Clients of mine, as well as readers of my material, will know that I completely avoid investing in stock-based actively managed mutual funds.  Weak relative performance, high fees and transparency are the main issues with these types of funds (for more, see my previous post “Reasons to be wary of stock-based actively managed mutual funds”).  For stock exposure, I invest solely in a combination of individual stocks and ETFs–passively managed index funds.

However, I do invest client money in a couple of actively managed fixed income mutual funds.  As explained in the linked post from above, there are two main reasons why:  (1) fixed income index fund offerings are not nearly as robust as the stock index fund offerings;  (2) because credit is generally extended to the needy, a danger with fixed income index fund offerings is that your investment could possibly have a preponderance of entities that are desperate for funding, thereby increasing credit risk.

In fact, my biggest single holding across client accounts is currently in DoubleLine’s Total Return Fund.  In this actively managed bond fund, portfolio manager Jeffrey Gundlach balances investments in interest-sensitive securities with investment in credit-sensitive securities.  The rationale goes:  if the economy improves, interest rates will rise resulting in losses in the interest-sensitive holdings (interest rates and bond prices are inversely proportional) but gains in the credit-sensitive securities.  So Gundlach is always hedged to a certain extent.  At the same time, he makes profits by tactically managing a portion of the portfolio for the short term based on interest rate/price movement and by holding securities with above-market yields so that he gets paid to wait.

The fund tends to focus on mortgage backed debt, which has been a target of the Federal Reserve stimulus programs.  For more on this, please link to the following Reuters article:

PIMCO, DoubleLine, TCW big winners from Fed’s QE3 assault