Investors have increasingly embraced fixed income ETFs, favoring their low-cost structure, ease of u...
Two Plays on DoubleLine for Income
05/23/2017 2:50 am EST
This is not the time to be complacent about the markets or our portfolios. There still are opportunities for safe, solid profits, but there also are potential problems ahead we need to keep on our radar screens, explains Bob Carlson, fund expert and editor of Retirement Watch.
Our Retirement Paycheck portfolio owns DoubleLine Income Solutions (DSL). This closed-end fund is sort of the best of DoubleLine. The fund can invest in any income security and anywhere on the globe
It invests primarily or high current income but also will invest for growth. It can use leverage and increases and decreases that leverage over time. The fund has been managed to prepare for the current environment for a while.
One step it took was to reduce the duration of securities held by the fund, so that they wouldn’t lose a lot of principal value as interest rates rise.
Another move was to minimize exposure to the most interest-rate-sensitive bonds, especially those issued in the United States.
The result is the fund is about 45% invested in emerging market bonds and 22% in high-yield corporate bonds. The rest of the fund is spread primarily among mortgage-backed securities, bank loans and commercial real estate-backed mortgages. The leverage currently is about 28%.
The fund returned 5.73% in the last four weeks and 11.15% for the year to date. The yield is 8.71%. The discount to net asset value of the fund decreased to 4.05%. That’s about half of the discount late last year.
It means the fund’s share price is rising faster than the securities held by the fund. Investors are noticing the strong performance of the fund as other income funds lose value when rates rise.
We keep a portion of our portfolios in a safe investment that pays an above-average yield but has long-term stability. DoubleLine Floating Rate (DBFRX) fits that bill in the current environment.
The fund primarily owns loans purchased from banks, sometimes known as leveraged loans. The interest rates paid on the securities fluctuates with public interest rates, usually LIBOR.
That means, unlike traditional bonds, the securities held by the fund won’t decline as market interest rates rise. The securities could decline because of concerns about the financial stability of the issuers or lack of liquidity in the markets.
The top industries of the issuers are health care, computers & electronics, leisure goods & activities, retailers, and chemicals & plastics. The loans tend to be short term, so the composition of the portfolio can change rapidly. The yield is 3.77%.
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