For performance information on one of the actively managed equity strategies, please contact the DoubleLine Communications team.
The DoubleLine Equity team seeks to provide better long-term equity investment returns on a risk-adjusted basis by applying an investment philosophy and process on a consistent basis. The team endeavors to generate such outperformance relative to peers and the relevant benchmark over a full market cycle.
The DoubleLine Equity team adheres to a differentiated investment philosophy predicated upon the idea that higher returns come only when investors stand outside of the consensus opinion with conviction and see their differentiated view proven correct over time. Such an approach requires being selective about which market opportunities to pursue, being patient in waiting for those investment ideas to come to fruition, and being thoughtfully prudent about the risks assumed in individual stock holdings and portfolio management.” By consistently adhering to a timeless strategy that marries rigorous, bottom-up research with a skeptical view of consensus opinion and a long-term investment time horizon, one can generate better risk-adjusted returns. This philosophy consists of the following key tenets:
- Fundamental research: The goal of DoubleLine’s equity research effort is to know its targeted companies well in order to develop assessments of value for those companies’ stocks that are independent and differentiated from consensus expectations. Of course, this approach views stocks as fractional shares of underlying businesses, whose fundamentals should be thoroughly understood. The team targets investment opportunities where an attractive company’s future prospects can greatly exceed those consensus expectations. Because team members build their own independent view of a particular stock, the DoubleLine Equity team can gain the conviction to invest in out-of-favor names shunned by many, and the fortitude to maintain such positions even when short-term sentiment moves adversely. Given that such research requires a rigorous, time-intensive effort, it is selectively applied only to the most promising opportunities, as determined by the relative attractiveness of a company’s businesses and stock price. Finally, this research discipline requires a skeptical mind, ready to question the preconceptions of the market and to retest the underlying assumptions of our own prior investment decisions.
- Long-term orientation: Although the short-term fluctuations of the market are often greater than the changes in the underlying value of the business driving a given stock price, equity prices over the longer-term do tend to follow those business fundamentals. Increasingly, market participants have adopted a shorter-term orientation, which enhances opportunities for investors with longer investing time horizons to purchase temporarily shunned stocks at more reasonable or even attractive prices. The DoubleLine Equity team searches for investment opportunities over a time frame of at least 3-5 years, which is an appropriate duration of time for companies to demonstrate business fundamentals evolving more favorably than the market had anticipated. This could be a growth company greatly expanding sales and profits beyond expectation, or it could be a temporarily under-performing firm showing rebounding returns and cash flow over time. Patience and conviction are required to take such a longer-term view, and the quality of the research effort is critical to maintaining an out-of-consensus investment thesis over extended periods of time. If we cannot justify holding a name within our current portfolio over a 3-5 year period, then we cannot justify holding it at all.
- Individual decision-making: While maintaining a team-oriented culture, the DoubleLine Equity team emphasizes the importance of individualized responsibility for decision-making. The team seeks to avoid “group think,” since shared responsibility often means systematizing its avoidance. The individual contributions of each investor on the team are reported regularly, so the quality of each team member’s decision-making is properly highlighted within the group. The DoubleLine Equity team wants each investor to succeed, and thus stands ready to serve as fresh eyes or devil’s advocates in the testing and evaluation of investment ideas. While the team’s scrutiny and debate over an investment proposal can help expose previously unseen risks or highlight areas for further research, the ultimate responsibility for a given investment is always individually worn and recognized.
- Primacy of price discipline: The importance of maintaining price discipline to obtaining better risk-adjusted returns has long been recognized. The DoubleLine Equity team believes that purchasing stocks at a discount to their intrinsic value enhances investment performance over time. A company’s value is determined by its long-term future profitability, but its stock value may be mispriced as that prospective profitability can be misunderstood temporarily for various reasons, including an underestimation of future growth prospects or an over-extrapolation of short-term difficulties. Purchase decisions require a meaningful disconnect between the current market price of the stock and our private assessment of the company’s intrinsic worth, thereby creating a favorable upside-to-downside ratio and also affording a margin of safety. Because such price discounts are frequently associated with relatively limited market expectations, such valuation sensitivity not only helps to boost expected investment returns over time, but often also confers the additional benefit of buffering a selectively-purchased portfolio from the adverse impact of a general decline in equity market valuation multiples. Similarly, sell decisions and portfolio rebalancing are also driven by valuation sensitivity, as investments can be reduced if more attractive opportunities arise or can be replaced if target price objectives are reached.
- Management of risk, properly defined: The DoubleLine Equity team believes that actual risk and perception of risk are unrelated and often antithetical. Indeed, cognitive biases cause people to over-extrapolate from short-term trends (i.e., the availability heuristic), thereby prompting risk perceptions to overshoot above or below the actual risks associated with owning a given stock. This dynamic is what creates the disconnect between market price and intrinsic value which can be exploited for investment profit. Of course, this perspective assumes that risk should be defined not as stock price volatility, but rather, as risk of permanent loss of capital, and it dictates that one should ensure that stocks of attractive businesses are purchased when the perception of risk is greater than the actual risk. Toward that end, the DoubleLine Equity team engages in a series of risk management efforts, including: a) thoroughly researching our security holdings to ensure that we understand what we own and know it is an attractive company, b) demanding a healthy discount between market price and intrinsic value, and c) maintaining these purchased stocks in a diversified portfolio that is itself monitored and managed to avoid excessive risks.
The DoubleLine Equity team believes that consistent and better long-term, risk-adjusted investment returns come from a disciplined process consistently applied.
The investment process begins with rigorous, bottom-up equity research. This research effort is repeatable, employs diversified idea sourcing, detailed due diligence, a long-term time horizon and strong price discipline. The diligence work, broken into two parts given its scope, is designed to develop deep investment insights that are essential for establishing an independent assessment of a stock’s intrinsic value, concomitant understanding of the investment risk profile and an analyst’s conviction behind the differentiated investment thesis. Team review of investment ideas entails careful vetting within a highly transparent and sometimes withering group debate, during which team members serve as fresh eyes and devil’s advocates to ensure appropriate scrutiny. Stock recommendations that survive this process are available for investment in the portfolios and strategies deemed appropriate.
Sound portfolio construction and management principles are also employed, including consideration of macroeconomic factors and business cycles, to ensure the creation and maintenance of properly diversified holdings. Only the highest conviction ideas are included in the portfolios (typically 35-50 names) to avoid dilution of our best ideas and to ensure a high active share. As a consequence of this name count constraint, the team maintains a consistent buy-sell discipline.
The entire investment process incorporates at multiple levels various aspects of risk management. The analyst’s equity research effort ensures that key business and financial metrics are understood, and that the fundamentals are better than the market believes, thus creating a price discount and margin of safety that should resolve favorably over time. The group evaluation is designed as a further check on the analyst’s research. Sound portfolio management also incorporates complementary efforts to address risk, both through diversification and the monitoring of excessive macro or factor exposures.
By consistently adhering to the investment process the DoubleLine Equity team constructs and manages diversified, concentrated portfolios reflecting the team’s highest-conviction ideas with the highest potential for risk-adjusted relative outperformance and valuation support.
The DoubleLine Equity team manages two strategies: Fundamental Value and Growth at a Reasonable Price (GARP).
The Fundamental Value and GARP strategies each target two opportunity sets arising when the market temporarily prices stocks below their intrinsic value: classic value and franchise value investments. Classic value opportunities occur in lower-multiple stocks of companies with temporarily depressed earnings, cash flow and returns. Franchise value opportunities occur in higher-multiple stocks of companies with durable or even disruptive business models with uncommon competitive advantages and often above-average reinvestment capability and avenues for growth.
The Fundamental Value strategy tends to concentrate mainly in classic value opportunities, while the GARP strategy focuses more heavily on franchise value investments.
The DoubleLine Equity team consists of seasoned investors with multiple decades of combined, relevant experience. The team employs a time-tested, differentiated investment philosophy and a repeatable, disciplined process to construct and maintain portfolios designed to generate higher risk-adjusted returns over a full market cycle. The group also runs investment strategies exclusively within concentrated portfolios characterized by high active share, thereby enhancing the ability to outperform designed index benchmarks and peers. These strategies currently enjoy excess capacity, given the relatively smaller assets under management, allowing the team to capitalize upon a wider set of opportunities—including smid-cap names as low as $2B in market capitalization—thus helping to boost relative performance. Finally, the DoubleLine Equity team, operating within the larger DoubleLine Group, leverages the expertise of multiple investment teams covering various asset classes, including high yield and investment grade debt, global and emerging markets credits and structured products; as a consequence, the equity investment and portfolio management decisions are informed in part by insights from the rest of the larger firm.