ore fixed income fund dlfx/dlfnx - doubleline …remained choppy with the s&p 500 index down...

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.


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

50

100

150

200

250

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


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.


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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


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%


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 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


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.


7


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.


0

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140

Bill

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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


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%.


* 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


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.


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


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


11


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


9/30/20144.99

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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


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.


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


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


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


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


15


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


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



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


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


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


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


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


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


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


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.


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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.


22


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.


23


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.

Important Information Regarding DoubleLine

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

policies and procedures, or to obtain additional information on DoubleLine’s proxy voting decisions, please contact DoubleLine’s Client Services.

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

DoubleLine. Clients should promptly inform DoubleLine of any potential or perceived policy or guideline inconsistencies. In particular, DoubleLine understands that

guideline enabling language is subject to interpretation and DoubleLine strongly encourages clients to express any contrasting interpretation as soon as practical. Clients

are also requested to notify DoubleLine of any updates to Client’s organization, such as (but not limited to) adding affiliates (including broker dealer affiliates), issuing

additional securities, name changes, mergers or other alterations to Client’s legal structure.

DoubleLine® is a registered trademark of DoubleLine Capital LP.

© 2014 DoubleLine Capital LP

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ore fixed income fund dlfx/dlfnx - doubleline …remained choppy with the s&p 500 index down...

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