Updated Wednesday, July 30, 2014 as of 11:23 PM ET
Portfolio - Fixed Income
Gundlach Expecting Kaboom of Defaults
by: Seth Lubove and Alexis Leondis
Friday, November 30, 2012
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Expensive Equities

“Retirees take resources from a society, and workers produce resources,” he says.

In line with Gundlach’s gloomy outlook for America, the Multi-Asset fund recently dumped some of its U.S. equities. Sherman says the stocks are too expensive and U.S. companies don’t have much potential for growth. But the fund has added to its holdings of gold-mining companies and natural gas producers in 2012 because these stocks are cheap, he says.

Gundlach has made some prescient calls on stocks. He recommended in April that investors short Apple Inc. and hedge that bet by going long on natural gas. He said Apple was priced too high at $606 after the stock had risen more than sevenfold from January 2009 to April 2012. After that call, Apple stock fell about 4.7 percent through Nov. 29.

Even after the September release of the iPhone 5, which shattered Apple’s pre-sale order records, the company will struggle to reach its earnings potential without an innovator like Steve Jobs at the helm, he says.

Natural Gas

Gundlach made his recommendation on natural gas stocks after they fell 59 percent from January 2009 to April 2012. The prices plunged as producers extracted gas trapped in shale and created a supply glut. Gundlach says investing in natural gas now is similar to buying gold in 1997, when prices hit an 18- year low before a surge in the precious metal’s value.

The Standard & Poor’s GSCI Natural Gas Index increased more than 77 percent from April through Nov. 28, partly on demand from electrical utilities switching to gas from coal.

Even with timely calls like these, Gundlach has to overcome skepticism from investors that a bond guy can succeed in equities and other investments. DoubleLine, which had $39.8 billion in assets in its four bond funds as of mid-November, had gathered only $190 million for its Multi-Asset Growth Fund.

Lagging Returns

Started in December 2010, the fund includes natural gas exchange-traded funds, gold futures and currency and agriculture options as well as U.S. and international stocks. The fund returned only 4.3 percent in 2012 through Nov. 28, trailing the 14.4 percent gain in the Standard & Poor’s 500 Index.

“We have confidence that when the opportunities arise within fixed income, DoubleLine will be able to take advantage of that,” says Jeremy DeGroot, who helps oversee $8 billion in assets as chief investment officer of Orinda, California-based Litman Gregory Asset Management LLC. “When you go outside of fixed income into broader multiasset allocation, we don’t have that conviction. We haven’t done the work to give us confidence that they can successfully do it.”

Self-assured as ever, Gundlach says he’s indifferent to his reputation as someone without a track record outside of bond funds. “I couldn’t possibly care less; I don’t have anything to prove,” he says.

Morningstar Fight

Gundlach does care enough about what Morningstar opines that he’s now fighting with the mutual-fund industry’s preeminent rankings and research firm. In meetings, e-mails and phone calls, he has repeatedly complained to Chicago-based Morningstar’s executives that their analysts are biased against DoubleLine.

In a July 18 report on DoubleLine’s flagship fund, entitled “Swim at your own risk,” Morningstar senior analyst Sarah Bush cautioned investors about Gundlach’s use of volatile mortgage- backed derivatives such as inverse floaters, which are debt instruments whose coupon payments decrease when short-term interest rates increase.

DoubleLine co-founder Barach dismisses Bush’s concern, saying the securities make up less than 3 percent of the fund’s investments and have performed well over the past 20 years while also providing cash flow.

“Morningstar has been dead wrong on DoubleLine since December 2009,” Gundlach says, referring to the month he started the firm. “They don’t understand what I’m doing.”

Bush says she met with Gundlach in April. She says DoubleLine later declined to fill out a detailed questionnaire that would have helped explain the Total Return Bond Fund’s performance.

TCW Cheerleader

“We got a call saying they had cooperated enough,” says Bush, who stands by her analysis.

Gundlach also accuses Morningstar senior analyst Eric Jacobson of being a cheerleader for TCW, Gundlach’s former employer.

“What’s so reprehensible here is, Jeffrey called and said, ‘If I were you, I would fire Eric,’” says Don Phillips, Morningstar’s president of investment research and Jacobson’s boss. “Eric was one of the most early and ardent supporters of Gundlach.”

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