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January 03, 2007
TCW's Gundlach sticks to his knitting, sews up another award
Jeffrey Gundlach, co-manager of the TCW Total Return Bond Fund (TGLMX) with Philip Barach, just won Morningstar's bond fund manager of the year award. He was also named one of the best by BusinessWeek for the fourth consecutive year back in March.
There's a broader lesson for investors in Gundlach's success, of course. Unlike many managers of so-called "total return" bond funds, like Pimco's Bill Gross say, Gundlach doesn't shift assets among the various market sectors. Instead, he sticks to what he knows best, mortgage-backed securities. The plethora of different mortgage-backed products and derivatives, all valued with some mind-numbingly complex mathematics, create a frequently less-than-efficient market for Gundlach to arbitrage.
For example, as mortgage borrowing rates ended their multi-decade decline and rose slightly over the past couple of years, many investors expected mortgage refinancings for homes bought after 2000 would drop. Without lower rates, why would home buyers refinance? But Gundlach realized that the high volume of sales was keeping mortgage turn-over high. As a result the fund has gained an average of 4.6% a year over the past three years, better than 93% of similar funds according to Morningstar. And over 10 years, the funds average 6.9% gain beats 98% of its peers.
The lesson for investors is pretty straightforward. If you want to go beyond indexing, stick with what you know. Aside from a few rare investors, like Peter Lynch, Will Danoff or perhaps Bill Gross, most investors will only beat the market by concentrating on the limited areas where they may know best.
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