All Hail Jeffrey Gundlach, the New Bond KingCharles Stein
Jeffrey Gundlach’s first full year as a mutual fund manager was by far his worst.
It was 1994, and some of the mortgage derivatives Gundlach owned were “slaughtered” when interest rates rose sharply, according to Howard Marks, who worked with the bond manager at TCW Group at the time. The TCW Total Return Bond Fund lost 6.2 percent and the young money manager got a schooling in risk control that has guided the rest of his career, said Marks.
“He learned that you don’t bet the ranch,” said Marks, the co-founder of Oaktree Capital Group LLC, which owns 20 percent of Gundlach’s firm, Los Angeles-based DoubleLine Capital, after providing startup cash. “Over time, that has helped him go from a smart guy to an excellent manager.”
Gundlach’s main mutual fund, the $45.6 billion DoubleLine Total Return Bond Fund, is at the top of its class as it marks its fifth anniversary on April 6. It’s bested all 235 competitors in the U.S. intermediate bond fund category since inception, according to Morningstar Inc. In the previous five years, the TCW Total Return Bond Fund then-managed by Gundlach ranked second.
Gundlach, 55, and his co-manager at both firms, Philip Barach, achieved the results with timely calls on the direction of interest rates and with a shifting mix of mortgage-backed securities that allowed them to beat the competition both in periods of rising and falling rates.
“This is a dynamic process where we move things around,” Gundlach said last week in a telephone interview. “You can’t do this at home.”
Gundlach founded DoubleLine with Barach in December 2009 after losing an internal struggle for leadership at Los Angeles-based TCW.
He built his reputation as a top-ranked mortgage investor at TCW, where he ran the Total Return Bond Fund for 16 years. Gundlach has beaten the benchmark Barclays U.S. Aggregate Index in 17 of the last 22 years between the two funds, according to data compiled by Bloomberg.
“He has shown a tremendous degree of consistency,” said Joshua Emanuel, chief investment officer at Elements Financial Group, a money manager based in Irvine, California, which oversees $500 million and has invested in DoubleLine funds.
DoubleLine, whose name alludes to the works of abstract artist Piet Mondrian, oversees $73 billion in a mix of mutual funds, closed-end funds, separate accounts and limited partnerships.
The firm was among the bond managers that benefited as investors pulled money from Pacific Investment Management Co. after Bill Gross suddenly left Pimco in September to work for Janus Capital Group Inc.
DoubleLine attracted $3 billion in January, the most it has won in any month. The firm has said it will close DoubleLine Total Return to new money well before it reaches $100 billion in assets.
Gundlach has distinguished himself at DoubleLine with mostly accurate predictions on interest rates. Sensing weakness in the U.S. economy in 2011, he reduced his holdings of riskier assets and boosted his position in long-dated government-backed mortgage securities that behave much like Treasuries.
When rates fell as Gundlach anticipated, the fund returned 9.5 percent in 2011, beating 98 percent of peers, Morningstar data show. Longtime rival Gross, who then ran the Pimco Total Return Fund, missed the bond rally and later called the year a “stinker” in a letter to clients.
In January 2014, Gundlach told Bloomberg News that markets were wrong to expect rising interest rates. He said rates would again fall, in part because pension funds would need to buy bonds to rebalance after stocks rallied in 2013.
As the yield on the 10-year Treasury note declined to about 2.2 percent from 3 percent over the course of the year, DoubleLine Total Return outperformed 90 percent of its peers.
Gundlach misfired with his forecast in 2013, when he predicted that interest rates would peak at 2.35 percent. Yields climbed to 3 percent as investors reacted to former Chairman Ben Bernanke’s suggestion that the central bank would scale back its bond purchases.
Still, Gundlach eked out a gain of less than 0.1 percent for the year at his main fund, beating 87 percent of competitors. The fund benefited from having less exposure to rising rates than its benchmark and from Gundlach’s holdings of mortgages not guaranteed by the federal government, which provided income to reduce losses elsewhere in the portfolio.
“We have lower risk and higher income,” Gundlach said in the interview. “The best of both worlds.”
Morningstar has challenged the notion that the fund has always maintained strong risk controls.
As the fund surged 16 percent in 2010, Gundlach had about 25 percent of its assets in “esoteric” mortgage-backed securities that “can be highly volatile and suffer from bouts of illiquidity,” analyst Sarah Bush wrote in a July 2014 note. The allocation had dropped to 4 percent to 5 percent last year, Bush wrote.
Based strictly on risk-adjusted returns, DoubleLine Total Return has earned Morningstar’s top score of five stars. The Chicago-based research firm, however, deems the fund “not ratable” by its analysts, saying DoubleLine has failed to answer its questions on portfolio construction and risk management. Loren Fleckenstein, an analyst at DoubleLine, said last year that the firm stopped cooperating with Morningstar in 2012 after “serial falsehoods and mischaracterizations.”
Gundlach also dismissed the criticism.
“You would think I had gone crazy and was buying pork bellies,” he said. “At some point, if you are going to say the fund is risky you have to produce some numbers to back it up. In fact, the numbers show the opposite.”
The fund’s below-average volatility in the past three years has led to it losing less than half as much as similar funds in periods of falling bond prices, Morningstar data show.
Lawrence Glazer, who helps oversee $2 billion as managing partner at Mayflower Advisors in Boston, said the billionaire Gundlach’s brash public image, coupled with his bold pronouncements on everything from global interest rates and gold to hot stocks, create the false impression that the fund carries high risk.
“His personality is not a reflection of the fund,” said Glazer, whose clients invest with DoubleLine. “He has managed volatility better than conservative peers.”
Gundlach is still taking on prevailing wisdom. If the Fed begins raising interest rates in the middle of 2015, as many economists expect, it will have to reverse course, he told investors on a March 10 conference call.
“The Fed is intent on being a blockhead,” Gundlach said, referring to the game he played as a child where participants build a tower from blocks without it collapsing on their turn.
Economists surveyed by Bloomberg expect the central bank to boost rates steadily over the next year.
Even when Gundlach errs, his fund tends to hold up, said Oaktree’s Marks, whose firm is the world’s biggest distressed debt investor.
“When you combine a high degree of insight with some learning experiences,” Marks said, “I think you get a good result.”
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