Investment Cubism 2017

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1 Investment Cubism 2017 Presented by: Jeffrey Gundlach CEO, DoubleLine 1

2 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 2

3 Self Portrait with Tuxedo 1927 Max Beckmann 3

4 Active vs. Passive Equity Flows Cumulative Since US Equity Funds Cumulative Flow ($bn) through 2017 $2,000 $1,500 $1,000 $500 $0 -$500 -$1,000 -$1,500 Active Cum Flows: -$1.0 Tn Passive Cum Flows: $1.7 Tn Passive US Equity Funds Active US Equity Funds 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

5 U.S. Equity Funds Cumulative Net Flows 1993 through 2017 US Equity Funds Cumulative Net Flows ($bn) $2,500 $2,000 $1,500 $1,000 $500 $0 -$500 Passive US Equity Funds Active US Equity Funds Fund universe based on US stock market, long-only mutual funds and ETFs; 1993 and 2017 annualized on partial years flows. * Through April 20, Source: Bloomberg, Morningstar, DoubleLine 5

6 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. 6

7 Bill Miller noted that the S&P 500 s track record of being very hard to beat suggested that the index committee were actually good active managers 7

8 I know it s been 15 years since we've been in the playoff. Well get ready, we re going. -Rex Ryan 8

9 Insanity in individuals is sometimes rare; but in groups it is the rule Friedrich Nietzsche 9

10 In Heaven, all the interesting people are missing Friedrich Nietzsche 10

11 Woman was God s second mistake Friedrich Nietzsche 11

12 There are no facts only interpretations Friedrich Nietzsche 12

13 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 Morningstar s 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 are calculated. 13

14 Reports of my death have been greatly exaggerated. Mark Twain 14

15 U.S. Represents over 50% of Global Market Cap 15

16 ... but only 24% of GLobal GDP 16

17 GDP Weighted Global Equity Index vs. ACWI ( ) Cumulative Returns of GDP Weighted Equity Basket vs. MSCI ACWI GDP Weighted Outperformance - (5.00) (10.00) (15.00) (20.00) (25.00) GDP Weighted Equity Basket MSCI ACWI 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

18 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 & Poor s Index is a capitalization weighted index of 500 companies. SAAR = Seasonally adjusted annual rate. You cannot invest directly in an index. 18

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.

19 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 & Poor s 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. 19

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 & Poor s Index is a capitalization

20 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 & Poor s 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

21 Performance: S&P vs. MSCI Source: Bloomberg S&P 500 is Standard & Poor s 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

22 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 & Poor s 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 & Poor s 500 Index is a capitalization-weighted index of 500 U.S. stocks.

23 SPX/ MSCI EM and DXY (30 yr) May 11, 1987 through May 7, 2017 Source: Bloomberg S&P 500 is Standard & Poor s 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. 23

24 USD and Fed Hiking Cycles Cumulative Performance Source: Bloomberg, DoubleLine Weeks Around First Fed Hike 2015-Now

25 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

26 EM Equities and Active Managers Relative Performance Tend to Correlate 40% 20% 0% -20% -40% -60% EM and Active outperforms Correlation: 0.86 EM and Active underperforms EM vs. SPX 3y Return Active vs. SPX 3y Return (RHS) 7% 5% 3% 1% -1% -3% -5% -7% -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 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 & Poor s 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 directly in an index. 26

27 The Voice of Reason: Index funds make as much sense as anything else, right? 27

28 The Voice of Conscience: I am under pressure to cut manager fees 28

29 The Voice of Practicality: Index funds have been outperforming lately 29

30 The Voice of Gundlach: Toss them out of the window 30

31 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

Tick, Tick, Tick. Jeffrey Gundlach. January 25, Presented By: Chief Executive Officer DoubleLine Capital

Tick, Tick, Tick. Jeffrey Gundlach. January 25, Presented By: Chief Executive Officer DoubleLine Capital Tick, Tick, Tick Presented By: Jeffrey Gundlach Chief Executive Officer DoubleLine Capital January 25, 2016 TAB I The Fed 1.12.16 Just Markets Webcast 2 Worst Years of Major Asset Classes Source: Bianco