DoubleLine Income Solutions (DSL) took its biannual trip to the bargain bin a few weeks ago. It was a short stay, as usual.
By mid-April, vanilla investors had worked themselves into a hysterical state. They somehow convinced themselves that the Federal Reserve was going to continue raising rates.
Let me repeat—they worried that, in an election year, the Fed was going to keep on hiking. Unlikely.
Even Bloomberg lamented that traders saw “no relief in sight for bonds.” A hopeless howl that piqued our contrarian interest. No doubt, relief was just around the corner.
Indeed it was in the form of Chairman Jay Powell and his soothing postgame pillow talk. Jay can be a real sweetheart when he wants to be. Stocks and bonds alike appreciated his gentle gestures and surprised the “we’re doomed” traders by rallying like crazy.
Hence, DSL’s dip below NAV proved brief:
Twice a year, DSL tends to overdo pullbacks. We don’t blame its legendary manager. DoubleLine fund holdings are handpicked by our man the “Bond God” Jeffrey Gundlach. In Gundlach we trust!
He does the hard work, scouring the globe for fixed-income deals. We kick back and buy his funds when they are trading at discounts. That’s rare.
DSL is a closed-end fund (CEF). As such, it has a fixed pool of shares. Unlike ETF and mutual fund managers, Gundlach does not issue more shares when the market loves DSL. So, his share count is steady, which means the fund will sell at a premium or discount to its net asset value (NAV).
Gundlach may be the alpha dog of fixed income, but DSL is a small pup with just a $1.3 billion market cap. That’s plenty big for our humble contrarian needs, but not nearly sizeable enough for institutional money.
Hence, most DSL shareholders are individual investors. And not the sophisticated types who frequent Contrarian Outlook, either! They panic and sell DSL at a discount at exactly the wrong moments, such as last October and April of this year.
Not only are they dumping a reliable 10.5% dividend paid monthly, but also they forego some sweet price gains.
Here’s the DSL discount chart again, this time in total return terms. Which means we’re counting the dividend payments and adjusting the historical prices accordingly. Which makes sense—this cash is in investors’ pockets!
Now check out these dips below NAV. Are these sweet entry points, or what?
DSL is fine to buy around fair value as well. Its NAV will increase as interest rates decrease. That said, sister fund DoubleLine Yield Opportunities Fund (DLY) trades at a 2% discount as I write.
In other words, DLY can be had for 98 cents on the dollar. The fund yields 8.9%, which is quite respectable, even by our lofty standards.
Now, 75% of DLY’s bonds are below investment grade or not rated. This would make me nervous except, again, Gundlach is our assigned shopper. There are great deals to be had below the investment grade line because pensions can’t touch this paper. We’ll trust the picks that Gundlach puts in our cart.
In Bondland, a savvy manager like Gundlach is well worth a higher management fee. Give me a fixed-income CEF run by a smart human over an ETF run by a dumb machine any day. Here’s why.
Rules-based investing is a bad idea on this side of the tracks. After all, who issues the most debt? The worst companies!
So, we can’t trust an ETF that purchases fixed income by market size. And that’s the problem with many fixed-income ETFs, especially those that invest in corporate bonds. They often end up buying debt from the biggest losers.
Let’s pick on iShares iBoxx High Yield Corporate Bond ETF (HYG
iShares iBoxx $ High Yield Corporate Bond ETF
(Confession: I’ve been a paying customer since 2013 when my Acura came fitted with Sirius and an extended free trial. I will give Bloomberg Radio the official credit for hooking me even though the “smart money” knows that the “80s on 8” station is indispensable too!)
Vehicle drivers have more audio options today. It’s easy to connect a mobile phone via Bluetooth, for example. SiriusXM’s “gravy train” of old users like me with ingrained habits is increasingly compromised.
As a result, SiriusXM takes on lots of debt—$9.2 billion to be specific—to keep the party rolling. How many people younger than your editor are opting for the SiriusXM installation on their new cars? These are not my favorite bonds.
And investors buying HYG are not going through this thought process!
But who wants to think anyway when, really, all we’re trying to do is retire on dividends? Let’s keep it simple—and buy DoubleLine funds on the dips.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
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