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March 07, 2016 12:00 AM

DoubleLine looking to extend its reach

Fixed-income firm planning equity acquisition, distressed credit fund for institutional investors

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    Scott Eells/Bloomberg
    Jeffrey Gundlach called 2015 a 'massive institutional improvement,' in part led by outflows at PIMCO.

    Reaching $90 billion in assets under management since its start in 2009, DoubleLine Capital LP is exploring new options for growth, possibly even an acquisition, founder Jeffrey Gundlach said.

    The fixed-income-oriented firm has hired an investment banking firm, which Mr. Gundlach declined to name, to help DoubleLine source the acquisition of an equity asset manager. He also said he expects to announce fundraising for a distressed debt credit fund for institutional investors this month.

    “I never thought we would be at $90 billion so fast,” Mr. Gundlach said of the Los Angeles firm he started after he was fired that same year from TCW Group Inc.

    Institutional assets account for about 20% of the firm's AUM, a Pensions & Investments analysis of company data shows.

    Mr. Gundlach hopes to raise $500 million to $1 billion for an initial fund that could buy junk and investment-grade corporate securities whose prices have dropped to distressed levels.

    At TCW, he had raised a series of vulture funds starting in 2007 that invested in mortgage-backed securities, but this time he is focused on corporate issuances.

    Corporate bonds, particularly those issued by energy companies, are vulnerable to price drops because many companies are in a cash-negative position, he said.

    At DoubleLine, Mr. Gundlach is the majority shareholder, but more than 40 employees — most of whom followed him from TCW — also are owners.

    Oaktree Capital Group LLC, which bought a 20% stake in DoubleLine in 2009, has profited from its investment. The firm received $55 million in investment income from DoubleLine in 2015 as the result of its share.

    Mr. Gundlach attributes the firm's growth to solid performance in DoubleLine's strategies, including its flagship $56 billion DoubleLine Total Return Bond Fund.

    For the year ended Dec 31, the DoubleLine Total Return Bond Fund posted a 2.8% return, compared with the Barclays U.S. Aggregate bond index returns of 0.55%, show data from eVestment LLC, Marietta, Ga. For the three- and five-year periods through Dec. 31, it showed annualized returns of 3.48% and 6%, respectively, compared with the benchmark's 1.44% and 3.25%.

    Timing also helped DoubleLine grow its assets under management, Mr. Gundlach said.

    He said management upheaval in 2014 at Pacific Investment Management Co., when the firm's top officials Mohamed El-Erian and William Gross left, caused some investors to move institutional assets from PIMCO's Total Return Fund into DoubleLine's Total Return Bond Fund.

    Mr. Gundlach said he couldn't say how much of DoubleLine's institutional inflows came directly from investors pulling out of PIMCO, but he called 2015 a year of “massive institutional improvement” in terms of institutional flows.

    Morningstar Inc. data show the DoubleLine Total Return Bond Fund had net inflows of $3 billion for the first nine months of 2014, but $4.1 billion for the three-month period of October to December. (Mr. Gross left PIMCO on Sept. 26, 2014.)

    The DoubleLine Fund recorded $10.5 billion in net inflows in 2015.

    Investors reassured

    The $1.3 billion Tulare County Employees' Retirement Association, Visalia, Calif., made the move to DoubleLine's Total Return Bond Fund from the PIMCO fund.

    David Kehler, Tulare County retirement administrator, said $50 million was transferred last August to DoubleLine.

    Mr. Kehler said investment performance at DoubleLine has been solid. He said the only concern had been that the county retirement system was moving assets from one “rock star,” Mr. Gross, to another, Mr. Gundlach, maintaining the key-man risk issue.

    But Mr. Kehler said he became convinced after a visit to DoubleLine “that there are solid people” behind Mr. Gundlach.

    Also, the passage of time since Mr. Gundlach and TCW in 2011 settled all claims in what had become one of the nastiest and most protracted legal battles in asset management history has helped.

    Neil Rue, a managing director at Pension Consulting Alliance LLC in Portland, Ore., said memories of the trial have faded and DoubleLine has “a solid investment track record and a very solid organization.”

    A jury ordered TCW to pay Mr. Gundlach and three co-defendants $66.7 million in back wages, but found Mr. Gundlach was liable for breaching his fiduciary duty to TCW. The case was settled out of court.

    Troy Searles, chief investment officer of the $3.3 billion Louisiana Parochial Employees' Retirement System, Baton Rouge, said institutional asset owners stayed away until negative attention from the trial faded and they were sure DoubleLine was a viable firm.

    Mr. Searles and the parochial system's board hired DoubleLine Capital in October 2015 to run a $70 million structured credit strategy given strong returns in the Total Return Bond Fund, which has about one-third of its investments in structured credit.

    “It's hard to disagree with the investment results,” Mr. Searles said.

    Mr. Gundlach said he is intent on building DoubleLine's strategies.

    A possible money market fund won't make a profit for DoubleLine, but will be a place for investors if other DoubleLine strategies see poor performance, he said.

    “When people get scared and they pull their money, we want them to stay in the DoubleLine family,” he said. “We don't want them to put their money in the Vanguard funds because it will never come back.”

    DoubleLine Capital joined with ETF pioneer State Street Global Advisors in February 2015, rolling out the SPDR DoubleLine Total Return Tactical ETF. It gained $2.2 billion in assets last year, making it the fastest-growing new ETF, Morningstar data show.

    Looking to diversify

    Mr. Gundlach also believes there is a future at DoubleLine for equity strategies, but has had some disappointments.

    The $6.1 million DoubleLine Equity Growth Fund will be liquidated shortly, said DoubleLine analyst Loren Fleckenstein last week.

    “It never gained traction,” he said. The fund was the last surviving of three equity funds launched in 2013.

    Mr. Gundlach confirmed that DoubleLine was a bidder for equity manager RS Investments, which was sold in December to Victory Capital Management Inc.

    He said he likes the idea of buying an equity firm to diversify DoubleLine's offerings.

    “We're a bunch of government-guaranteed, fixed-income people at our roots. This is the core of the firm. You don't get more scaredy-cat than that. So we're always scared, when the market drops we think it's going to go further but when it is up we think it's too expensive. Equity people think when it's down it's a buy and when it's up it's going to the sky. It helps round us out.” n

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