Several people (like me) have repeatedly wondered about what can go wrong w/ DSE_X. This is hardly an answer, but today I observe that its and CAPE's decline is significantly greater than that of all of the LCV div etfs and selected LCV funds I follow: OUSA, NOBL, DVY, SCHD, TWEIX, PRBLX, etc. etc.
Otoh, its decline still was less (marginally) than SP500.
So while there remain good arguments to hold pure LCV div vehicles, anyone who follows the wide and common advice to have a high equity percentage in SP500 may be well-served by instead choosing CAPE or DSE_X.
Comments
I love DSENX, but if I understand it right, its formula leads it to avoid certain parts of the market, which means it overweights others. Like any other fund, it could get that bet wrong, and Gundlach could mess up his bond bets too.
Yet it is designed, by avoiding the pricier parts of the market, to overperform in a correction. We may soon find out how well that design works...
By contrast, I do see an advantage to paying active management fees for SFGIX, an active manager with a long successful track record at another fund shop--Matthews--and now his own shop. The manager of that fund doesn't follow a formula but does intensive fundamental research of the securities he owns, and has the results to prove it. Now you could call that just luck--a classic active versus passive debate--but at the very least you know Andrew Foster is definitely active. You're not paying for a formula. The only really active side in DSEEX is on the bond side, which is not the primary driver of its returns.
So the counterparties responsible for the swaps tied to the CAPE index are Barclays Capital, BNP Paribas, and Bank of America. Anything goes wrong with them and there's a problem. Additionally the swaps cost between 0.43% to 0.47% of the swap's value to put on, adding to fees. So there is added risk and cost and I still don't think this would be that hard to replicate with a small options position to add a little bit of leverage. Now you could say the leverage isn't bad in the fund as it is bonds on top of stocks and those two asset classes aren't highly correlated normally. The only problem is there are circumstances when those asset classes are correlated such as in a rising interest rate or highly inflationary environment causing both bonds and stocks to fall. I would say that environment or a credit crisis where Barclays, BNP or Bank of America get into trouble could expose the added risks here.
If I could find another mutual fund or ETF based on math. model with similar consistency and outperformance of benchmark for at least 10 years I would be happy to jump in.
What else is there, ultimately? Plus the method.
I just now looked at the best LCV at M* for 3y and 5y, and graphed IFUTX and TWEIX, their winners, against DSENX since inception (3.5y ago). Outperformance. Also for every other period I could graph, short and longer, it is no contest.
Yes, past performance etc. My question would be how it would do against its category.
I am not comparing it with CGMFX or WEMMX or FRIFX.
As for mimicking, yeah, I also have looked at many bondy ways to augment CAPE and thus far come up short.
So that's the love answer, for me.
I also don't think the leverage is typical leverage risk either. Normally the really big risk with leverage is that you end up with a bigger debt than you have assets. That isn't the case here except in a situation so extreme that the fund isn't able to liquidate bonds in an orderly way to pay losses on the swaps when they expire. Considering the bonds they have, especially a decent chunk of Treasuries, and the fact that their swaps are laddered, my assessment would be that the risk related to being levered is small, not zero, but not something that would concern me.
You're right there are costs to the swaps and the management fee, but the swaps are essentially paper bets as I understand them. That means you're not dealing with a bid-ask spread and you don't have any trading costs for the equity. Considering the impact trying to buy or sell $750 million of a sector fund at the end of a month I guess the savings in this regard aren't insignificant. In addition, if you tried to mimic this yourself, assuming you wouldn't be trading enough volume to affect the market, you would almost certainly incur higher costs than the fund to create the leverage and to trade the etfs, plus whatever small expense ratio the etfs charge anyway.
I think it mostly boils down to whether you believe in the CAPE approach to the equity side and whether you believe in Gundlach (and Sherman) to manage the bond side well. CAPE isn't known for forecasting short-term movements so I wouldn't count on the equity side always being as good as it has been but I wouldn't bet against Gundlach on the bond side.
More recent, during the latest correction ( I'm using 6/1/2015 thru 2/11/2016)
DSENX declined 9.1%, TWEIX declined -4.3% and FUSEX declined 11.9%. From 6/1/2015 thru 3/22/2017 DSENX HAS returned 27.5%, TWEIX 23.2% and FUSEX 15.7%. DSENX exhibited less downside and much more upside than the S&P500 during this time frame during the same market conditions.
So what could go wrong with DSENX strategy? At present credit markets are robust and the trend of the S%P 500 is still up. What if one or the other or both change direction? The same question can be asked about TWEIX but at least there is some history with TWEIX in good/not so good markets and less questions to seek answers. DSENX is an intriguing fund with relative out performance. For me I'm gonna keep it simple and stay with stock funds and bond funds.
2. For a newer fund like DSENX that record doesn't exist. I'm not sure it could be "mirrored" by looking at various asset classes at the time, since its performance appears highly dependent on manager execution.
3. I have purchased new funds for which '07-09 records weren't in existence. IMHO this requires a higher degree of confidence in management (based on track record) and an even better understanding of the fund's investment approach than might otherwise be needed. One such fund is RPGAX which I've owned almost since inception in 2013.
On the other hand, concerned about equity valuations and a narrowing spread between high quality and junk bonds, I recently sold OPPEX (Oppenheimer Capital Income). This is a normally low volatility fund which attempts to hedge market risk (equity and bond) in various ways. It's provided a smooth ride over the year I've owned it. However, in looking back at '07-'08, this otherwise low volatility income fund managed to shed 40% over 2 years (nearly 38% in '08). I'd started with a small commitment to the fund. As the amount grew (and markets evolved) I decided that the risk-reward profile wasn't suitable for my needs.
FWIW
CAPE alone has been backtested to '02, fwiw:
http://investwithanedge.com/new-barclays-shiller-cape-sector-rotation-etn
... annualized return [['02-'12]] of +10.8% (adjusting for investor fees) with 19.6% standard deviation. For the same period, the S&P 500 Total Return Index gained +7.2% with a 21.2% standard deviation.