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October 04, 2010 01:00 AM

Gundlach bouncing back

Challenges remain, but firm's prospects are seen as strong

Randy Diamond
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    Alex Gallardo/Los Angeles Times
    Building: Jeffrey Gundlach knows DoubleLine needs consultants' green light in order to gain institutional clients.

    Jeffrey Gundlach hasn't lost his investment magic — or his famous ego — running DoubleLine Capital LP, the Los Angeles money manager he formed after his highly publicized firing from now rival manager TCW Group last December.

    In an interview in a DoubleLine conference room, Mr. Gundlach touted his market-beating performance over two decades and listed the traits that got them there: “I am unbelievably patient, I have a memory like an elephant, and a very high ability to focus.”

    So far, the combination is serving him well.

    His biggest mutual fund, the $2 billion-plus DoubleLine Total Return Bond Fund, returned 13.99% from its April 6 inception through Sept. 20, making it the highest-performing intermediate-term bond fund tracked by Morningstar Inc., Chicago.

    “Mr. Gundlach and his team have shown themselves to be skilled in diversifying a fund with various securities that stand up to the difficult market environment,” said Miriam Sjoblom, Morningstar's associate director of fund analysis.

    But the $5 billion DoubleLine has under management in a dozen fixed-income strategies is only a fraction of the $70 billion Mr. Gundlach oversaw at TCW before his forced ouster on Dec. 4.

    His termination in a dispute over control of the company occurred on the same day that TCW officials announced they had acquired a competing fixed-income manager — Metropolitan West Asset Management — to take over from Mr. Gundlach.

    Mr. Gundlach said he expects to be managing $6 billion to $8 billion by the end of the year. He also said that as of July, DoubleLine was in the black — seven months after opening its doors.

    Still, Mr. Gundlach said it probably will take some time to gain institutional investors, which made up $57 billion of his $70 billion in assets at TCW.

    Vetting by consultants

    To gain institutional investors, he acknowledged, DoubleLine needs to be vetted by consultants.

    One consultant hurdle DoubleLine has overcome is that the firm is profitable. Another still to cross: Some consultants will recommend a firm to institutional investors after one year, while others want to see a three-year track record.

    Still another big obstacle is the pending litigation between Mr. Gundlach and TCW. After 45 of the 60 members of Mr. Gundlach's TCW team followed him to DoubleLine, TCW filed suit, claiming that Mr. Gundlach conspired with co-workers as part of a plan to form a competing firm. Mr. Gundlach countersued TCW and its parent, Societe Generale, charging he was terminated as part of a plot to deprive him of hundreds of millions of dollars in compensation that he was due.

    He expects the suits to be resolved in the first quarter of 2011.

    Jeffrey MacLean, CEO of Wurts & Associates, a Seattle investment consultant, said the lawsuits are Mr. Gundlach's biggest hindrance to getting institutional assets.

    “A consultant doesn't want to recommend placing money with a firm and then have something disrupt that portfolio,” Mr. MacLean said. “It could be a messy situation. There needs to be closure in the court case.”

    Overall, Mr. MacLean is bullish on Mr. Gundlach's new firm. “He is a talented bond manager,” he said.

    But Mr. MacLean said Mr. Gundlach also faces challenges starting a fixed-income shop in an environment where megamanagers such as BlackRock Inc. and Pacific Investment Management Co. dominate areas of increasing interest to clients including credit, currency, international bonds and private placements.

    “These kinds of capabilities are a harder thing to manufacture over a short period of time,” he said.

    Mr. Gundlach said his team is experienced in various segments of fixed income.

    The fact that many TCW co-workers followed Mr. Gundlach to DoubleLine is evidence that he inspires loyalty. But Mr. Gundlach acknowledged that dealing with him is an acquired taste.

    “I can be charming, I can be uncharming,” he said, adding that he's very demanding of his employees.

    In informal conversations with Pensions & Investments, a few of his employees said Mr. Gundlach doesn't mince words. If someone has erred, he'll let him or her know, quickly and directly. One said Mr. Gundlach has gotten in his face more than once when he was displeased with his performance. But the employee said he would rather work for a strong leader like Mr. Gundlach — and have the potential to make lots of money — than a mediocre manager who is not as successful in creating wealth for his employees.

    Mr. Gundlach said there are advantages to managing a smaller portfolio, such as being more selective. “It's fun to manage $5 billion. If you manage $70 billion, you're going to have to say 'yes' to the marginal securities,” he said.

    Avoided losses

    Mr. Gundlach made his mark in 2007 and 2008 by avoiding the disastrous results that hit other fixed-income managers, by moving out of non-agency mortgage strategies and into government-guaranteed funds, agency mortgage-backed securities and divestitures. But in 2009, Mr. Gundlach went back to the same securities he had abandoned in the prior two years, taking advantage of low prices.

    While Mr. Gundlach earned his stripes as a fixed-income manager, documents filed with the Securities and Exchange Commission in July show he is diversifying. He is starting a new fund, the DoubleLine Multi-Asset Growth Fund, which will invest in bonds and stocks as well as real estate securities, commodities and currencies. DoubleLine officials say they can't talk about the fund because of the mandatory quiet period surrounding the SEC review.

    But most people associate Mr. Gundlach with mortgage-backed securities. Morningstar's Ms. Sjoblom said he has a team with deep MBS experience.

    “All signs point to him continuing to be successful with mortgages,” she said. But she said that investors should be aware that Mr. Gundlach's Total Return Bond Fund invests up to a third of assets in higher risk securities.

    “Investing in non-agency mortgage-backed securities or distressed mortgage-backed securities comes with a lot of credit risk, and there could be bumps along the road,” Ms. Sjoblom said.

    Related Articles
    Why I followed Jeffrey Gundlach to DoubleLine
    TCW's claims against DoubleLine Funds Trust dismissed
    TCW on the comeback trail
    DoubleLine nets nearly $6 billion in first year
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