DLY - DLY: Even The Bond King Stumbles

Summary

• DoubleLine Yield Opportunities Fund is an active fixed income allocation fund that aims to provide high current income.
• The DLY closed-end fund is currently yielding 10.0%.
• DLY managed to underperform almost all fixed income asset classes in 2022 despite being managed by Mr. Gundlach.
• I would be hesitant to invest in this fund until we see better investment results.

The DoubleLine Yield Opportunities Fund (DLY) fund is an active fixed income allocation fund lead managed by "bond king" Jeff Gundlach. Although the fund pays an attractive 10.0% forward yield, I am worried about the security selection in the fund. In 2022, DLY managed to underperform almost all fixed income asset classes, despite it being managed by supposedly one of the most astute investor. I would be hesitant to allocate capital to this fund until we see better performance results.

Fund Overview

The DoubleLine Yield Opportunities Fund is a closed-end fund ("CEF") that seeks high levels of total return while emphasizing current income. The DLY fund invests in a portfolio of debt securities and other income producing investments to achieve its objective. The DLY fund actively allocates exposure across the global fixed income universe with an initial focus on securitized credit securities. However, throughout a market cycle, the DLY is expected to have the flexibility to reallocate to traditional corporate credit markets if opportunities arise.

The DLY fund is relatively young, with an inception date of February 25, 2020. However, it has been able to garner $748 million in net assets as it is lead-managed by the " bond king ," Jeff Gundlach. With gross assets of $916 million, the DLY fund has 19% leverage (Figure 1). The DLY fund charged a 2.6% net expense ratio for fiscal 2022.

Portfolio Holdings

The DLY fund has 82% of its assets in non-investment grade credits or unrated, as of January 31, 2023 (Figure 2).

The fund's holdings are also primarily shorter-duration, with a portfolio duration of 2.6 years (Figure 3).

Figure 4 shows a sector breakdown of the DLY fund. The biggest sector weights are non-agency CMBS at 20.9%, high yield corporates at 19.3%, and non-agency RMBS at 15.1% of the portfolio.

Returns

Figure 5 shows DLY's historical returns. The DLY fund has had a poor start, with a 3Yr average annual return of -1.4% to February 28, 2023. The fund recorded a modest 4.6% return in 2021 and a disastrous 2022, with a -17.2% loss.

Negative Security Selection Does Not Give Investors Confidence

To put DLY's returns into context, figure 6 shows the returns of the iShares iBoxx $ High Yield Corp Bond ETF ( HYG ), which returned 4.1% and -11.4%, respectively, in 2021 and 2022.

Investors should note that the HYG exchanged-traded fund ("ETF") has an effective duration of 3.9 years. So, during 2022's historic interest rate increase cycle when the Federal Reserve raised short-term Fed Funds rate by 425 bps, the modest duration exposure of the HYG ETF caused it to lose 11.4%.

In theory, DLY's portfolio duration of 2.6 years means it has less interest rate exposure than the HYG ETF, so it should have suffered lower losses. However, in fact, the DLY lost 17.2% vs. HYG's 11.4% loss. This suggests DLY had extremely poor security selection in 2022, leading to fourth quartile performance.

Even The Bond King Stumbles

The returns performance of the DLY fund is especially surprising since in his "Just Markets" webcast from January 2023, Mr. Gundlach claimed he said in his January 2022 webcast "quite definitively that bank loans were his favorite fixed income asset class" and they have vastly outperformed in 2022 (Figure 7).

If bank loans really were Mr. Gundlach's favorite fixed income asset class in 2022, then why wasn't the DLY fund packed with bank loans instead of a paltry 9.2% allocation as of the March 31, 2022 semi-annual report or an 8.5% allocation as of the September 30, 2022 annual report ?

Furthermore, looking at DLY's -17.2% 2022 return, the fund appears to have " underperformed" every single fixed income asset class with the exception of EM Sovereign bonds, as shown in figure 7 above. This is quite a poor performance for a "bond king."

Distribution & Yield

One reason the DoubleLine Yield Opportunities Fund has been fairly popular with investors is because it pays a monthly $0.1167 / share distribution that annualizes to a 10.0% market yield. On NAV, the DLY fund yields 9.1%.

With only 3 years of operating history, it is hard to definitely judge whether the DoubleLine Yield Opportunities Fund is an amortizing "return of principal" fund. However, early results are not encouraging as the fund has a 3Yr average annual return of -1.4% vs. a NAV yield of 9.1%.

Conclusion

The DoubleLine Yield Opportunities Fund is an active fixed income allocation fund lead-managed by the "bond king" Jeff Gundlach. While DLY pays an attractive 10.0% forward yield on market price, the fund's returns performance since inception has been poor. 2022 was a disaster year for DLY that cannot simply be explained by interest rate exposure. In 2022, the DLY underperformed almost all fixed income asset classes. I would be hesitant to allocate capital to DoubleLine Yield Opportunities Fund until we see better performance results.

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