10/30/2015 9:00 am EST
We recommend being well balanced and diversified among several funds that each provide good margins of safety and are positioned to do well in almost any scenario that is likely to come our way, explains Bob Carlson, editor of Retirement Watch.
Such is the case with two of our recommended funds, both from the DoubleLine fund family.
One top performer has been DoubleLine Total Return Bond (DBLTX), managed by Jeffrey Gundlach. The fund is up 2.28% for the year to date. The yield is 4.22%.
Gundlach continues to believe that there is too much risk in the global economy for the Fed to raise interest rates by much and that deflation is more of a risk than inflation.
While others have talked about preparing for interest rates to increase, he hasn't changed the portfolio much over the last few years.
It continues to be more than half in agency mortgage securities, which are based on mortgages issued by government agencies or quasi-agencies. These provide a low yield and a lot of stability, because the focus in on short duration securities.
About 22% is in non-agency securities that were purchased substantially below face value. These generate cash through mortgage prepayments and refinancing.
The rest of the fund is in cash, Treasury bonds, commercial mortgages, and other assets that are traded as markets create opportunities.
Many emerging market bond funds did poorly so far this year. We did better with DoubleLine Emerging Markets Fixed Income (DBLEX) for two reasons.
First, DoubleLine has believed for several years that the dollar would be strong while other currencies—especially emerging economy currencies—would stumble. That's been the case.
As a result of this policy, the fund owns few bonds denominated in foreign currencies. It seeks bonds denominated in US dollars.
The other reason the fund has held its value well is that it generally avoids sovereign debt. It looks for corporate debt and quasi-government debt, which is debt issued by entities that are explicitly or implicitly backed by governments.
Emerging market sovereign debt generally hasn't held up well. As a further protection, the fund seeks debt issued by entities with improving finances that aren't yet reflecting in higher credit ratings.
The fund likes to buy when rates are still lower and then watch the prices rise when the ratings are upgraded.
The fund's yield is 5.23%. In our view, emerging market debt invested in this way is a good place to be in the current environment.
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