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Investment Cubism

2017
Presented by:

Jeffrey Gundlach
CEO, DoubleLine

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Lagging Behind
Percentage of U.S. Equity Funds outperformed by
benchmark
5-year 10-year 15-year

Large-Cap 88% 85% 92%

Mid-Cap 90% 96% 95%

Small-Cap 97% 96% 93%

Source: S&P Dow Jones Indices as of December 31, 2016, Wall Street Journal
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Self Portrait with Tuxedo
1927

Max Beckmann

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Active vs. Passive Equity Flows Cumulative Since
2007 2007 through 2017
$2,000

Active Cum Flows: -$1.0 Tn


US Equity Funds Cumulative Flow ($bn)

$1,500
Passive Cum Flows: $1.7 Tn
$1,000

$500

$0

-$500

-$1,000
Passive US Equity Funds
Active US Equity Funds
-$1,500

Fund universe based on US stock market, long-only mutual funds and ETFs; 2017 annualized on partial years flows. * Through April 30, 2017
Source: Bloomberg, Morningstar, DoubleLine 4
U.S. Equity Funds Cumulative Net Flows
1993 through 2017

$2,500
US Equity Funds Cumulative Net Flows ($bn)

Passive US Equity Funds


$2,000
Active US Equity Funds
$1,500

$1,000

$500

$0

-$500

Fund universe based on US stock market, long-only mutual funds and ETFs; 1993 and 2017 annualized on partial years flows. * Through April 20, 2017.
Source: Bloomberg, Morningstar, DoubleLine 5
The S&P 500 is maintained by a committee of market professionals.

There are no rigid or absolute rules for the S&P 500.

Having the index committee means the S&P 500 is actively managed.

When the unexpected happens the index committee can respond


quickly.

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Bill Miller noted that the S&P 500s track
record of being very hard to beat
suggested that the index committee were
actually good active managers

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I know its been 15 years
since we've been in the
playoff. Well get ready,
were going.

-Rex Ryan
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Insanity in individuals is
sometimes rare; but in
groups it
is the rule
Friedrich Nietzsche
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In Heaven, all the
interesting people are
missing
Friedrich Nietzsche

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Woman was Gods second
mistake
Friedrich Nietzsche

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There are no facts only
interpretations
Friedrich Nietzsche

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Performance: Active vs. Passive Managers Has
Been Cyclical

Source: Morningstar Direct, Baron Capital


The analysis is based on monthly rolling 3-year returns for the period 12/31/1981 to 6/30/2016.
US OE Large includes all share classes in Morningstars US OE Large Growth, US OE Large Value, and US OE Large Blend categories. The passive fund performance is calculated as the average 3-year performance of all index fund share classes in each category.
The performance of active funds is calculated as the average 3-year performance of all non-index fund share classes in each category. Results for each category are then averaged and the differences between active funds averages and passive funds averages 13
are calculated.
Reports of my death
have been
greatly
exaggerated.
Mark Twain

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U.S. Represents over 50% of Global Market Cap

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... but only 24% of GLobal GDP

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GDP Weighted Global Equity Index vs. ACWI (1995-2017)
Cumulative Returns of GDP Weighted Equity Basket vs. MSCI ACWI
200

150

100

50
GDP Weighted Equity Basket
0
MSCI ACWI
-50
5.00 GDP Weighted Outperformance
-
(5.00)
(10.00)
(15.00)
(20.00)
(25.00)

GDP weighted index uses top 10 countries by share of GDP. Rebalanced every 5 years.
MSCI ACWI = MSCI ACWI index is a free-float weighted equity index. It includes both emerging and developed world markets. You cannot invest directly in an index. 17
S&P Capitalization / U.S. GDP

December 31, 2000 through April 21, 2017


Source: Bianco
GDP = Gross Domestic product is the amount of goods and services produced within a given country. S&P = S&P 500 is Standard & Poors Index is a capitalization weighted index of 500 companies. SAAR = Seasonally adjusted annual 18
rate. You cannot invest directly in an index.
CAPE Ratio - S&P 500 vs. MSCI Emerging
December 31, 2004 through May 7, 2017

CAPE ratios adjusted for inflation by using headline CPI deflated earnings. April 21, 2017 CAPE uses March 2017 CPI data
Source: Bloomberg, DoubleLine
S&P = S&P 500 is Standard & Poors Index is a capitalization weighted index of 500 companies. MSCI = MXEF Index is the MSCI Emerging Markets index is a free float equity index that captures large and mid-cap EM markets. You cannot invest directly in an index.
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Price -to-Book Ratio - S&P 500 vs MSCI Emerging
Markets December 31, 2004 through May 6, 2017

Source: Bloomberg, DoubleLine


S&P = S&P 500 is Standard & Poors Index is a capitalization weighted index of 500 companies. MSCI = MXEF Index is the MSCI Emerging Markets index is a free float equity index that captures large and mid-cap EM markets. You cannot invest directly in an index. 20
Performance: S&P vs. MSCI

Source: Bloomberg
S&P 500 is Standard & Poors 500 Index is a capitalization-weighted index of 500 U.S. stocks. MSCI EM Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM)
countries. You cannot invest directly in an index. 21
S&P 500 vs. MSCI EM Relative Performance (3 yrs)
May 6, 2014 through May 7, 2017

Source: Bloomberg, DoubleLine


S&P = S&P 500 is Standard & Poors Index is a capitalization weighted index of 500 companies. MSCI = MXEF Index is the MSCI Emerging Markets index is a free float equity index that captures large and mid-cap EM markets. You cannot invest directly in an index. 22
SPX/ MSCI EM and DXY (30 yr)
May 11, 1987 through May 7, 2017

Source: Bloomberg
S&P 500 is Standard & Poors 500 Index is a capitalization-weighted index of 500 U.S. stocks. MSCI EM Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. You cannot invest directly in
an index.
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USD and Fed Hiking Cycles
150

140
1983
130
2015-Now
120
1999
Cumulative Performance

110

100 1994
90

80
2004
70
1986
60

55

90
-105
-100
-95
-90
-85
-80
-75
-70
-65
-60
-55
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
60
65
70
75
80
85
95
100
105
Weeks Around First Fed Hike
Source: Bloomberg, DoubleLine
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Trump And The U.S. Dollar (December 31, 2007 to May 7, 2017)

"I love the concept of a strong dollar, in many respects obviously I like a strong dollar. But
when you look at the havoc that a strong dollar causes," he said on CNBC. "While there
are certain benefits, it sounds better to have a strong dollar than in actuality it is.
Donald Trump

Source: Bloomberg, DoubleLine


DXY = U.S. dollar indicates the international value of the US dollar measuring the exchange rate between the US dollar and other major world currencies. You cannot invest directly in an index. 25
EM Equities and Active Managers Relative
Performance Tend to Correlate
40% 7%
EM and Active outperforms
5%
20% Correlation: 0.86
3%
0% 1%
-1%
-20% -3%
EM and Active underperforms
-5%
-40%
EM vs. SPX 3y Return Active vs. SPX 3y Return (RHS) -7%
-60% -9%

Source: DoubleLine; Bloomberg


Note: Active manager performance is based on median monthly performance of large cap equity mutual funds that launched prior to January 1995. Active manager proxy is composed of 25 managers from large cap equity peer group created by Bloomberg. The
managers are US centric and constituents represent >$200bn in AUM.
S&P = S&P 500 is Standard & Poors Index is a capitalization weighted index of 500 companies. MSCI = MXEF Index is the MSCI Emerging Markets index is a free float equity index that captures large and mid-cap EM markets. RHS = right hand side. You cannot invest 26
directly in an index.
The Voice of Reason:
Index funds make as
much sense as
anything else, right?

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The Voice of Conscience:
I am under pressure to
cut manager fees

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The Voice of Practicality:
Index funds have been
outperforming lately

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The Voice of Gundlach:
Toss them out of the
window

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Investment Recommendation:
Long EEM (Emerging Markets ETF)
Short SPY (S&P 500 ETF)
Leverage 1x

This is the opinion of the speaker. Performance is no guarantee of future results. This is not a solicitation to buy or sell. 31