There have been a lot of discussions about the Doubleline Schiller Enhanced CAPE funds, primarily DSENX, but I'd like to make sure I know how they work before doing anything with them. I would appreciate any corrections or clarifications.
In basic terms the fund is comprised of 4 out of the 5 cheapest sectors based on CAPE and the sector exposure is adjusted monthly. The funds achieves this exposure primarily through swaps. Swaps are very flexible because 2 parties can effectively agree to "bet" against each other over a period of time and they can negotiate the specific terms. By doing this they essentially replicate the index and gain the appropriate value exposure to the chosen sectors. At the least, however, the fund has to be gaining leverage through their use of swaps. It could be that neither party is actually investing or shorting the sectors but instead they just have a "paper" bet and each party only has to be concerned about the others ability to pay if they lose where the leverage comes from not actually "buying" anything. Or it could come in the form similar to futures contracts where the investment is leveraged and you only need to maintain a small portion of the value of the investment as margin.
Regardless of how they achieve the leverage the fund has therefore gained the ability to "perform" as if they had all their assets invested in those 4 sectors without investing all their cash and they use that excess cash to buy bonds, earn income and "enhance" the return that the index achieves.
To the extent that they use most or all of their excess cash to buy bonds, part of the risk is that they'd need to liquidate bonds to pay losses when the swap expires if the fund's sector exposures lose value. This might be why they have 18% of their fixed income investments in US govt. bonds, since they wouldn't be difficult to liquidate if it was necessary. They also have 8.7% in pure cash which I guess could be a margin requirement or could simply be a way of limiting the likelihood that they'd be forced to liquidate bonds if the equity investments lose money.
I guess to the extent that any of their swaps aren't readily marketable they would have to include a provision that either party could "end" the bet at any time. This would allow them to reallocate to whatever sectors are chosen each month, but my knowledge about the details of how they're effecting these swaps is basically non-existent so its just a guess.
Maybe I'm missing something but it seems like the main risks with the fund are related to the terms of the swap, which the public probably never finds out unless someone spills the beans and whether the fixed income securities they choose are sensitive to interest rates and could more than offset the income they produce due to a loss of value. Since a good majority of those bonds, according to the fact sheet, have short durations, it would at least seem like they're not being overly aggressive with their goal of "enhancing" the index.