On December 17, 2018, DoubleLine launched the DoubleLine Colony Real Estate and Income Fund. It seeks capital appreciation and income with returns in excess of its benchmark, the Dow Jones U.S. Select REIT Index over a full market cycle. The managers will use derivatives to create investment returns that approximate the returns of the newly-launch Colony Capital Fundamental US Real Estate Index. To the extent that there’s additional capital available, they will also invest in an actively managed portfolio of short-to-intermediate term fixed income securities. It’s an open-ended, index overlay fund — not a balanced fund, structured product, or a K-1 offering.
There are three arguments for considering an investment in the fund.
First, real estate adds substantial value to a traditional stock-bond portfolio. So what are some benefits of REIT ownership?
According to Jeffrey Sherman, president of DoubleLine Alternatives LP, the DJ U.S. Select REIT Index outperformed the S&P 500 by > 4% per year over the last 20 years, has a correlation to stocks of .57 and .18 to bonds, have tended to perform positively during rising rates over the long term, and tended to outperform stocks during periods of declining rates over the long term.
That’s evidence of a differentiation benefit.
Second, Colony’s “fundamental index” approach addresses serious problems that traditional fixed-income indexes embody. While investors and commentators are generally worshipful of equity indexes, many professionals are deeply worried about intrinsic flaws in fixed-income investing. Most fixed-income indexes, REIT indexes included, are issuer-weighted; that is, they automatically give the greatest weight to the larger debt issuers who are, by definition, the most indebted companies. Fundamental indexes seek to target the most attractive issues by analyzing underlying financial metrics.
The DoubleLine managers like the Colony Capital Index because it avoids the riskiest segments within any single market and takes a different approach than do traditional REIT strategies.
The Colony Capital REIT Index implements fundamental real estate investing principles from its 27 years of managing real estate assets for institutional investors across private and public markets.
It emphasizes a quality over value approach and seeks to deliver superior risk-adjusted returns, relative to other REIT indices, from publicly traded real estate equities.
That means it emphasizes exclusion by omitting
- Financial mortgage REITS
- The least-profitable and the highest-yielding REITs
- The most leveraged REITs and
- The most expensive REITs, measured by an enterprise value to operating profits ratio
The remaining REITs are then weighted by market capitalization, subject to concentration and diversification limits, to derive the Index’s composition.
If REITs and bonds go down, your portfolio will be down. The volatility of the fund will be similar to the REIT market and the standard deviation will come primarily from exposure to the Colony Index. On the flip side, however, higher volatility has been accompanied by a higher Sharpe ratio and a higher return profile over the long term.
For example, while it may sound strange to mention “Active Share” about an index fund, the fund’s active share is 40.41% as of January 31, 2019. (The top four to five REIT indices have a .99 correlation.) That independence is important because too many REIT indexes, and even supposedly smart-beta REIT indexes, are over-concentrated by sector, over-exposed to financial risk and prone to value old REITs merely because they’re old.
Third, DoubleLine is really, really good. 87% of DoubleLine funds are in the top half of their peer groups over the past year, 77% over the past three years and 100% over the past five years. Jeffrey Gundlach, CEO and CIO of DoubleLine Capital LP, and Jeffrey Sherman, deputy CIO of the firm and president of DoubleLine Alternatives LP, serve as portfolio managers of the Fund. With the contributions of DoubleLine’s fixed income investment teams (including mortgage-backed securities, Treasuries, corporate securities and international debt and the firm’s Fixed Income Asset Allocation Committee), Mr. Gundlach and Mr. Sherman actively manage the fixed income portfolio.
The CEO of Colony Capital is Tom Barrack. He and Jeffrey Gundlach know each other. Mr. Barrack’s offices are located 2 ½ blocks from those at DoubleLine. Mr. Barrack was looking for a partner and came to DoubleLine to discuss starting a fund together. Colony Capital is not a sub-advisor to the fund, and no money goes to it. Colony Capital is simply the index provider. DoubleLine didn’t pick Colony to create an index. Colony created its own index, and DoubleLine chose to have exposure to it.
Fund Facts
Class I (Institutional Class) DBRIX $1M, IRA $5.000; ER 0.66%. The fund is available for purchase through 14 brokerages, including major platforms such as JP Morgan, Fidelity, TD Ameritrade, and Vanguard.
Class N (Investor Class) DLREX $2,000, IRA $500; ER 0.91%. The fund is available for purchase through 12 brokerages, including major platforms such as Fidelity, Vanguard, TD Ameritrade, and Schwab.
Bottom Line
Given its emphasis on creating a quality over value portfolio based on its differentiated methodology discussed here, DBRIX/DLREX invites serious interest from investors. DoubleLine begins posting performance for newly launched funds three months after inception. Consult Morningstar if you need information before then.
