"Valuation – It's All Relative" – DoubleLine CAPE Slides

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Webcast News –

Jeffrey Gundlach – June 10, 2014

DoubleLine Total Return Bond Fund and Core Fixed Income Fund

1:15 pm PDT/4:15 pm EDT

Sam Garza – June 24, 2014

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1:15 pm PDT/4:15 pm EDT

Philip Barach – July 8, 2014

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To Receive Presentation Slides, Email fundinfo@doubleline.com

What is Double Value?

“If you can't explain it simply, you don't understand it well enough.” -Albert Einstein

What is Double Value?

  • Barclays Shiller CAPE® US Sector Index shifts the exposures to the “cheapest” sectors of the large cap equity market
  • DoubleLine’s collateral portfolio within the Shiller Enhanced CAPE® strives to shift its exposure to the “cheapest” sectors of the global fixed Income market
  • Both strategies offer a potential value play in their respective markets
  • The DoubleLine Shiller Enhanced CAPE® strategy strives to provide one diversified value product with two distinct sources of value, hence “Double Value.”
  • The portfolio is created using “Index Overlay” technique

Constructing an Equity Index Overlay

  • Invest a small portion of the strategy’s assets in an equity index future (or a deltaone equity index swap)

- This portion of the assets is posted as initial margin and held as collateral against the equity position

  • Use the remaining assets to fund a fixed income collateral portfolio
  • Delivers exposure to equity market and may generate fixed income cash flows

Doubleline Shiller

Defining Relative Value Ratios

“You have to learn the rules of the game and then play better than anyone else.” -Albert Einstein

CAPE Ratio

Recognizing that company earnings can be volatile in the short-run, how can an investor construct a more intelligent valuation metric?

  • Acclaimed value investors Benjamin Graham and David Dodd noted in Security

Analysis that equity valuations tend to follow a business cycle of 3-7 years

  • The CAPE Ratio was formulated in the seminal 1988 piece from Robert Shiller and John Campbell.
  • CAPE = Cyclically Adjusted P/E (Price-to-Earnings)


  • The CAPE® ratio seeks to assess longer term equity valuation by using an inflation adjusted earnings horizon of the S&P 500 Index by sector. That is 10 times longer than the traditional P/E measure
  • Similar to the traditional P/E the CAPE® can be applied to a single equity, a portfolio of equities, a sector or a broad based index

Relative CAPE Indicator

  • To account for differences between sectors where CAPE® indicator have historically been of different magnitudes one can construct a “Relative CAPE®” indicator

- By applying the CAPE® ratio, equity sectors showing a higher CAPE® ratio have tended tohave lower subsequent returns

  • This provides investors the capability to compare sector valuations on a level playing field

Doubleline cape

Relative CAPE Ratio for Value Investing - Sectors

Relative CAPE® values fluctuate over time, these fluctuations are used to select the most undervalued sectors in the market.

doubleline cape sectors

Historical Sector Exposures of Shiller Barclays CAPE US Sector Total Return Index Since Inception

September 4, 2002 through May 7, 2014

Over the past 139 months, the strategy was primarily allocated to five sectors:

- Industrial: 94% of the time

- Health Care: 76% of the time

- Consumer Staples: 71% of the time

- Energy: 70% of the time

- Financial: 59% of the time

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Why DoubleLine Chooses Shiller Barclays CAPE US Sector Total

Return Index Over Traditional Equity Indices?

  • Identifies and invests in relatively undervalued equity sectors
  • Does not rely on subjective forecasts
  • Uses a long term estimate of value, avoiding short term bias
  • Is based on the rigorous research of Professor Robert Shiller and John Campbell

– Which in turn is based upon the value investing principles of Benjamin Graham & David Dodd

  • We believe it is an Intelligent Alternative to Capitalization Weighted Portfolios (S&P 500)

See full "Valuation - It's All Relative" - DoubleLine CAPE Slides in PDF format here.

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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