BondsOnline.com: instant access to and extensive coverage of over 3.5 million stocks, bonds, indexes and other securities covering major and emerging markets and exchanges across the globe.
Recession Scares DoubleLine's Gundlach More Than Rising Rates
Forbes - Jan. 25, 2012
Jeffrey Gundlach doesn’t understand why bond investors are so obsessed with rising interest rates. They’re moving to cash, they’re buying short-term debt, they’re even switching to dividend-paying stocks—all to avoid the potential for paper losses on bonds if and when rates go up.
“I have never met anybody, at any time, who told me they wanted interest rate risk,” says Gundlach, 52,
chief executive of $23 billion (assets) DoubleLine Capital. “People love every other type of risk in the financial markets—default risk, venture capital risk, but not interest rate risk.”
Gundlach’s thinking is informed by a thorough understanding of mathematics (he studied it in a Ph.D. program at Yale) and nearly three decades of managing fixed-income portfolios. Yet his main point about the current bond market is a simple one: Risk can’t be avoided, but it can be weighed. And right now the risk of inflation and higher interest rates is simply not as great as the risk of a European sovereign default or two, followed by bank failures and another recession.
“That can happen again—yes, it can,” says Gundlach, who oversaw fixed-income investments at Trust Company of the West for 24 years until an acrimonious divorce from the firm in 2009. “And if it happens, the only asset class that will go up is high-quality bonds,’’ he adds.
Say this for Gundlach: He got it right last year, when he sold riskier bonds and bought Treasurys in his $1.5 billion Core Fixed Income Fund, on a bet that Europe’s problems weren’t over and investors would flee to U.S. government debt for safety. Pimco’s William Gross took the opposite tack, shorting Treasurys in the belief that federal deficits and the Fed’s loose monetary policy would lead to inflation and higher rates. Core Fixed Income finished 2011 with an 11.5% total return, compared with 7.8% for the Barclays Capital Aggregate Bond Index and 4.2% for Pimco’s Total Return Fund.
Today Gundlach manages five no-load mutual funds. His mortgage-heavy Total Return Bond has a weighted average life of about five years and a 7.9% yield. Core Fixed Income has a 4.5% overall yield but only an unexciting 3.5% yield on the 23% of its money in investment-grade corporate bonds. Managing that portfolio is Bonnie Baha, one of more than 40 Gundlach loyalists who followed him from TCW to DoubleLine.
Not surprisingly, Baha shares Gundlach’s concern over European risk. She is avoiding bank paper, even though there’s little chance that JPMorgan Chase bonds yielding 4.5% will default. Aside from the U.S. banks’ domestic problems (increased regulation and the loss of income from overdraft fees and proprietary trading), if a European country does default, the whole sector will feel the effects, she figures. “Just because [bank bonds] are cheap doesn’t mean they’re a deal,’’ she says. “There are years when buying things because they’re cheap pays off well. But then you have a year like 2008, and you learn pretty quickly.”
So for now DoubleLine is staying defensive with utility, consumer goods and health care company debt. “With corporate bond investing, you win by not losing,’’ Baha says.
Gundlach is also cautious on municipal bonds, which he believes are getting pricey. The Standard & Poor’s Municipal Bond Index has climbed nearly 5% since October—an impressive performance for bonds yielding, on average, around 3% (equivalent to 4.6% from a taxable bond). But Gundlach detects a flavor-of-the-month quality to the muni market, as investors pile into the bonds without thinking about the risk of a correction. “People, when they’re young in the business—and some very experienced people as well—believe they can beat a market downturn while staying in the sector,” Gundlach says. “It doesn’t work.”
Income Security Recommendation February 2012 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
