Advertisement
Investing

Be Prepared for the Worst With DoubleLine Total Return Bond Fund

Manager Jeffrey Gundlach is not surprised by the current market turmoil; his fund has been ready for such hard times.

The stock market's plunge has stunned a lot of investors. Not Jeffrey Gundlach. A well-regarded bond fund manager, Gundlach thinks that after the government revises various data, economists will conclude that that the U.S. sank into a new recession in the first quarter. "We're going through a period of crisis and economic weakness that stems from decreased government spending," he says. "There is no recovery. There are no jobs."

Advertisement - Article continues below

And this is not the time to invest in stock, says Gundlach, who runs DoubleLine Total Return Bond Fund (symbol DBLTX). “It seems suicidal to buy a broad-based basket of stocks or economically sensitive commodities or emerging markets stocks -- all of which are very leveraged to economic growth,” he says.

Gundlach believes it will take several years before the economy begins to feel normal. Why? “We were living in a debt-based economy for the past 30 years. Recessions were kept short and shallow by piling on debt.” Now the bill has come due. Standard & Poor’s’ downgrade of America’s debt rating on August 5 is a manifestation of the bill collector’s arrival. (See PRACTICAL ECONOMICS: U.S. Voters, Politicians to Blame for National Debt Woes.)

Gundlach is even more worried about Europe. He sees the mainly European banks that own euro-zone government debt facing enormous risks. “We have a financial system that has a global banking panic looming over its head at any minute,” he says. “To overestimate the problem is almost impossible. You have to start thinking very seriously about the European banking system’s solvency.”

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

When it comes to big-picture views from smart fund managers, I listen carefully to what they say, but I pay far more attention to how they invest. Because of his gloomy forecast, Gundlach has tweaked his portfolio so that about 55% of its assets are in government-guaranteed mortgage-backed securities. But, just in case he’s wrong, he has 44% of the fund invested in high-yielding private mortgage securities, which will do well in an economic recovery or even if inflation picks up.

Hedging his bets is a hallmark of Gundlach’s investing style. The name of his firm, DoubleLine, comes from the double yellow stripes in the middle of roads where no passing is allowed. Gundlach always deploys his assets on both sides of the street.

His approach to mortgages has worked -- in spades. Since its inception in April 2010, DoubleLine Total Return has produced eye-popping numbers. Over the past 12 months through August 5, the fund gained 13.2% -- a whopping 8.1 percentage points better than Barclay’s U.S. Aggregate Bond index. The fund yields 8.7%.

Advertisement - Article continues below

The above figures are for the fund’s institutional share class, which charges annual expenses of 0.49%, a modest price. If you use a broker, this is the best share class to buy, even if you have to pay a transaction fee. The institutional share class’s minimum investment is $100,000 for a regular account but only $5,000 for an IRA. The fund’s N class shares, with the symbol DLTNX, are frequently sold without a transaction fee and require only $2,000 to start but charge annual expenses of 0.74%. Minimum investments are generally much lower for both share classes when you invest through a broker.

Advertisement
Advertisement - Article continues below

Gundlach’s career -- and his success -- didn’t begin last year. He has produced a brilliant record since 1993, when he took the reins at TCW Total Return Bond (TGMNX). From the time he launched the TCW fund through December 2009, it returned an annualized 6.9%, compared with 6.0% for the Barclay’s index.

Advertisement - Article continues below

TCW fired Gundlach at the end of 2009 in a bitter dispute over who owns the rights to the investing methods he employs. That battle is being waged now in a California courtroom. Fortunately, it doesn’t seem to be a major distraction for Gundlach, 51, who took many of his best analysts with him when he left TCW.

Gundlach’s methods are unusual in bond land. In Total Return, he specializes in mortgage-backed securities, a complex sector of the market. Even government-backed mortgages are confusing. They pay higher yields than most other bonds, but, because mortgage holders refinance when rates drop, bond investors get their money back at the worst possible time to reinvest.

One of the best ways to invest, in my opinion, is to find a difficult-to-navigate sector -- and then identify a savvy manager in that sector who brings a lot of resources to bear. With some 30 analysts, Gundlach probably has more professionals analyzing mortgage-backed securities than any other firm.

Advertisement - Article continues below

It’s best to think of his portfolio as having two sides -- a risky side and a safe side. The risky side will do well if the economy firms or inflation heats up; the safer side will do well in a rotten economy because the mortgages are government-guaranteed.

Advertisement
Advertisement - Article continues below

In the risky part of Gundlach’s portfolio -- the private mortgage-backed securities that precipitated the 2008 financial meltdown -- intensive research is crucial. His analysts examine the underlying loans of each security, determining what percentage of borrowers are making payments, what their credit ratings are, whether documentation was submitted when they took out the loans and whether they’ve ever missed a payment. Analysts also look at where homes are located, how good the loan servicer is at recovering money in defaults and how careful the lender was in making loans.

Total Return owns a mix of private mortgages. Some are prime loans, which are extremely likely to pay off. Others are Alt-A loans, which are riskier than prime loans but safer than subprime loans. And a handful are subprime mortgages, loans made to borrowers with shaky credit.

Gundlach and his team choose among dicey private mortgage securities with extreme care. Given how good his record is, the only mystery to me is why the fund has assets of only $8.7 billion.

Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.

Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy
mortgages

Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy

One 70-year-old’s story highlights the challenges. Prepare for more paperwork and hoops to jump through than you could imagine.
August 2, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020

Recommended

The 7 Best Funds for Beginners
mutual funds

The 7 Best Funds for Beginners

New investors have it better than ever. The best mutual funds and ETFs for beginners feature no minimum investments, dirt-cheap fees and broad market …
July 30, 2020
Metropolitan West Corporate Bond Has a Bright Future
Making Your Money Last

Metropolitan West Corporate Bond Has a Bright Future

This new-ish corporate bond fund is comanaged by familiar faces.
July 23, 2020
Oakmark International Disappoints Us
Kip 25

Oakmark International Disappoints Us

When this fund is good, it shines relative to peers, but when it is bad, it fares far worse.
July 23, 2020
Protect Your Portfolio From Inflation
Financial Planning

Protect Your Portfolio From Inflation

It’s not an immediate threat, but some warning signs say to set up some defenses now.
July 23, 2020