ore fixed income fund dlfx/dlfnx - doubleline …remained choppy with the s&p 500 index down...
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333 S. Grand Ave., 18th Floor || Los Angeles, CA 90071 || (213) 633-8200
Quarterly Commentary
Core Fixed Income Fund
DBLFX/DLFNX
September 30, 2014
333 S. Grand Ave., 18th Floor || Los Angeles, CA 90071 || (213) 633-8200
2
Quarterly Commentary 9/30/14
Overview
Eyes were focused on major central banks and policy
makers during September as market participants tried
to envision the future of major central bank policies.
One of the largest policy changes came from the
European Central Bank (ECB) President Mario Draghi,
which included a reduction of 10 basis points (bps) in
interest rates across the periphery. The move was
timely with the disappointing 0% quarter-over-quarter
(QoQ) second quarter Gross Domestic Product (GDP)
growth in the eurozone and is likely a response to
provide liquidity and growth to the area. Draghi also
introduced a plan to purchase asset-backed securities
starting in October with the intention of expanding the
ECB balance sheet to 2012 levels, €1 trillion1. In the
U.S., Federal Reserve (Fed) Chair Janet Yellen reduced
Fed purchases to $15 billion with language suggesting
the completion of the current quantitative easing (QE)
program in October. The Fed also reiterated its
commitment to maintain a low interest rate policy for
a “considerable amount of time,” citing a low inflation
and a recovering job market.
Growth and employment in the U.S. were certainly
highlights during the third quarter as September
nonfarm payrolls increased by 248,000. The figure
surpassed most estimates as payroll additions came
particularly from older age groups including those
aged 50+. In addition to the strong payroll number,
the Unemployment Rate fell to 5.9%, below the 6.0%
level reminiscent of pre-recession levels.
Unfortunately, the trend of a lower unemployment
can partially be attributed to the decline in the Labor
Force Participation Rate, which fell to a new 26-year
low of 62.7%. The improving employment picture also
coincided with the final upward revision of second
quarter GDP to 4.6% QoQ, revised higher due to an
increase in fixed investment of nonresidential
structures and equipment.
Quarterly Commentary
Despite the strong growth, the figure could also be
viewed with some skepticism as inventories played a
large role contributing 1.4% to GDP. Corporations
certainly benefited from strong growth during the
quarter as well, as corporate profits rebounded to $2.1
trillion, falling just short of the all-time high reached
during the fourth quarter of 2013.
Strong corporate sentiment also carried over to
mergers and acquisitions (M&A) activity which
remained robust during the quarter as North America
deal volumes exceeded $1.5 trillion year-to-date (YTD).
M&A activity this year has been partially driven by tax
inversion deals which are often characterized by U.S.
companies acquiring firms in other countries where tax
rates are lower. M&A activity is expected to remain
The U.S. Dollar (USD) experienced remarkable strength
1. Approximately $1.27 trillion U.S. Dollars as of 9/30/2014.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14
Underemployment/Unemployment RateUnemployment Rate
Underemployment Rate
Source: Bureau of Labor Statistics, Bloomberg
Last Unemployment = 5.9%Last Underemployment = 11.8%
0
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300
350
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14
Net
Pay
roll
Ad
dit
ion
s (0
00
s)
Nonfarm Private Payrolls - Net ChangeBLS
ADP
Source: Bureau of Labor Statistics (BLS), Bloomberg, ADP
Last BLS = 248KLast ADP = 213K
3
Quarterly Commentary 9/30/14
during the quarter as stronger growth and strong for
the remainder of the year with volumes reminiscent
of 2007 levels.
The U.S. Dollar (USD) experienced remarkable
strength during the quarter as stronger growth and
employment in the U.S. contrasted against a
backdrop of struggling developed economies across
the rest of the world. Against a basket of currencies
the USD Index (DXY) had the strongest quarter since
the third quarter of 2008 as the DXY Index rose over
7.7% to close the quarter at 85.94. Against two of the
largest currency trading pairs, the Euro (EUR) and
USD, and USD and the Japanese Yen (JPY), the USD
appreciated 8.4% and 8.2%, respectively. A stronger
USD also proliferated into commodities which fell
6.02% during September adding to the 12.46% QoQ
decline as measured by the S&P Goldman Sachs
Commodity Index (S&P GSCI). Meanwhile, equities
remained choppy with the S&P 500 Index down
1.40% during September reducing the third quarter
gain to just 1.13%. Fixed income returns as measured
by the Barclays U.S. Aggregate Bond Index were also
mixed, down 0.68% month-over-month (MoM) and
up 0.17% QoQ. Treasury bond yields as measured by
the benchmark 10-year U.S. Treasury (UST) were little
changed during the quarter with the yield declining 4
bps to 2.49%. The 10-year UST traded within a 30 bps
yield range of 2.33%-2.63% during the quarter.
Quarterly Commentary
0
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$B
illio
ns
North American M&A Activity Volume
Deal Count (rhs)
Source: Bloomberg; RHS = right-hand side y-axis
4
Quarterly Commentary 9/30/14
Emerging Markets Fixed Income (EMFI)
In EMFI, the three sectors of the market – the
external sovereign, corporate debt and local currency
bonds, represented by the JP Morgan Emerging
Markets Bond Index Global Diversified (EMBI), the JP
Morgan Corporate Emerging Markets Bond Index
Broad Diversified (CEMBI) and the JP Morgan
Government Bond Index Emerging Markets Broad
Diversified (GBI-EM), respectively – posted negative
returns for September 2014 and the third calendar
quarter.
It was an uneven third quarter for risk assets, as
investors digested a series of flashpoint geopolitical
issues around the globe, apparently slowing growth in
large economies such as the eurozone and China, as
well as the Fed drawing its QE program to a close and
the prospect for interest rate increases in the first half
of 2015. Emerging Markets (EM) equities, as
measured by the MSCI Emerging Markets Index, fell
3.38% over this same period. Some of this decline
may be linked to the strong USD: the USD Index
(USDX) rose from 79.78 on July 31 to 85.94 on
September 30, its highest month-end close since
2010. For the third quarter, EM debt as represented
by the EMBI declined 0.59%, with a sharp decline in
September wiping out small gains from July and
August. Investment-grade, longer-duration USD-
denominated bonds were the leading performers in
the asset class.
Abroad, the eurozone continued to battle
deflationary pressures (in both “periphery” nations
such as Portugal and “core” members like France) and
the ECB under Mario Draghi has been receptive to
lowering rates and more unorthodox QE measures
such as those undertaken by the Fed. In September
the ECB unexpectedly slashed its main refinancing
rate 10 bps to 0.05%, while also unexpectedly
lowering its deposit facility rate from -0.10% to -
0.20% in order to help spur lending across the
eurozone. Preliminary quarter-over-quarter Gross
Domestic Product (GDP) growth was reportedly non-
existent for 2Q14, while the Consumer Price Index
(CPI) rose just 0.30% year-over-year (YoY) in
September and its jobless rate remained stubbornly
high at 11.5%. President Draghi has announced QE
plans to begin purchasing, as early as October, asset-
backed securities and covered bonds to the tune of
500 billion euros2 over three years. The euro has sold
off sharply with the ECB’s easing efforts, falling from
1.339 USD on July 31 to 1.263 USD by September 30.
Though in prior months targeted stimulus measures
by Chinese authorities appeared to assuage investors
that the government’s 7.5% growth for 2014 could be
met, increasingly uneven data in the third quarter
appeared to once again raise doubts and lead to a
headwind across broader EM markets, especially
those heavily linked to commodities for Chinese
consumption. Imports unexpectedly shrank 3.0% YoY
in August, and though the government’s measure of
the manufacturing sector was essentially unchanged
for September, HSBC’s measure of the manufacturing
sectors (which tends toward small-to-medium firms)
expanded at a slower rate for the month. Foreign
direct investment continued to fall in August by 14%
Quarterly Commentary
2. Approximately $634 billion U.S. Dollars as of 9/30/2014.
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14
JP Morgan Emerging Markets Bond Index Performance
9/30/2014 to 9/30/2014
EMBI
CEMBI
GBI-EM
Source: JP Morgan
5
Quarterly Commentary 9/30/14
Quarterly Commentary YoY, on the back of July’s 16.95% decline YoY. The
Central Bank in China has aimed to counteract
slowing data with stimulus including 500 billion yuan3
liquidity measures for the five largest Chinese banks,
as well as loosening credit for the real estate sector.
On the socio-political front, widespread student-led
protests in Hong Kong against pre-vetting by Beijing
of local governmental candidates has led questions of
how hard authorities would crack down and if
leniency could lead to further unrest in China’s
western peripheral provinces.
The simmering conflict in Ukraine over rebellion in its
Russophone eastern provinces proved to be
extremely fluid over the third quarter. The Russian
military has been widely seen as arming the rebels to
keep Ukraine in disarray and out of the West’s sphere
of influence. Western nations including the U.S. and a
number of NATO allies have directly accused
unmarked Russian forces of fighting alongside rebel
forces in a clandestine war effort. Though Russia has
denied this, the level of evidence has been enough for
the U.S. and EU to slap several rounds of sanctions on
the Russian banking and energy sectors, as well as
targeting individuals. The latest round of sanctions in
September essentially limited the debt financing
capabilities of a number of state-owned firms to
extremely short duration paper. This was as a result
of the Russian-supplied rebels making large territorial
gains after opening a new southeastern front along
the Azov Sea. In the face of the massive weight Russia
appeared to be throwing behind the rebels, by late
September Kiev and Moscow had engaged in a truce
along with negotiating the natural gas supplied by
Russia to Ukraine. The truce remains shaky, with
sporadic clashes still occurring, but the conflict
appears to have momentarily “frozen” similar to
South Ossetia following Russia’s 2008 war with
Georgia. The ruble sold off sharply in the third
quarter, rising from 35.687 per USD on July 31 to
39.60 by September 30, and the Russian Central Bank
has been forced to intervene to defend it.
The Middle East witnessed one conflict die down and
another escalate sharply in the third quarter. While
the seven-week conflict in Gaza between Hamas and
Israel that saw several thousand civilians killed in the
crossfire ended with a late-August truce, the U.S. and
other Western powers have launched a broad air
campaign against the Islamic State (IS). The Sunni
militants of IS had made rapid gains over the summer
against Bashar al-Assad’s Syrian regime and Kurdish
and Shia forces in northern and central Iraq. This
advance was checked by U.S. air strikes in late August,
and Washington lobbied hard through September
before building a coalition of air forces from Western
Europe and the Persian Gulf to strike IS positions in
Iraq. The U.S. has pressed the air war to strike at IS
inside Syrian borders. The U.S.-led coalition has
committed to supplying arms to Iraqi forces, and the
U.S. will attempt to arm “moderate” Syrian rebels who
oppose IS and Damascus. Toward the end of
September, the Turkish parliament approved use of its
military amid massive streams of refugees as IS roils its
border regions. The regional conflict appears likely to
grow in scale and Washington has noted it could take
years to ultimately defeat IS. Despite the unease in the
region, the price of Brent crude oil fell from $106.02 at
July close to $94.67 by September’s end, likely due to
strong shale extraction continuing from the U.S.
In Latin America, the October Brazilian Presidential
elections captivated investors’ attention. Brazilian
equities and debt rallied for the first two months of
the quarter as candidate Marina Silva appeared to gain
ground on sitting President Dilma Rousseff (notably
following the death of initial candidate Eduardo
Campos in a plane crash). Center-left Silva was viewed
as more market-friendly than leftist President Rousseff
and more likely to implement needed economic
3. Approximately $817 billion U.S. Dollars as of 9/30/2014.
6
Quarterly Commentary 9/30/14
reforms. But by late September President Rousseff’s
polling had regained ground and Brazilian assets
broadly fell; the real ended September at 2.447 per
USD, its weakest month-end in 2014. Twin deficits
and inflation above the upper band of the central
bank’s 6.5% target (6.51% actual in August) have
remained headwinds for the country. First-round
voting in early October saw center-right candidate
Aecio Neves unexpectedly leap past Silva to force a
runoff with Rousseff. As investors apparently viewed
Neves as even more likely to make reforms than Silva,
Brazilian assets rallied strongly on this result.
Investors continued to allocate funds to EM fixed
income funds during the third quarter: $7.2 billion
entered the asset class, with $3.9 billion going to hard
currency funds and $3.3 billion toward local currency
funds. These inflows brought the asset class YTD as of
September 30th net positive $13.3 billion. There has
been dispersion between hard and local currency
funds, though, YTD: through the third quarter, local
currency funds witnessed $3.2 billion in outflows
versus $16.5 billion inflows for hard currency.
Quarterly Commentary
7
Quarterly Commentary 9/30/14
Investment Grade Credit
U.S. Investment Grade corporate credit spreads
widened as UST yields rose across the curve during
the month of September. The Barclays U.S. Credit
Index ended September 9 bps points wider
generating a monthly return of -1.41%. The
Investment Grade Credit market was negatively
impacted by both higher yields and wider spreads.
During the third quarter, the Barclays U.S. Credit
Index fell 0.03% on a total return basis as the UST
curve flattened. Spreads were changed little during
July and August but ended the quarter wider by 11
bps at an options-adjusted spread (OAS) of 107.
Within investment grade credit, sector performance
during the month was driven by lower commodity
prices and continued M&A. The worst-performing
sector was Oil Field Services as spreads widened 32
bps returning -3.18%. The Metals & Mining and
Refining sectors widened 27 bps and 22 bps, with
returns of (-2.87%) and (-2.51%), respectively. The
best performing sectors were Packaging, tighter by 9
bps, Supranationals, tighter by 1 bp and Leisure,
unchanged. Packaging and Leisure are very small
components of the Index at 0.05% and 0.03%,
respectively. Supranationals are 5.51% of the Index
and have a much larger impact on Index returns. The
quarterly returns of the Index were heavily impacted
by the September performance as there was a clear
reversal of the “risk on” trend that was evident over
the past few months. The worst-performing sector
over the quarter was Energy, led lower by Oil Field
Services which fell 2.46%. The best performing sector
was Utilities which tend to be more defensive in
nature, returning 0.45%.
As expected, fixed-rate gross investment grade supply
for September was robust, with approximately $124
billion. This compares with just $26 billion and $51
billion for July and August, respectively. The increase
in issuance is not surprising as September tends to be
one of the busiest months of the year for the sector,
particularly following the Labor Day holiday. October
is a seasonally slow month but the new issue market
could remain robust as M&A volumes accelerate
throughout the year. Net inflows continued into
Investment Grade Credit during September as mutual
funds flows totaled $7.8 billion, according to EPFR
Global.
Quarterly Commentary
0
20
40
60
80
100
120
140
Bill
ion
s o
f U
.S. D
olla
rs
Total Fixed-Rate Investment Grade Supply
Source: Barclays Live
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Performance of Select Barclays Indices Last 12 Months9/30/2013 to 9/30/2014
Barclays Capital U.S. Credit Index
Barclays Capital U.S. Aggregate Index
Source: Barclays Live
8
Quarterly Commentary 9/30/14
High Yield
The High Yield market as measured by the Citi High-
Yield Cash-Pay Capped Index returned -2.15% during
the month of September, -1.95% during the third
quarter, and 3.26% YTD. The Index’s yield-to-worst
was 6.11% at September 30, 2014, widening 85 bps
for the month, 117 bps for the quarter, and 51 bps for
the YTD. The spread-to-worst of 461 bps widened 60
bps during the month, 83 bps during the quarter and
46 bps for the YTD. During the month, lower-rated
bonds underperformed: CCC-rated returned -3.46%, B
-rated returned -1.97%, and BB-rated returned -
1.94%.
Performance during September was characterized by
selling pressure in high-yield, with stronger bids
appearing only in the final days of the month. A
number of factors contributed to this weakness,
including significant supply, low cash balances, tepid
stocks, continuing rate concerns and waning risk
appetite. The month started with the anticipated post
-Labor Day barrage of new issuance but seemed to
get off-track immediately, as the early transactions
appeared to lack any meaningful discount to
secondary yields and traded down upon being
allocated to investors.
New-issue volume totaled $43.8 billion in September,
the heaviest monthly issuance of 2014. However, the
final three days totaled only $1.1 billion versus $10.7
billion, $8.6 billion, $11.3 billion and $12.2 billion in
the preceding weeks. For context, weekly new-issue
volume has averaged $7.3B YTD, and half that of July
and August. In terms of proceeds, refinancing
accounted for 31% of September’s volume, with
acquisition-related activity being 33% and general
corporate purposes at 23%.
High-yield retail flows saw an aggregate withdrawal of
$3.5 billion over the past five weeks, compared to the
July/August combined outflow of $20.4 billion and the
$16.4 billion that was withdrawn during the “taper
tantrum” in May/June 2013. However, according to JP
Morgan the price decline for high-yield bonds in
September was $2.89, similar to the $2.86 peak-to-
trough decline between late June and early August
2014, but far less severe than $6.69 decline witnessed
over May/June 2013.
Only one company defaulted on $42 million of high-
yield bonds in September; eight companies have
defaulted totaling YTD $22.5 billion, bringing the par-
weighted U.S. high-yield default rate down slightly to
1.86%, but higher than the 0.68% rate from the start
of the year. Excluding TXU’s default, the par-weighted
default rate declined slightly to 0.53%. The issuer-
weighted high-yield default rate was relatively flat
MoM at 1.45%.
Quarterly Commentary
* MTD = Month-to-Date
Source: S&P Capital IQ Leveraged Commentary and Data (LCD)
Automobile Manufacturing/Vehicle Parts -0.77%
Pharmaceuticals -1.00%
Restaurants -1.00%
Transportation - Rail & Other -1.00%
Airlines 6.15%
Diversified Telecommunications 6.15%
Paper & Forest Products 6.04%
Transportation - Rail & Other 5.97%
Metals/Mining -4.30%
Textile/Apparel/Shoe Manufacturing -3.63%
Secondary Oil & Gas Producers -3.26%
Tower -3.23%
Gaming -3.37%
Wireless -1.67%
Textile/Apparel/Shoe Manufacturing -1.54%
Metals/Mining -0.73%
Top-Performing Industries MTD* as of 9/30/2014
Top-Performing Industries YTD as of 9/30/2014
Bottom-Performing Industries MTD* as of 9/30/2014
Bottom-Performing Industries YTD as of 9/30/2014
9
Quarterly Commentary 9/30/14
Bank Loans
The S&P/LSTA Leveraged Loan Index lost 0.57% for
the month of September, with the change in market
value reducing returns by 0.97%. For the quarter
ending September, 30, 2014, the S&P/LSTA Leveraged
Loan Index lost 0.47%, with the change in market
value reducing returns by 1.61%. The Index returned
2.11% YTD, with the interest accrual more than
offsetting the market value change of -1.31%. The
Index yield-to-maturity increased 7 bps to 5.01% YTD.
The discounted spread to a 3-year life is LIBOR +501
bps as of September month-end, which increased
from LIBOR4 +465 bps earlier in the month. Taking a
look at performance by rating showed that the lower
end of the credit spectrum underperformed higher
rated loans and the broad based index as a whole
during September. Defaulted and CCC loans returned
-3.32% and -1.07%, respectively, while B and BB rated
loans returned -0.51% and -0.52% respectively.
Pricing pressures in September were partly
attributable to preemptive selling in order to raise
cash in anticipation of the large pipeline of primary
market deals. This was evidenced by the 31bps in
underperformance of the S&P/LSTA 100 Index
relative to the broader Index during September, as
the more liquid constituents in the former were used
as “dry powder”. With no new defaults in the Index
during September, the trailing 12 month default rate
fell to 3.59% (0.95% excluding TXU) from 3.61% in
August on a par-weighted basis. The issuer-weighted
trailing 12-month default rate stood at 1.43%.
Loan supply exceeded demand for the 8th month in a
row, as net loan supply increased by $14.6 billion
during September, which was the largest monthly
increase to date during 2014. For the quarter, net
loan supply has increased by $19.6 billion with net
loan supply totaling $51.0 billion this year.
Meanwhile, retail loan mutual funds reported their
sixth straight monthly outflow, which totaled $2.1
billion during September. While this was an
improvement from Augusts outflows of $3.0 billion,
cumulative quarter-to-date and YTD outflows now
stand at $6.6 billion and $4.5 billion, respectively.
Quarterly Commentary
Source: S&P Capital IQ Leveraged Commentary and Data (LCD)
Forest Products 0.16%
Beverage & Tobacco 0.06%
Ecological Services and Equipment -0.15%
Clothing - Textiles -0.17%
Publishing 6.54%
Utilities 5.32%
Forest Products 4.62%
Media 3.43%
Nonferrous Metals - Minerals -1.99%
Utilities -1.52%
Oil and Gas -1.17%
Publishing -0.84%
Food Service 0.20%
Nonferrous Metals - Minerals 0.57%
Food Products 0.92%
Cable and Satellite Television 0.97%
Top-Performing Industries MTD as of 9/30/2014
Top-Performing Industries YTD as of 9/30/2014
Bottom-Performing Industries MTD as of 9/30/2014
Bottom-Performing Industries YTD as of 9/30/2014
4. LIBOR = London Interbank Offered Rate
10
Quarterly Commentary 9/30/14
pick up loans at more attractive pricing with the
outflow from the retail fund space translated to lower
loan prices. These lower loan prices contributed to
the S&P LSTA Leverage Loan Total Return Index to
have a return of -0.47% for the third quarter.
The ABS East Conference was held in Miami at the
end of September and was well attended by more
than 3,700 investment professionals. CLO managers
are still trying to bring new deals to market by year-
end, ahead of the SEC ruling on risk retention.
Typically, most managers have warehouses set up to
ramp up the portfolio before a deal closes. Recently,
some warehouses have had longer ramp up periods
to attempt to take advantage of any softness in the
loan market.
Collateralized Loan Obligations (CLOs)
Collateralized Loan Obligation (CLO) continued to issue
new deals during the third quarter, at a slower speed in
August and September relative to July. August and
September both issued roughly $7.5 billion in new issue
while July issued over $11 billion, the slower pace
attributed to a typical summer slowdown. The quarter-
ended with YTD issuance at $93 billion across 177
deals. At this time last year issuance was at $60 billion
across 124 deals. Also, this year’s issuance is only $4
billion shy from the record setting year of 2006. The
third quarter’s pace is expected to continue into the
final quarter of 2014 and surpass 2006’s issuance
record.
As managers continue to bring more deals to the
market, this has caused new issues spreads to slightly
widen. New issue AAA spreads for top tier managers
were pricing in the low 140 DM (discount margin) in
July. By the end of the quarter, new issue AAA spreads
widen by 5-10 bps. AAAs were not alone in widening
this quarter; all tranches in the capital stack leaked
wider. AA through BBs spreads are wider by 20-40 bps
while single B spreads are 85 bps wider. The decrease
in CLO prices over the quarter is attributed to the
excess supply from new issue and not due to any
fundamental problems with CLOs. Although spreads
have widened, managers are still trying to bring new
deals in the final quarter. Managers are pushing ahead
with new deals to stay in front of the ruling from risk
retention and while CLO technicals remain strong.
Bank loan returns, as represented by the S&P LSTA
Leveraged Loan Total Return Index, were volatile over
the third quarter. July and September both
experienced negative monthly returns while August
had a moderate return. Retail loan funds continued to
experience outflows that began in April 2014. This
weakness is a positive for CLO managers as they could
Quarterly Commentary
11
Quarterly Commentary 9/30/14
the current production coupons weakened due to
increasing concerns regarding the end of QE.
Aggregate prepayment speeds across all agencies
edged higher at the beginning of the quarter, but
declined for the months of August and September
due to housing seasonality. This has been consistent
with declining existing home sales throughout the
quarter and indicative of lower housing turnover
going forward as we enter into the winter months. In
addition, more stable mortgage rates towards the
end of the quarter and slightly lower refinancing
activity, measured by Mortgage Bankers Association
(MBA) Refinancing Activity Index, also indicate lower
prepayment speeds going forward. Though the 30-
year fixed mortgage rate did peak close to 4.45% in
the middle of the quarter, it ended close to where it
began at around 4.12%. Furthermore, the Home
Affordability Refinance Program (HARP) eligible
universe has now declined to around 20% of all
outstanding mortgage borrowers. There have been
no changes to the program’s anticipated end in
December 2015 as we continued to see prepayment
burnout occur within HARP eligible collateral.
Total Agency MBS gross issuance grew over the
quarter with July, August, and September seeing a
total of $90 billion, $95 billion, and $96 billion,
Agency Mortgage-Backed Securities
For the quarter ending September 30, 2014, the
Barclays U.S. MBS Index returned 0.18% while the
Barclays UST Index returned 0.33%. The yield curve
flattened slightly with the long end declining, and the
front end remaining relatively unchanged. Broad
spread widening within the mortgage markets during
the second half of the quarter with uncertainty
regarding interest rate direction and the potential
selling of Agency mortgage-backed securities (MBS)
by the Fed resulted in the sector’s underperformance.
Not surprisingly, 30-year collateral outperformed 15-
year collateral as U.S. interest rates declined more at
the longer end of the curve. Higher coupon MBS
outperformed lower coupon counterparts as much of
Quarterly Commentary
9/30/20144.99
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6.00
7.00
06/08 12/08 06/09 12/09 06/10 12/10 06/11 12/11 06/12 12/12 06/13 12/13 06/14
Duration of Barclays U.S. MBS Index
Source: BloombergSource: Bloomberg
Conditional Prepayment Rates (CPR)
2013 - 2014 Oct Nov Dec Jan Feb March April May June July Aug Sept
Fannie Mae (FNMA) 11.5% 10.4% 10.6% 8.7% 8.0% 9.4% 9.9% 10.4% 11.7% 12.2% 11.4% 11.3%
Freddie Mac (FHLMC) 12.0% 10.8% 11.1% 9.1% 8.3% 9.8% 10.2% 10.8% 11.8% 12.2% 11.6% 11.2%
Ginnie Mae (GNMA) 12.1% 11.2% 11.2% 9.7% 10.0% 11.0% 12.8% 13.8% 14.8% 15.1% 14.6% 14.6%
Barclays Capital U.S.
MBS Index 7/31/2014 8/31/2014 9/30/2014 Change
Average Dollar Price $104.49 $105.23 $104.80 -$0.43
Duration 5.13 4.82 5.01 0.19
Barclays Capital U.S.
Index Returns 7/31/2014 8/31/2014 9/30/2014
Aggregate -0.25% 1.10% -0.68%
MBS -0.59% 0.94% -0.16%
Corporate -0.04% 1.44% -1.41%
Treasury -0.16% 1.05% -0.55%
source: eMBS, Barclays Capital
ABX & PrimeX 3 month charts - source: Morgan Stanley
FHLMC Commitment Rate - source: Bloomberg
12
Quarterly Commentary 9/30/14
respectively. Net issuance has increased as housing
turnover picked up over the summer months.
Issuance on both a gross and net basis has increased
throughout the year, though we have yet to reach
half of 2013’s total.
The September Federal Open Market Committee
(FOMC) meeting provided some clarity regarding its
plans following the end of QE on interest rates,
reinvestments of MBS, and the potential selling of
currently held Agency MBS. The Fed and Chair Yellen
have stated that they “expect to cease or commence
phasing out reinvestments after it begins increasing
the target range for the federal funds rate; the timing
will depend on how economic and financial
conditions and the economic outlook evolve”. Most
observers think that the reinvestments of MBS
payments will continue into the middle of 2015 at the
very least. Additionally, the Fed has also commented
on the selling of currently held Agency MBS by stating
that they “do not anticipate selling [Agency MBS] as
part of the normalization process, although limited
sales might be warranted in the longer run to reduce
or eliminate residual holdings”. Following this clarity,
the mortgage market broadly tightened as the
nervousness of the markets leading up to the meeting
subsided.
Quarterly Commentary
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
12/31/10 5/31/11 10/31/11 3/31/12 8/31/12 1/31/13 6/30/13 11/30/13 4/30/14
Mortgage Bankers Association (MBA) Refinance Index
9/26/20141,293.70
Source: Bloomberg
120.00
140.00
160.00
180.00
200.00
220.00
240.00
12/31/10 4/30/11 8/31/11 12/31/11 4/30/12 8/31/12 12/31/12 4/30/13 8/31/13 12/31/13 4/30/14 8/31/14
Mortgage Bankers Association (MBA) Purchase Index
9/26/2014168.8
Source: Bloomberg
13
Quarterly Commentary 9/30/14
CPR and subprime falling 0.2 CPR. For the third
quarter, prime speeds increased by 1.9 CPR while Alt-
A and subprime collateral were down 0.2 CPR and 0.4
CPR, respectively. Loss severities were mixed in
September with prime and Alt-A severities falling
4.4% and 1.6%, respectively, while subprime
severities increased 2.8%. For the third quarter,
prime and Alt-A collateral severities improved on
average by 5% and 4%, respectively. The pace of loan
modifications slowed during the quarter, with most of
the modifications again being loan modifications.
Loss adjusted yields remained largely unchanged for
September. Prime bonds traded in the 3.75-4% range,
Alt-A in the 4% range and subprime from 5-6%
depending on the weighted average life (WAL) profile.
Returns in non-Agency MBS continued to tighten
throughout the period, albeit at a slower pace than
previous quarters.
There was some noteworthy progress made during
August and September in the area of mortgage
related settlements. The New York State Court
postponed a hearing to reargue the $8.5 billion
settlement case to February 26, 2015. Triaxx, one of
the main opposition parties to the settlement, has
since agreed to terms. It is of the opinion of many
Wall Street research analysts that this settlement will
materialize in the next 12 months. The Countrywide
Settlement was in the news in September.
Non-Agency Mortgage-Backed Securities
The non-Agency MBS trading volume started the third
quarter with a bang and finished off with a whimper.
Trading volumes spiked in July as Blackrock Solutions
liquidated two large lists. The combined lists added
an additional $8 billion of current face and consisted
mostly of distressed Alt-A and subprime securities.
After a traditionally sluggish August, trading volumes
in September picked up modestly. Much of the
volume came from money managers and hedge
funds. Once again, lower credit quality collateral saw
the highest volume with subprime collateral
accounting for $4.7 billion of total current face traded
during the month of September. Prime and Alt-A
collateral accounted for $1 billion and $920 million,
respectively.
Mortgage loan fundamentals fluctuated during the
third quarter, but ended the quarter changed
modestly. The Government Sponsored Enterprise
(GSE) Risk Transfer trades (STACR/CAS) saw little
change in performance during September. Legacy non
-Agency MBS exhibited slower speeds across the
board in September with prime prepays falling 0.6
CPR (Conditional Prepayment Rate), Alt-A down 0.8
Quarterly Commentary
30
40
50
60
70
80
90
6/3
0/1
1
8/3
1/1
1
10
/31
/11
12
/31
/11
2/2
9/1
2
4/3
0/1
2
6/3
0/1
2
8/3
1/1
2
10
/31
/12
12
/31
/12
2/2
8/1
3
4/3
0/1
3
6/3
0/1
3
8/3
1/1
3
10
/31
/13
12
/31
/13
2/2
8/1
4
4/3
0/1
4
6/3
0/1
4
8/3
1/1
4
ABX Prices
ABX 2006-2 AAA
ABX 2007-1 AAA
Source: Markit via Morgan Stanley
9/29/201479.6
9/29/201474.1
14
Quarterly Commentary 9/30/14
since the 2007 peak and represent a steadily
improving and functioning commercial real estate
(CRE) market.
The overall U.S. CMBS delinquency rate fell by 7 bps
to 6.03% in September, following a one-month
weakening, according to Trepp Analytics. For the
month, four of five property sectors saw decreases in
delinquency rates with retail the only outlier,
increasing by 17 bps to 5.86%. The industrial sector
exhibited the greatest decline in delinquencies,
improving by 73 bps to a 7.66% delinquency rate,
followed by a 31 bps improvement in lodging
delinquency to 5.06%, a 10 bps increase in
multifamily delinquency to 8.99%, and a 5 bps decline
in office delinquency to 6.56%. The Moody’s/RCA
Commercial Property Price Indices (CPPI) national
major markets composite index declined in August
2014 while non-major markets were up. September
loan loss severities averaged 56% on $1.8 billion of
loan liquidations, nearly double the August amount,
with both numbers driven by the resolution of a large
distressed legacy loan collateralized by a specialty use
property.
Commercial Mortgage-Backed Securities
(CMBS)
CMBS spreads held firm in September despite $12
billion of new issuance, representing the highest level
of monthly new issuance since 2007. The market as a
whole continued to display robust demand, absorbing
the quarter’s $28 billion of deals without a hiccup. The
Barclays U.S. CMBS Index returned -0.52% in
September. Despite the Index under-performance, we
are cautiously optimistic with regards to this sector as
certain parts of the capital structure present relative
value versus investment grade corporates. In terms of
near term expectations, we expect spreads across the
curve to be range bound and tracking broader
markets, as the bulk of heavy issuance for 2014 is
behind us. For the month, legacy AAA spreads
tightened by 3 bps to 83 bps over swaps. The most
recently priced new issue deal 10-year last cash flow
(LCF) AAAs priced at 83 bps over swaps, a 7 bps
tightening over the last deal priced in August and BBBs
priced at 335 bps, a 35 bps tightening. Despite what
may represent a meaningful move in spreads, there
continued to be a trend of pronounced price tiering
across deals in terms of credit. As such, new primary
issuance market levels may vary on a deal by deal basis
and will probably continue to do so in the near to
medium term.
The $12 billion of September new issuance consisted
of 12 deals, the highest level YTD and a sharp increase
from August’s $6 billion of new issuance. Of those 12
deals, seven were fixed-rate conduit transactions,
totaling $9 billion of issuance, equivalent to the
combined July and August total. While the $15 billion
of new issuance originally calendared for the month
did not all price before month-end, both the conduit
and total new issuance amounts are market highs
Quarterly Commentary
15
Quarterly Commentary 9/30/14
maturity, rising 16 bps from June 30 to end at 1.06%.
The 30-year bond yield fell 13 bps to 3.21%. Returns
followed a similar pattern, with the higher returns at
longer maturities. The return on the 3-year note was -
0.16% for the third quarter. The 10-year and 30-year
benchmark issues returned 0.75% and 3.33%,
respectively. The return on the Barclays U.S.
Government Index was 0.32% for the quarter and
3.00% YTD.
TIPS, as mentioned, slipped relative to conventional
UST in the third quarter as investor expectations of
future inflation fell; TIPS cheapened so as to maintain
their expected return versus conventional Treasuries
in a lower inflation environment. The Barclays U.S.
TIPS Index returned -2.04% in the third quarter. The
TIPS YTD return is still modestly ahead of
conventional Treasuries. The Barclays U.S. Municipal
Bond Index, along with other credit-sensitive sectors,
outperformed UST in the third quarter, returning
1.49%.
U.S. Government Securities
The UST market was range-bound through the third
quarter. Domestic economic data was mixed, as
growth remained sustained but lackluster. Through
September nonfarm payrolls had topped 200k in seven
of the last eight months and the September
unemployment fell to 5.9% but wage growth was
disappointing. Commodity prices fell throughout the
quarter, and crude oil prices fell to their lowest level
since late 2012. Inflation expectations, as reflected in
Treasury Inflation-Protected Securities (TIPS) prices,
turned sharply lower and measures of consumer price
inflation were flat or declining and below the Fed’s
target. Economic data outside the U.S. was almost
uniformly disappointing. Europe teetered on the edge
of recession and deflation remained a threat.
Geopolitical risk eased a bit as tensions in Ukraine
lessened.
The result of the muddled data was a largely
unchanged UST market with the 10-year UST note
yield ending the quarter at 2.51%, virtually unmoved
from the 2.51% yield as of June 30. Consistent with the
approaching turn in Fed policy, intermediate yields
rose while the 30-year bond yield fell. The 3-year UST
note yield was the worst performing benchmark
Quarterly Commentary
8/29/2014 9/30/2014 Change
3 month 0.02% 0.02% 0.00%
6 month 0.05% 0.03% -0.02%
1 year 0.09% 0.10% 0.01%
2 year 0.49% 0.57% 0.08%
3 year 0.93% 1.04% 0.11%
5 year 1.63% 1.76% 0.13%
10 year 2.34% 2.49% 0.15%
30 year 3.08% 3.20% 0.12%
Source: Bloomberg
Yield Curve
16
Quarterly Commentary 9/30/14
Quarterly Commentary
DoubleLine Core Fixed Income Fund
Ticker: DBLFX/DLFNX
As of September 30, 2014
The DoubleLine Core Fixed Income Fund outperformed the Barclays Capital U.S. Aggregate Bond Index’s return
of 0.17% over the third quarter ending September 30, 2014. The U.S. Treasury (UST) yield curve was relatively
unchanged over the period with the longer end of the curve mildly declining. The 10-year Treasury yield ended
the period at 2.49% lowering by 4 bps quarter-over-quarter; however, it touched a local low of 2.33% in the
month of August. Credit assets broadly widened which caused sectors such as High Yield and Bank Loans to lag
in performance versus other assets held within the Fund. High Yield, which is less than 5% of the portfolio, came
under selling pressure in the third quarter due to a multitude of factors that included significant market supply,
low cash balances and continuing rate concerns. The Bank Loan sector widened as retail funds reported six
straight months of outflows which have put more pressure on demand/supply technicals. Some pricing
pressures were also attributable to possible preemptive selling during the latter month of the trailing three
month period in anticipation of a large new issue pipeline. Residential Mortgage-Backed Securities (RMBS),
which continued to be the largest sector within the Fund at approximately 30%, was the best performing sector
as both Agency and Non-Agency MBS performed well from strong interest income and mild price appreciation.
CLOs also added strong positive returns to the portfolio despite some minor weakening in valuations as the
sector earned stable coupon returns. The record breaking new issuance has finally started to seep into the CLO
market as spreads have widened across the capital structure with mezzanine tranches widening more than
seniors. Both EMFI and CMBS additionally contributed positive returns to the Fund, but lagged behind RMBS and
CLOs. Both Emerging Markets Fixed Income and CMBS beat their indices, the JP Morgan Emerging Markets Bond
Index Global and the Barclays U.S. CMBS Index, respectively, for the quarter.
Performance Attribution
17
Quarterly Commentary 9/30/14
Investment Grade—Refers to a bond considered investment grade if its credit rating is BBB– of higher by Standard & Poor’s or Baa3 or higher by Moody’s. Ratings are based on a corporate bond model. The higher the rating the more likely the bond will pay back par/100 cents on the dollar.Below Investment Grade—Refers to a security that is rated below investment grade. These securities are seen as having higher default risk or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive. They are less likely to pay back 100 cents on the dollar.
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by calling 213-633-8200 or by visiting www.doublelinefunds.com.The performance information shown assumes the reinvestment of all dividends and distributions.The Barclays U.S. Aggregate Bond Index is an index of U.S. dollar denominated, investment-grade U.S. corporate government and mortgage-backed securities. You cannot invest in an index.*If a Fund invested in an affiliate Fund sponsored by the Adviser during the period covered by this report the Adviser agreed to not charge a management fee to the Fund in an amount equal to the investment advisory fees paid by the affiliated Fund in respect of the Fund’s investment in the affiliated fund to avoid duplicate charge of the investment advisory fees to the investors.
Month End September 30, 2014
September 1-Year 3-YearAnnualized
Since InceptionAnnualized
(6-1-10 to 9-30-14)
I-share -0.76% 6.24% 4.70% 7.19%
N-share -0.69% 5.97% 4.48% 6.94%
Barclays U.S. Aggregate Index
-0.68% 3.96% 2.43% 3.84%
Quarter EndSeptember 30, 2014
3Q 2014
1-Year 3-YearAnnualized
Since InceptionAnnualized
(6-1-10 to 9-30-14)
I-share 0.35% 6.24% 4.70% 7.19%
N-share 0.28% 5.97% 4.48% 6.94%
Barclays U.S. Aggregate Index
0.17% 3.96% 2.43% 3.84%
Weighted Average Life4 Breakdown
(Percent of Portfolio)
0 to 3 years 18.8%
3 to 5 years 22.6%
5 to 10 years 35.3%
10+ years 16.6%
Cash 6.8%
Total 100.0%
Duration Breakdown3
(Percent of Portfolio)
Less than 0 6.4%
0 to 3 years 32.4%
3 to 5 years 18.7%
5 to 10 years 25.9%
10+ years 9.8%
Cash 6.8%
Total: 100.0%
Current Quality Credit Distribution5
(Percent of Portfolio)
Cash 6.8%
Government 17.3%
Agency 17.3%
Investment Grade 25.9%
Below Investment Grade 30.6%
Unrated Securities 2.2%
Total: 100.0%
Portfolio Characteristics
# of Issues 682
Ending Market Value $2,151,610,856
Market Price2 $101.65
Duration3 4.32
Weighted Avg Life4 6.49
Sector Breakdown
(Percent of Portfolio)
Cash 6.8%
Government 17.3%
Mortgage-Backed Securities 29.2%
Emerging Markets 15.1%
Investment Grade Corporate 10.3%
Commercial MBS 7.1%
Bank Loans 5.3%
High Yield Corporate 4.5%
Collateralized Loan Obligations 4.5%
Total 100.0%
As of September 30, 2014 I-Share N-ShareBarclays U.S.
Aggregate Index
1-Yr Std Deviation1 2.63% 2.57% 2.58%
Gross Expense Ratio 0.52% 0.77%
As of September 30, 2014 I-Share N-Share
Gross SEC 30-Day Yield 4.05% 3.80%
Net SEC 30-Day Yield* 4.07% 3.82%
1. Standard Deviation - A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Calculated by the square-root of the variance.
2. Market price is the weighted average of the prices of the Fund's portfolio holdings. While a component of the fund's Net Asset Value, it should not be confused with the Fund's NAV.
3. Duration is a commonly used measure of the potential volatility of the price of a debt securities, prior to maturity. Securities with a longer duration generally have more volatile prices than securities of comparable quality with a shorter duration.
4. Weighted Average Life (WAL) - the average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding.5. Credit distribution is determined from the highest available credit rating from any Nationally Recognized Statistical Rating Organization (S&P, Moody's and
Fitch).Sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security. Portfolio holdings generally are made available fifteen days after month-end by calling 1-877-DLine11.The source for the information in this report is DoubleLine Capital, which maintains its data on a trade date basis.
Core Fixed Income Fund As of September 30, 2014
18
Quarterly Commentary 9/30/14
Disclaimer
Disclaimer
The fund’s investment objectives, risks, charges and expenses must be considered carefully before investing.
The statutory and summary prospectuses contain this and other important information about the investment
company, and it may be obtained by calling 1 (877) 354-6311/ 1 (877) DLINE11, or visiting
www.doublelinefunds.com. Read it carefully before investing.
While the Fund is no-load, management fees and other expenses still apply.
Please refer to the prospectus for further details.
Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for
longer-term debt securities. Investments in Asset-Backed and Mortgage-Backed securities include additional risks
that investors should be aware of including credit risk, prepayment risk, possible illiquidity and default, as well as
increase susceptibility to adverse economic developments. Investments in foreign securities may involve political,
economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for
investments in emerging markets. Investments in lower-rated and non-rated securities present a greater risk of
loss to principal and interest than higher-rated securities.
In order to achieve its investment objectives, the Core Fixed Income Fund may use certain types of investment de-
rivatives. Derivatives involve risks different from, and in certain cases, greater than the risks presented by more
traditional investments. Derivatives may involve certain costs and risks such as liquidity, interest rate, market,
credit, management and the risk that a position could not be closed when most advantageous. Investing in deriv-
atives could lose more than the amount invested. The Fund may also invest in securities related to real estate,
which may decline in value as a result of factors affecting the real estate industry.
Fund portfolio characteristics and holdings are subject to change without notice. The Advisor may change its
views and forecasts at anytime, without notice.
Credit ratings from Moody’s range from the highest rating of Aaa for bonds of the highest quality that offer the
lowest degree of investment risk to the lowest rating of C for the lowest rated class of bonds. Credit ratings from
Standard & Poor’s (S&P) range from the highest rating of AAA for bonds of the highest quality that offer the low-
est degree of investment risk to the lowest rating of D for bonds that are in default. Adverse economic conditions
or changing circumstances, however, are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation according to S&P’s methodology.
Sector allocations are subject to change at any time and should not be considered a recommendartion to buy or sell any
security., Portfolio holdings generally are made available fifteen days after month-end by calling 1-877-DLine11.
The source for the information in this report is DoubleLine Capital, which maintains its data on a trade date basis.
DoubleLine© is a registered trademark of DoubleLine Capital LP.
DoubleLine Funds are distributed by Quasar Distributors, LLC. ©2014 DoubleLine Funds.
19
Quarterly Commentary 9/30/14
Definitions
ABX Index -The ABX Index consists of the 20 most liquid credit default swaps (CDS) on U.S. home equity asset-backed securities (ABS) and is used to hedge asset-
backed exposure or to take a position in the subprime mortgage asset class. The ABX Index has four series (06-1, 06-2, 07-1 and 07-2) with five tranches per series.
The ABX 07-1 AAA Index references underlying collateral of that 2007 vintage and AAA credit quality type, just as the ABX 06-2 AAA Index references underlying
collateral of the 2006 vintage and AAA credit quality type.
BofA Merrill Lynch U.S. Corporate Index (COAO) -The Merrill Lynch Corporate Index tracks the performance of U.S. dollar denominated investment
grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have an investment grade rating (based on an average of
Moody’s, S&P and Fitch) and an investment grade rated country of risk (based on an average of Moody’s, S&P and Fitch foreign currency long term
sovereign debt ratings). Securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount
outstanding of $250MM.
BofA Merrill Lynch US High Yield Index (H0A0) -Tracks the performance of US dollar denominated below investment grade corporate debt publicly
issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at
least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon
schedule and a minimum amount outstanding of $100 million.
Barclays U.S. Aggregate Bond Index -The Barclays Capital U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar
denominated. The index covers the US investment grade fixed rate bond market, with index components for government and corporate securities,
mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and
reported on a regular basis.
Barclays U.S. CMBS Index -This index measures the performance of investment grade commercial mortgage-backed securities, which are classes of
securities that represent interests in pools of commercial mortgages.
Barclays U.S. Corporate Index -The Barclays Capital U.S. Corporate Index is the corporate component of the Barclays Capital U.S. Credit Index. It consists
of publically-issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality
requirements. To qualify, bonds must be SEC-registered. The corporate sub-sectors are industrial, utility and finance, which include both U.S. and non-
U.S. corporations.
Barclays U.S. Corporate HY Index -The index is representative of the universe of fixed-rate, non-investment grade debt.
Barclays U.S. Credit Index -This index is the US Credit component of the US Government/Credit Index and consists of publically issued US corporate and
specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-
registered. The US Credit Index is the same as the former US Corporate Investment Grade Index.
Barclays U.S. Government Index -This index is the US Government component of the US Government/Credit Index and includes securities issued by the
US Government, including treasuries and agencies. This includes public obligations of the US Treasury with a remaining maturity of one year or more and
publically issued debt of US Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the US Government.
Barclays U.S. High Yield Index -This index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issuer from countries
designated as emerging markets (e.g. Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-
EMG countries are included. Original issue zeros, step-up coupon structures, 144-As and pay-in-kind (PIK, as of October 1, 2009) are also included.
Barclays U.S. High Yield Loan Index -The Barclays U.S. High Yield Loan Index is an unmanaged index that provides broad and comprehensive total return
metrics of the universe of U.S.-dollar denominated syndicated term loans.
Barclays U.S. MBS Index -The Barclays Capital U.S. MBS Index measures the performance of investment grade fixed-rate mortgage-backed pass-through
securities of the Government-Sponsored Enterprises (GSEs): Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Barclays Municipal Bond Index -This index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S.
states and territories, and their political subdivisions, in the U.S. domestic market. Qualifying securities must have at least one year remaining term to
final maturity, a fixed coupon schedule and an investment grade rating (based on Moody’s, S&P and Fitch). Minimum size vary based on the initial term
to final maturity at time of issuance.
Barclays U.S. Treasury Index -The Barclays Capital U.S. Treasury Index is the U.S. Treasury component of the U.S. Government Index. Public obligations of
the U.S. Treasury with a remaining maturity of one year or more.
An investment cannot be made in an index.
20
Quarterly Commentary 9/30/14
Definitions
Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index -This index includes all publicly issued, U.S. TIPS that have at least one year
remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. The CPI ex-Shelter reference in this
commentary means this Index is an inflation linked bond index, linked to the U.S. Consumer Price Index (CPI) and excludes the Shelter subset.
Basis Point -A basis point (bps) equals to 0.01%.
Beta -A measure of volatility of a security or a portfolio in comparison to the market as a whole.
Cash Flow -Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to
pretax income.
Citi High-Yield Cash-Pay Capped Index -This index represents the cash-pay securities of the Citigroup High-Yield Market Capped Index, which
represents a modified version of the High Yield Market Index by delaying the entry of fallen angel issues and capping the par value of individual issuers
at $5 billion par amount outstanding.
Consumer Price Index (CPI) -This index measures changes in the price level of a market basket of consumer goods and services purchased by
households. The CPI in the U.S. is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban
consumers for a market basket of consumer goods and services."
Credit Suisse Leveraged Loan Index -Credit Suisse Leveraged Loan is an index designed to mirror the investable universe of the U.S.-denominated
leveraged loan market.
Duration -A measure of the sensitivity of a price of a fixed income investment to a change in interest rates, expressed as a number of years.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) -Net income with interest, taxes, depreciation, and amortization added
back to it. This measure can be used to analyze and compare profitability between companies and industries because it eliminates the effects of
financing and accounting decisions.
Free Cash Flow -Cash not required for operations or for reinvestment.
HELOC -A home equity line of credit (HELOC) is a line of credit extended to a homeowner that uses the borrower’s home as collateral.
HSBC China Manufacturing PMI -A composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as a
leading indicator for the whole economy. The indicator is derived from individual diffusion indices which measure changes in output, new orders,
employment, suppliers' delivery times and stocks of goods purchased.
HSBC China Services PMI -A composite index that covers hotels & restaurants, transport & storage, financial intermediation, renting & business
activities, post & telecommunications and other services. Each response received is weighted each month according to the size of the company to
which the questionnaire refers and the contribution to total service sector output accounted for by the sub-sector to which that company belongs.
Institute of Supply Management (ISM) Manufacturing -This index is based on surveys of more than 300 manufacturing firms by the ISM and monitors
employment, production inventories, new orders and supplier deliveries.
JP Morgan Corporate Emerging Markets Bond Broad Diversified Index (CEMBI) -This index is a market capitalization weighted index consisting of US-
denominated Emerging Market corporate bonds. It is a liquid global corporate benchmark representing Asia, Latin America, Europe and the Middle
East/Africa.
JP Morgan Emerging Markets Bond Global Diversified Index (EMBI) -This index is uniquely-weighted version of the EMBI Global. It limits the weights
of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt
outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by EMBI Global.
JP Morgan Government Bond Emerging Markets Broad Diversified Index (GBI EM) -This index is the first comprehensive, global local Emerging
Markets index, and consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain
exposure.
JP Morgan Emerging Markets Bond Index Global Diversified (EMBI GD) -A uniquely-weighted version of the EMBI Global. It limits the weights of those
index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. The
countries covered in the EMBI Global Diversified are identical to those covered by EMBI Global.
An investment cannot be made in an index.
21
Quarterly Commentary 9/30/14
Definitions
London-Interbank Offered Rate (LIBOR) -British Bankers Association Fixing for US Dollar. The fixing is conducted each day at 11 am (London time). The
rate is an average derived from the quotations provided by the banks determined by the British Bankers’ Association.
Moody’s/RCA Commercial Property Price Index -The Moody's/RCA Commercial Property Price Index (CPPI) describes various non-residential property
types for the U.S. (10 monthly series from 2000). The Moody's/RCA Commercial Property Price Index is a periodic same-property round-trip investment
price change index of the U.S. commercial investment property market. The dataset contains 20 monthly indicators.
Morgan Stanley Capital International Emerging Markets Index (MSCI EM) - The MSCI Emerging Markets Index is a float-adjusted market capitalization
index designed to measure equity market performance in global emerging markets. It consists of indices in 26 emerging economies, including but not
limited to, Argentina, Brazil, China, India, Poland, Thailand, Turkey, and Venezuela.
Mortgage Bankers Association (MBA) Refinance Index -An index that covers all mortgage applications to refinance an existing mortgage. It includes
conventional and government refinances.
Mortgage Bankers Association (MBA) Purchase Index -An index that includes all mortgage applications for purchases of single-family homes. It covers
the entire market, both conventional and government loans and all products.
Payment Option ARM -A monthly adjusting adjustable-rate mortgage (ARM) which allows the borrower to choose between several payment options (a
30 or 40-year fully amortizing payment, a 15-year fully amortizing payment, an interest– only payment, a minimum payment or any amount grater than
the minimum payment).
Prime, Alt-A, and Subprime-These are subsets of non-Agency mortgage-backed securities (MBS) depending on underlying loan criteria. For example,
the prime non-Agency MBS bucket includes prime rated securities that have underlying loans where the borrowers are most credit-worthy and highest
likelihood of paying. Alt-A non-Agency MBS includes underlying loans where borrowers still have good credit but there may be other risk concerns with
the loan, for example a higher loan-to-value (LTV) or debt-to-income ratios. Subprime non-Agency MBS includes underlying loans with the lowest credit
quality borrower type and raised risk concerns of likelihood of payment. Subprime Mezzanine (Mezz) refers to a tranche of a subprime non-Agency
MBS security, specifically the mezzanine tranche.
PrimeX -The PrimeX index is a synthetic credit default swap (CDS) index which references non-Agency, prime residential mortgage-backed securities
(RMBS). There are 20 prime RMBS deals referenced from the 2005, 2006, and 2007 vintages. The vintages separate the PrimeX into four sub indices by
cut-off dates and collateral type. The PrimeX Fixed-Rate Mortgage (FRM) 1 and FRM 2 are two of these sub indices that contain specific underlying col-
lateral and vintage types.
Real Gross Domestic Product (GDP) -An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed
in base-year prices. Often referred to as "constant-price," "inflation-corrected" GDP or "constant dollar GDP".
Purchasing Managers Index (PMI) -The PMI is an indicator for economic activity, more specifically of the economic health of the manufacturing sector.
This index is based on five major indicators including new orders, inventory levels, supplier deliveries, production and employment environment. Na-
tionally, this data is collected by the Institute of Supply Management (ISM), but for China it is produced by HSBC and is called the Purchasing Manufac-
turing Index, though it measures the same thing for that country.
S&P 500 Index - Standard & Poor’s US 500 Index, a capitalized-weighted index of 500 stocks.
S&P/Case-Shiller Index -The index measures the change in value of the U.S. residential housing market by tracking the growth in real estate values by
following the purchase price and resale value of homes.
US Dollar Index (USDX) -The US Dollar Index is a market weighted index that measures the value of the US Dollar relative to a basket of foreign curren-
cies.
S&P/LSTA Leveraged Loan Index -The capitalization-weighted syndicated loan indices are based upon market weightings, spreads and interest pay-
ments, and this index covers the U.S. market back to 1997 and currently calculates on a daily basis. Created by the Leveraged Commentary & Data
(LCD) team at S&P Capital IQ, the review provides an overview and outlook of the leveraged loan market as well as an expansive review of the S&P
Leveraged Loan Index and sub-indexes. The review consists of index general characteristics, results, risk-return profile, default/distress statistics, and
repayment analysis.
An investment cannot be made in an index.
22
Quarterly Commentary 9/30/14
Definitions
Spread -The difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the
yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of
differing maturities, credit ratings and risk.
Spread-to-Worst -The difference in returns between 2 different security classes, or 2 securities of the same class, but different representative securi-
ties.
U.S. Dollar Spot Index (DXY) - An index that indicates the general initial value of the USD by averaging the exchange rates between the USD and major
world currencies.
Weighted Average Life (WAL) - The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding.
Yield-to-Maturity (YTM) - The rate of return anticipated on a bond if held until the end of its lifetime. YTM is considered a long -term bond yield
expressed as an annual rate. The YTM calculation takes into account the bond’s current market price, par value, coupon interest rate and time to ma-
turity. It is also assumed that all coupon payments are reinvested at the same rate as the bond’s current yield.
Yield-to-Worst -The lowest potential yield that can be received short of default. It’s the lower of the yield-to-call and the yield-to-maturity.
An investment cannot be made in an index.
23
Quarterly Commentary 9/30/14
As of September 30, 2014 the DoubleLine Core Fixed Income Fund held 1.88% in Fannie Mae (FNMA), 0.49% in Freddie Mac (FHLMC), 0.16% in Ginnie Mae (GNMA) and
0.00% in TXU. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security.
Important Information Regarding This Report
Issue selection processes and tools illustrated throughout this presentation are samples and may be modified periodically. Such charts are not the only tools used by the
investment teams, are extremely sophisticated, may not always produce the intended results and are not intended for use by non-professionals.
DoubleLine has no obligation to provide revised assessments in the event of changed circumstances. While we have gathered this information from sources believed to
be reliable, DoubleLine cannot guarantee the accuracy of the information provided. Securities discussed are not recommendations and are presented as examples of
issue selection or portfolio management processes. They have been picked for comparison or illustration purposes only. No security presented within is either offered for
sale or purchase. DoubleLine reserves the right to change its investment perspective and outlook, as well as portfolio construction, without notice as market conditions
dictate or as additional information becomes available. This material may include statements that constitute “forward-looking statements” under the U.S. securities laws.
Forward-looking statements include, among other things, projections, estimates, and information about possible or future results related to a client’s account, or market
or regulatory developments.
Ratings shown for various indices reflect the average for the indices. Such ratings and indices are created independently of DoubleLine and are subject to change without notice.
Important Information Regarding Risk Factors
Investment strategies may not achieve the desired results due to implementation lag, other timing factors, portfolio management decision-making, economic or market
conditions or other unanticipated factors. The views and forecasts expressed in this material are as of the date indicated, are subject to change without notice, may not
come to pass and do not represent a recommendation or offer of any particular security, strategy, or investment. Past performance (whether of DoubleLine or any index
illustrated in this presentation) is no guarantee of future results. You cannot invest in an index.
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In preparing the client reports (and in managing the portfolios), DoubleLine and its vendors price separate account portfolio securities using various sources, including
independent pricing services and fair value processes such as benchmarking.
To receive a complimentary copy of DoubleLine’s current Form ADV (which contains important additional disclosure information), a copy of the DoubleLine’s proxy voting
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Important Information Regarding DoubleLine’s Investment Style
DoubleLine seeks to maximize investment results consistent with our interpretation of client guidelines and investment mandate. While DoubleLine seeks to maximize
returns for our clients consistent with guidelines, DoubleLine cannot guarantee that DoubleLine will outperform a client's specified benchmark. Additionally, the nature
of portfolio diversification implies that certain holdings and sectors in a client's portfolio may be rising in price while others are falling; or, that some issues and sectors
are outperforming while others are underperforming. Such out or underperformance can be the result of many factors, such as but not limited to duration/interest rate
exposure, yield curve exposure, bond sector exposure, or news or rumors specific to a single name.
DoubleLine is an active manager and will adjust the composition of client’s portfolios consistent with our investment team’s judgment concerning market conditions and
any particular security. The construction of DoubleLine portfolios may differ substantially from the construction of any of a variety of bond market indices. As such, a
DoubleLine portfolio has the potential to underperform or outperform a bond market index. Since markets can remain inefficiently priced for long periods, DoubleLine’s
performance is properly assessed over a full multi-year market cycle.
Important Information Regarding Client Responsibilities
Clients are requested to carefully review all portfolio holdings and strategies, including by comparing the custodial statement to any statements received from
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