Gundlach’s Total Return Loses Analyst Rating in Dispute

Jeffrey Gundlach’s Total Return Bond Fund at DoubleLine Capital LP has lost its analyst rating from Morningstar Inc. after a long-running dispute over the research firm’s coverage of the money manager.

“DoubleLine has declined to answer Morningstar’s due-diligence questions,” analyst Sarah Bush wrote in a report published yesterday. “Without more detail on portfolio construction and attribution, risk controls and the team backing Gundlach, Morningstar has determined that this fund is not ratable.” The fund was previously rated “neutral.”

Loren Fleckenstein, an analyst at DoubleLine, said the Los Angeles-based company stopped cooperating with analysts in 2012 “after two years of publishing serial falsehoods and mischaracterizations of DoubleLine and our Total Return Fund.”

Gundlach, 54, who was named Morningstar’s fixed-income manager of the year for 2006, started DoubleLine in December 2009 after he was fired as chief investment officer of TCW Group Inc. amid a dispute that led to a legal battle. His Total Return Bond Fund has surged to $33.8 billion in assets after opening in April 2010 and beat 97 percent of peers in the past three years, according to data compiled by Bloomberg.

DoubleLine complained to Morningstar about its coverage going back to Gundlach’s split with TCW, Fleckenstein said. In 2011, the firm sent an eight-page letter to Donald Phillips, Morningstar’s head of global fund research at the time, listing complaints.

Star Rating

“Ratings have historically been an important part of what a financial intermediary relies upon” in choosing a mutual fund, Geoff Bobroff, an investment-industry consultant in East Greenwich, Rhode Island, said in an interview. Losing Morningstar’s analyst rating “clearly could” cost the fund some investors.

Morningstar, which is based in Chicago, also assigns funds a better-known, quantitative “star rating” based on risk-adjusted past performance. DoubleLine Total Return still has that five-star designation, the highest possible score.

DoubleLine’s complaints have centered mainly on Morningstar’s view that Total Return, while producing outstanding results, has also taken relatively large risks. Morningstar reiterated that view in the report yesterday.

“The fund’s outsized gains, and a 12-month yield that once ran at more than double the category norm, did raise the question of risks in the portfolio and led to Morningstar’s original neutral Morningstar Analyst Rating,” Bush wrote.

Risk, Reward

Todd Rosenbluth, director of mutual fund and ETF research for S&P Capital IQ in New York, said it was “strange” that the fund was singled out for taking risks when its star rating, which incorporates risk, is so high. S&P Capital IQ competes with Morningstar in providing fund research to investors.

“If a fund is taking on risk and investors aren’t being rewarded for that risk, that should show up in the stars,” Rosenbluth said in a telephone interview today.

Russel Kinnel, Morningstar’s director of manager research, said the star rating can’t capture some elements of risk in bond funds, such as credit and liquidity, because they won’t be expressed in price swings. Most models for measuring a security’s risk focus on volatility.

“If the star rating did everything, you wouldn’t need the forward-looking analyst rating,” Kinnel said today in a telephone interview.

Frequent Criticism

Criticism of Morningstar’s ratings is frequent and widespread in the fund industry and comes with the territory of rating funds for a broad audience, said Burton Greenwald, a Philadelphia-based consultant who has advised mutual-fund companies for more than 25 years.

“Criticism comes from sources who don’t think they are being fairly evaluated,” Greenwald said.

Morningstar’s analyst ratings represent expectations for a fund’s future performance, said Nadine Youssef, a Morningstar spokeswoman, and rely partly on publicly available information and partly on interviews with fund managers.

“We stand by our analysis for DoubleLine Total Return,” Youssef said in an e-mail. “Our reasoning is well-detailed in our report.”

DoubleLine Total Return returned an annual average of 5.8 percent in the three years through yesterday, according to data compiled by Bloomberg. This year it’s up 4.4 percent, beating 89 percent of the competition.

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