine's equity growth fund its "latest stumble." Was that a fair assessment?
Well, I'm not sure what the term "latest" stumble was supposed to imply since we haven't stumbled much at all. In fact, I think we have gotten things pretty right. I think with equities it was more of a timing issue.
We have been in this environment where it hasn't exactly been open to active equity management. There has been the trend towards more passive indexation ETF strategies, and like I said in contrast to when we started DoubleLine as a firm — and of course started with fixed income investing — we just happened to be lucky it was a great time to start a fixed income group. With the equities, unfortunately the timing wasn't so good, but that doesn't mean we aren't interested in pursuing that space again.
I think we would like to have some exposure there, but I could pull other examples like the DoubleLine Shiller Enhanced CAPE fund where we partner with Robert Shiller, who had the good grace to win a Nobel Prize just before the fund opened. It was good timing and a nice marriage for our fixed income management with the rules-based CAPE Shiller index. Again, I am not sure what point The Wall Street Journal was making, but it's an area that I can see us reentering in the future.
How does DoubleLine analyze new products from the competition?
We're certainly aware of what our colleagues are doing, however a lot of our launches will be driven by client interest — investors coming to us with a particular goal or objective in designing a good strategy for us.
Where does DoubleLine stand on the current trend towards robo tools?
I'm not sure how to comment on that because we don't seem to have a tough time reaching investors as it is. We're the outlier, admittedly.
Many of our competitors are seeing outflows in this space as opposed to inflows, but we're very pleased with the pace of asset growth and the sources of investor capital that we are happy to invest.
