It hasn’t been a good year for the “bond king” Bill Gross. The manager of the $242 billion PIMCO Total Return (MUTF:PTTRX) fund made the terrible mistake of avoiding Treasuries. As a result, the fund has posted only a 1.9% return. Keep in mind that Gross’ 15-year average annual return is 7.2%.
In light of this, maybe it’s time to look for another bond king? Perhaps so. After all, the world financial system has been extremely volatile and the Federal Reserve certainly has been engaging in unique policies, such as quantitative easing and “Operation Twist” (which involves heavy buying of longer-dated bonds).
So who might take Gross’ crown? Well, a strong candidate is Jeffrey Gundlach. A math whiz, he quickly became a star performer at TCW Group and turned its bond business into a powerhouse. Yet the relationship eventually got strained (which is not uncommon with top-notch portfolio managers). So in 2009, TCW fired Gundlach, who then went on to start his own fund operation. Because of this, TCW sued him for breach of fiduciary duty and the misappropriation of trade secrets.
After a high-profile trial, the jury ruled DoubleLine liable for the misappropriation of trade secrets but not for breach of fiduciary duty or business interference. Also, the jury awarded Gundlach $66.7 million for back pay.
But the trial was not a distraction for Gundlach, who continued to rack up impressive returns. So far this year, the DoubleLine Total Return Bond (MUTF:DBLTX) fund is up 8.84%.
Why all the success? For the most part, Gundlach has a good sense of the macroeconomic environment. Thus, when he gets a sense of the general trends, he finds creative ways to cash in. For example, he has been aggressive with exotic mortgage securities lately, which have been helpful in boosting yields. He also has focused on dollar-denominated assets and shorted French debt.
What’s Gundlach’s outlook? Based on a recent presentation to investors, it is fairly grim. He thinks the U.S. is headed for a recession. And the key reason is the sovereign debt crisis in Europe.
Interestingly enough, it is this kind of situation that bodes extremely well for the bond market. But profiting means getting the timing right, as well as focusing on the right values. In other words, it is a great environment in which Gundlach can thrive.
Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
