Gundlach, DoubleLine & Floating Rates
02/13/2017 8:00 am EST
Bonds have been tumbling since interest rates hit lows in July 2016, and the decline accelerated after the election. There’s been a partial recovery lately, but make no mistake, the outlook for bonds isn’t good, cautions Robert Carlson, editor of Retirement Watch.
Jeffrey Gundlach of the DoubleLine funds correctly forecast President Trump's victory; he now expects the new administration will be bad for bonds, and that in a few years we’ll realize July 2016 was the bottom for the bond bull market that began in 1982.
This is a good opportunity to take Gundlach’s advice and reduce our bond exposure. We’ll put some of the money in DoubleLine Floating Rate (DBFRX).
If the $100,000 minimum investment isn’t for you, invest in the DoubleLine Floating Rate "N" shares (DLFRX). The only differences are a lower minimum investment and higher expenses.
DBFRX primarily buys floating-rate or adjustable-rate bonds. The interest rate paid by the borrower fluctuates with a widely published benchmark rate, such as LIBOR, which refers to the Intercontinental Exchange London Interbank Offered Rate.
The rate changes much like the interest rate on a credit card or adjustable-rate loan. Because interest rates on the loans float, the value of the loans doesn’t fluctuate as much with interest rate changes, and the fund is largely protected in periods of rising interest rates.
The fund still can lose value at times, if the interest rates on the loans held by the fund don’t reset quickly or the issuers aren’t financially stable.
Bank loans, also known as leveraged loans, are the primary investments of the fund. These are loans that were made by banks and then securitized and sold to investors.
DoubleLine does careful credit analysis and tries to avoid loans to shaky borrowers. Many other floating-rate funds will seek loans from low-quality borrowers because they pay higher yields.
The fund avoided energy-related loans the last few years because of the declining price of oil. The top industries are health care, computers and electronics, leisure goods and activities, food products and retailers other than food and drugs.
The duration of the fund is only 0.37 years. About 99% of the fund’s holdings are B-rated or better. The recent yield was 3.40%. Its return for the last 12 months was 5.51%.
The fund can lose value, especially when there are concerns about a recession or the stability of bank loan borrowers, which happened in late 2015. But it isn’t going to lose much value based on interest rate increases compared to regular bond funds. Plus, the yield will rise as interest rates climb.