Gundlach Sees Falling Yields Curtailing Bond Deposits
Jeffrey Gundlach, manager of the top-ranked DoubleLine Total Return Bond Fund (DBLTX), said shrinking bond-market returns may prompt investors to stop piling into fixed-income funds as soon as this year.
“If bond yields stay where they are, we’re getting to a place by the end of July where the 12-month trailing return is just over 1 percent,” Gundlach, whose Los Angeles-based DoubleLine Capital LP managed $56 billion as of March 31, said in an interview, referring to broad fixed-income benchmarks. “There will be a rethinking of bond allocations.”
Investment strategists are predicting an end to the three- decade rally in bonds as benchmark interest rates hover near zero for a fifth year and stock markets rally. Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge- fund manager, said in January that 2013 will be a “game changer” as investors reallocate money away from low-yielding deposits.
Gundlach, who correctly predicted the subprime mortgage crisis in 2007 and last year told investors to bet against Apple Inc. (AAPL) shares before they started falling, said while he expects investors to lose some enthusiasm for bonds, that doesn’t mean they’ll pour the money into equities.
“People keep talking about this idiotic ‘great rotation’ thing, but I think the question of what people are going to do with their money gets harder by the day,” Gundlach said. “Will bond flows fall? I think the answer is yes.”
Equity funds had their best first quarter this year since 2006, attracting an estimated $67 billion through March, according to the Investment Company Institute. So far, there’s no evidence that the deposits have come at the expense of bond mutual funds, which received an estimated $72 billion.
Gundlach has been a beneficiary of investor appetite for top-performing bond funds. His DoubleLine Total Return fund has grown to $40 billion since its 2010 inception. The fund advanced an annual 12 percent to beat 99 percent of peers over the past three years, according to data compiled by Bloomberg.
The fund had its three-year anniversary on April 6, the point at which many large institutions consider investments in mutual funds.
Gundlach, who is speaking to investors today at the New York Yacht Club, said last year he may limit new money into the fund when it reaches about $50 billion. He said in the interview that a slowdown in demand may make that move unnecessary.
“The good news is that market forces will line up with great serendipity with the fund’s capacity,” Gundlach said. “I don’t think we will be adding $2 billion a month, so we’ll be at $40 billion to $50 billion and it may happen without us having to do anything.”
The Barclays U.S. Aggregate Index, among the most widely used fixed-income benchmarks by fund managers seeking to measure performance, advanced 0.5 percent this year through April 9. The average intermediate-term bond fund in the U.S. rose 0.3 percent in the three months ended March 31, the worst first-quarter performance since 2009, according to Morningstar Inc. (MORN) in Chicago.
The U.S. Federal Reserve won’t stop its bond purchases to stimulate the economy, known as quantitative easing, any time soon, Gundlach said today at the New York Yacht Club, without giving a time frame. The program is helping the stock and bond markets, and is also helping ease budget deficits.
“I don’t expect QE to stop,” Gundlach said.
It is possible that investors will still be interested in top-performing bond funds as declining yields in the market make passive investing unattractive, Gundlach said. Unlike active managers, who aim to beat indexes using security selection, index-tracking products such as exchange-traded funds mimic broad market benchmarks.
Gundlach co-founded DoubleLine in December 2009 after he was fired from TCW Group Inc. over a dispute. Gundlach was joined by Philip Barach, now DoubleLine’s president, and more than 40 people from TCW including corporate-bond specialist Bonnie Baha and emerging-market debt manager Luz Padilla.
At TCW, Gundlach managed the top-performing TCW Total Return Bond Fund (TGLMX), which at its peak was less than one-third the size of the DoubleLine fund. The $9.3 billion TCW Total Return fund, now managed by a team led by Tad Rivelle, has advanced an annual 9.2 percent over the past three years, ahead of 97 percent of peers, according to data compiled by Bloomberg.
A former drummer in a rock band with a passion for art, Gundlach’s investment picks over the past year included natural gas, gemstones and stocks. He made his recommendation to invest in natural gas in April 2012 after the Standard & Poor’s GSCI Natural Gas Index had fallen 59 percent over the past three years. Since then, the index has almost doubled.
Gundlach also recommended betting on a decline in Apple shares as the “short of a lifetime.” Apple shares have declined 31 percent in the past year.
Chipotle Mexican Grill Inc. (CMG) fell as much as 2.75 percent today after Gundlach recommended shorting the stock. Chipotle looks “vulnerable” after recent gains, Gundlach said, without giving a price target.
In a short sale, an investor borrows a security and sells it, in anticipation that the price will fall and the security can be repurchased later at a lower cost.
DoubleLine is expanding into stocks as Gundlach expects bond returns to trail equity markets over the next decade or so. He said in September that equities were a superior investment to bonds as an inflation hedge and that he was seeking to diversify and broaden the firm. He also said at the time that equities wouldn’t repeat the poor performance they had from 2000 to 2010.
DoubleLine hired two stock fund managers, Brendt Stallings and Husam Nazer, from TCW in January and opened a small-cap stock fund this month.
“It’s extraordinarily unlikely that one will have another lost decade” for equities, Gundlach said during a conference call on April 1. “We all need to hope, anyway, that over a 10 to 15 year viewpoint, equities outperform bonds.”
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