Institutions are bit players in the DoubleLine story

Only 15% of assets are institutional; most consultants skittish

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Jeffrey Gundlach's firm garnered more than $56 billion in assets under management since its launch in December 2009.

Although DoubleLine Capital LP is one of the most successful startups in money management, institutional assets have been hard to attract.

Many investment consultants continue to tell clients to stay away, citing issues related to the nasty legal spat between DoubleLine founder Jeffrey Gundlach and TCW Group, his old firm, as well as Mr. Gundlach's investment approach.

“We have not allocated to DoubleLine in large part because of the drama surrounding Mr. Gundlach. The suit and countersuit were messy; the personality issues that came out did not put him in a positive light,” said Brian Rowe, director of manager research at investment consultant Wurts & Associates, Seattle.

There is no disputing DoubleLine's growth. The Los Angeles firm had no clients when it opened in December 2009, staffed by Mr. Gundlach and more than 40 former TCW team members. DoubleLine reported $56.2 billion in assets under management as of March 31, 2013, according to data provider eVestment LLC, Marietta, Ga.

Mr. Gundlach was accused by TCW of breaching his fiduciary duty and stealing trade secrets to start his firm. Mr. Gundlach countersued for $500 million in back pay in a case ultimately settled out of court in December 2011 — but not before a messy legal battle.

In the trial, TCW lawyers focused not only on the charges against Mr. Gundlach, but also on attempting to portray him as greedy and conceited. Mr. Gundlach insisted he was just trying to obtain the compensation owed to him, but his famously large ego was also on display.

While at TCW, around two-thirds of the assets he managed were institutional. At DoubleLine, 14.8% of assets are institutional, according to eVestment. That's up from 9% a year earlier.

Mr. Gundlach, DoubleLine's CEO and chief investment officer, refused to be interviewed for the story.

In a statement, DoubleLine analyst Loren Fleckenstein said DoubleLine executives are content with “our business-channel mix and asset size.”

“Most of DoubleLine's AUM is invested in commingled vehicles, including mutual funds, closed-end funds and hedge funds,” he added. “This is administratively more efficient than managing a proliferation of separate accounts, each with customized investment guidelines and structures.”

Since its inception in April 2010 through June 14, Mr. Gundlach's biggest fund — the DoubleLine Total Return Fund, with more than $30 billion in assets — returned an annualized 11.1%. The Barclays Capital U.S. Aggregate index returned 4.9% during the same period.

Mr. Gundlach's old mutual fund, the TCW Total Return Bond Fund, returned an annualized 8.6% during the same period, while MetWest Asset Management's Total Return Bond Fund returned 7.7%. (TCW bought MetWest in December 2009 to replace Mr. Gundlach.)

Not just performance

But for many consultants, it's not just about performance, and they continue to keep their distance.

Mr. Rowe of Wurts said he remained concerned about information disclosed during the trial. “This is an example of what not to do; you don't steal client lists, you don't push other employees to come along with you. It doesn't instill a lot of trust from an institutional standpoint,” Mr. Rowe said.

Another consultant from a major institutional consulting firm, who asked not to be identified because his firm prohibits consultants from publicly discussing money managers, said his firm will not recommend Mr. Gundlach. “Jeffrey Gundlach is too controversial,” he said.

Michael Rosen, principal and CIO of investment consultant Angeles Investment Advisors LLC, Los Angeles, said any issues from the trial have been resolved in his mind. “I think Mr. Gundlach is a genius; he has demonstrated that he is one of the great bond investors of our generation,” he said.

But Mr. Rosen won't recommend Mr. Gundlach to clients because he believes DoubleLine's Total Return Fund portfolio is risky. “It's a mistake to think that this is a typical bond portfolio; there is a lot more risk than people appreciate,” he said.

The fund has around 25% of its securities in non-agency-backed mortgages. Its largest portfolio concentration, 29.2%, is in agency pass-throughs.

Sarah Bush, senior mutual fund analyst at Morningstar Inc. in Chicago, said in an April 17 report that investors in the Doubleline Total Return bond fund “swim at their own risk.”

“Of primary concern is the at-times heavy use of mortgage-backed derivatives, in particular inverse floaters and inverse interest-only securities,” Ms. Bush said. “These add a dose of economic leverage and have historically been volatile and at times much less liquid than plain-vanilla pass-throughs.”

Ms. Bush acknowledged the mutual fund has “mellowed a bit” with age. She said holdings of inverse floaters, inverse interest-only securities and other mortgage-backed derivatives that peaked at a quarter of the portfolio in the fall of 2010 stood at less than 10% in March. Exposure to non-agency-backed mortgages had been 50% before falling to 25%.

According to Mr. Gundlach's quarterly webcast on the Total Return Fund, held June 4, inverse floater securities only accounted for 0.8% of the portfolio as of March 31.

'Pre-eminent mortgage guy'

Mr. Gundlach also has his supporters. Bill Lowery, CEO of Lowery Asset Consulting, LLC, Chicago, said he has been recommending Mr. Gundlach to clients for more than 20 years — first at TCW and now at DoubleLine — because of his strong performance. “He is the pre-eminent mortgage guy,” said Mr. Lowery.

Mr. Lowery said the TCW turmoil is a thing of the past and most of Mr. Gundlach's team followed him to his new firm, a sign of the commitment they have to him and his new firm. Employees also have an ownership interest in DoubleLine. “It's reasonable to recommend his firm given those attributes,” he said.

Mr. Lowery said he has recommended DoubleLine to pension funds, endowments and foundations; he wouldn't name them.

Keith Berlin, senior vice president-director of global fixed income and credit at Fund Evaluation Group LLC in Cincinnati, also highly recommends Mr. Gundlach's firm. “It goes beyond Jeffrey; we have a high degree of confidence in the investment ability at DoubleLine,” he said.

Mr. Berlin said Mr. Gundlach's team has a high level of expertise, especially Philip Barach, DoubleLine's president.

Mr. Berlin said the fact that Mr. Gundlach's team followed him from TCW says a lot. “The whole firm left their jobs to go to a firm with no assets,” he said. “If that doesn't give you a confidence in leadership, then I don't know what would,” he said.

Mr. Berlin said several foundations and endowments have hired DoubleLine based on his recommendation. He said he could not disclose clients.

“Jeffrey is known as a great mortgage investor, now he has to prove that he can be a great investor in all asset classes,” Mr. Berlin said.

This article originally appeared in the June 24, 2013 print issue as, "Institutions are bit players in the DoubleLine story".