“We’re invested in various parts of the credit market,” and use a flexible income strategy, says Jeffrey Gundlach.
He’s mostly invested in the U.S. but also globally, “in an attempt to have returns that are positive and a premium over benchmarks such as the London Interbank Offered Rate (LIBOR),” says Gundlach, who’s CEO of DoubleLine Capital in Los Angeles, California, and manager of the Renaissance Flexible Yield Fund.
When there’s “potential for Treasury bonds to outperform LIBOR and to develop absolute returns,” Gundlach will consider including them in his portfolio, for example. But, over the last four or five years, Treasury bonds in the U.S. have offered little to no yield.
What’s useful is investors can also look to flexible income strategies in rising-rate environments, says Gundlach. This is important because “investors have been overly fearful of rising interest rates over the past five years.”
Gundlach explains, “A good environment is one where credit markets—and I’m talking about [investments outside of] government-guaranteed credit—are stable to improving, and where returns would likely be higher under a rising-rate environment over, for example, a three-year horizon.”
He adds, “Since we’re trying to outperform LIBOR on an absolute basis, the benchmark of LIBOR moving higher over time is beneficial to [flexible yield] programs.”
Where to invest today
Investors should focus on strong areas of the credit market, says Gundlach.
This includes corporate credit, securitized credit (like mortgage backed securities; both commercial and residential) and emerging market debt, he notes, as well as bank loans and corporate credit securities.
When reviewing his flexible yield strategy, Gundlach and his team analyze trends that they predict will continue over the medium term (18 months to two years). “What we’re looking for is to avoid risk when there’s perception that certain parts of the credit market [are] suffering based on fundamental movements. We move assets from sectors that may have performed well to sectors that may have lagged.”
Over the last 18 months, he adds, “The collapse of certain commodity prices like oil has led us to de-emphasize things like energy-related bonds in the corporate economy. [We’ve] favoured securitized assets that [could] better sidestep the problems of credit concerns brought on by weak commodities.”