DoubleLine Chief Executive Officer Jeffrey Gundlach called it.
He was one of the few prominent money managers who correctly predicted that Donald Trump would be elected president of the U.S. He also pretty much nailed this year's bottom for Treasury yields. He said Los Angeles-based DoubleLine went "maximum negative" on the debt on July 6, when 10-year yields dropped to 1.32 percent. Since then, they have risen to 2.1 percent.
"The yield on the 10-year yield may reverse and go lower again, but I am not interested," Gundlach said in July. "You don't make any money. The risk-reward is horrific."
This seems especially prescient now. Since Tuesday, the day Trump was, indeed, chosen to lead the world's biggest economy, yields on 10-year Treasuries plunged at first then surged at the fastest pace in history on a percentage basis. “The markets did what I said on the news," Gundlach wrote in an email. "Bonds tanked and stocks crashed temporarily, which proved to be a buying opportunity,” according to a Bloomberg article.
One would expect DoubleLine's main open-ended bond fund, its $60.9 billion Total Return strategy, to be crushing its competitors given Gundlach's contrarian and accurate view. But since July, while its return is better than its benchmark index and many other comparable bond funds, it still posted a loss.
In the last month, it's ranked in the 15th percentile of comparable funds, according to Bloomberg data. For the year, the fund is ranked in the 70th percentile for performance year to date, which isn't bad but isn't the screaming victory investors might expect for a portfolio manager who called the market so accurately in recent months. Still, over the past five years the fund ranks in the 92nd percentile.
So why the discrepancy between the DoubleLine bond fund's recent performance and its leader's prescient calls? Well, it would have been too risky for DoubleLine to bet an entire mutual fund on one contrarian premise while also promising investors the relative safety of bonds. "Portfolios must be constructed with an aim to outperform under a range of future scenarios," according to DoubleLine's website. The firm doesn't want to tie up a mutual fund's entire fortune with one-directional macroeconomic bets.
Even investors with a higher risk appetite have shown distaste at putting all their eggs in one basket. In December 2013, when Gundlach told his hedge fund investors that he was betting benchmark U.S. bond yields would drop, one client said, "Forget it, I am pulling my money out," according to a Reuters article in 2014. About 30 percent of investors withdrew their money in response to Gundlach's conviction about rates, which proved to be right.
Of course, even Gundlach has missed some calls, including his view in January that it was still too soon to invest in U.S. junk bonds, a warning that he followed up on in April. Since then, U.S. high-yield bonds have returned 7.1 percent. Everyone is wrong sometimes, which is why it makes sense to make investments that can avoid severe losses in a variety of situations while perhaps missing some sudden big changes in sentiment.
This just shows how difficult it will be to win big over the next few months, even if a money manager gets a few big bets right. Opportunities will abound, but so will the risk of failures (see the Mexican peso, 30-year bonds and emerging-market debt.) Mutual-fund investors have made a clear statement since the crisis -- they don't want to lose a ton of money again. Investment managers are tasked with balancing out risks and hedging against being wrong, even at a significant cost.
So when Gundlach said "I told you so" after the election, he was absolutely right. He nailed it with respect to Trump's victory and its effect on bonds. But he's primarily an investor, not a riverboat gambler. It's good to be right. It's better to do the right thing.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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