A reader asked me what I think of the DoubleLine Income Solutions (DSL) closed-end fund. Well, thanks for the question. It’s a great time to revisit this one. The fund strives to deliver high total returns by investing in debt and income-producing securities. It uses some leverage (32%) to help achieve that outcome. The reported total expense ratio is 2.8%, but this tends to look high when there’s leverage being employed. It is managed by Luz Padilla, Bonnie Baha and Jeffrey Gundlach. The CEF currently trades at a slight discount to NAV:
Unfortunately, DSL trends to trade at a discount to NAV, which limits the potential for the gap to NAV to close. But it is not impossible that this gap closes and you make a few hundred basis points there.
The distribution rate is currently impressive:
Which usually begs the question of whether that’s sustainable. DSL pays distributions on a monthly basis which is a common practice among income-oriented funds.
At a first glance, this sort of distribution is, of course, highly attractive. But what kind of portfolio is Gundlach running under the hood. Let’s see what he’s actually doing.
About 33% of the fund is kept in cash or cash equivalents, which is quite unusual and likely reflects a bearish outlook. But that’s not the only unusual positioning:
The fund is fading government securities almost completely. Instead, it is taking on heaps of credit risk by overloading on corporate bonds and bank loans. Another category that’s overrepresented is asset-backed securities.
Only slightly over 30% of the portfolio is invested in the U.S. That means there is a lot of corporate credit risk from across the globe in the portfolio. If you are a regular reader of my articles, you know I like to look outside of the U.S. at this time. So, I look quite favorably upon this positioning.
Duration is perhaps another very important positioning characteristic. The fund concentrates in the 0-10 year, and it looks like it is especially overweight the 5-7 year category.
Finally, I like to look at the portfolio to see whether I like it. Bond portfolios tend to be very well-diversified across securities. However, they are sometimes concentrated towards one issuer or sector. That isn’t necessarily a bad thing. You want talented active managers to concentrate in their great ideas after all:
In this case, there is quite some exposure to financial institutions. These tend to issue higher-yielding securities, like the Chimera Investment Corporation (CIM) (mortgage credits), Citigroup (C) and JPMorgan (JPM) trusts.
DSL data by YCharts
DoubleLine Income Solutions is a volatile fund. You have to be able to ride out the swings, but if you can, it really looks like an interesting solution. I like the DoubleLine team. Gundlach’s ideas are often edgy, but are based on solid research and reasoning. I’m not thrilled about the duration (which conflicts with my views about duration positioning), But the discount to NAV, differentiated portfolio and high yield are attractive enough to overlook that.
Check out the Special Situation Investing report if you are interested in uncorrelated returns. We look at special situations like spin-offs, share repurchases, rights offerings, M&A events, etc. But we also have a keen interest in the commodity space. Especially in the current late stages of the economic cycle.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.