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Here Is The WSJ Article That Jeff Gundlach Has Been Raging Against

Well, the "fake news" article that Jeff Gundlach has been quietly - and not so quietly - raging against for weeks on Twitter, is finally out.

Readers will recall that DoubleLine's Jeff Gundlach has been engaging in an odd subtweeting campaign on Twitter over the past month with what until recently had been an unnamed media outlet that was allegedly being used by a similarly unnamed Doubleline competitor to accuse Gundlach's fund of doing poorly and suffering outflows, something the "bond king" has said is "false news" to borrow a Trumpism...

... and then last week, Gundlach finally revealed that the "fake news" publication with the imminent hit piece in question was the WSJ:

Meanwhile, Gundlach - having recently turned quite bearish and predicting, accurately, last weeks volatility surge, had done everything in his power to take preemptive damage control and publicize that DoubleLine is in no way in peril, in need of funding, or worried about outflows. In a recent interview with Bloomberg's Erik Shatzker, Gundlach said that he is content with the size of his fund, which he does not want growing too large, and may soon turn new money away:

“Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today.

 

‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’... “I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’”

 

“Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.”

The statement echoed what Gundlach said in a tweet from August 2: "DoubleLine Facts: All time high AUM, revenue, headcount. Returns good-to great across funds. CEO never berates employees. Boycott fake news!"

Then, as we reported two weeks ago, we suggested that the reason for the recent din over DoubleLine - or rather Total Return Bond Fund - AUM is that Gundlach was anticipating the latest Morningstar fund flow data, reported by Reuters, according to which investors pulled another $200 million from Jeffrey. Gundlach's flagship Total Return Bond Fund in July, extending the outflow streak that began in November to nine consecutive months. So far this year, the fund has posted outflows of $3.6 billion, leaving it with $53.6 billion in AUM as of the end of

As Reuters wrote "the withdrawals are notable given that other bond funds are swimming in new cash from investors and at a time when the DoubleLine fund's performance has been strong.

Some $203 billion flowed into bond funds in the first half of 2017, and bond funds overall have not recorded a single week of outflows all year, according to the Investment Company Institute, a trade group.

The outflows are odd in the context of TRF's YTD outperformance: "DoubleLine Total Return Bond Fund's lower-cost institutional shares were up 3.2 percent this year through Tuesday, beating its benchmark, according to data from Thomson Reuters' Lipper research unit." Preempting the news, Gundlach in a tweet early Wednesday said that DoubleLine is a top-ranked fund company by net cash inflows this year through July.

Sure enough, while TRF is seeing outflows, the broader DoubleLine continues to take in cash: overall, the firm pulled $253 million into its mutual funds and ETFs during July and $2.5 billion this year, ranking 24th of 405 fund families, according to Morningstar data. A recent interview with Reuters may explain this discrepancy: Gundlach said DoubleLine was "trying to focus on our strategy: growing our other funds." He was referring to the SPDR DoubleLine Total Return Tactical ETF, DoubleLine Core Fixed Income Fund, DoubleLine Shiller Enhanced CAPE, DoubleLine Low Duration Bond Fund, DoubleLine Infrastructure Income Fund and DoubleLine Flexible Income Fund. Those six funds have attracted $5.8 billion this year, according to Morningstar.

"We are marketing our other funds and not DBLTX," Gundlach said. "We are accomplishing exactly what we planned."

As we concluded two weeks ago, "it remains to be seen if there is anything more structural within DoubleLine to explain the outflows, or the explanation for Gundlach's recent odd tweeting behavior."

* * *

And with all that in mind, fast forward to Sunday morning when the long-awaited and much-(pre)publicized WSJ article was finally released. In it, the WSJ's Greg Zuckerman picks up on what we, Reuters and Morningstar previously noted, namely the 9 consecutive months of outflows from DoubleLine's flagship bond fund:

Jeffrey Gundlach built one of the most successful new bond funds ever, amassing $61.7 billion of assets at the DoubleLine Total Return Bond Fund over just six years. But during the past year something else happened: Some customers began to leave. Assets under management at the fund dropped 13% from their peak last September to $53.6 billion as of July 31. 

 

Investors have pulled $8.5 billion from the fund in that period, Morningstar Inc. says, while funds in the same category took in net inflows of 7.2%. The fund has had outflows in each of the past nine months.

Naturally, the WSJ was delighted to take advantage of the massive publicity Gundlach's own tweeting had generated in recent weeks for the coming piece:

As performance has slipped and the fund has shrunk, Mr. Gundlach, 57 years old, has turned combative, taking on the media and continuing to taunt a rival. Meanwhile, some within the firm are bracing for what could be a more challenging environment.

And here are the "dots" that one can finally connect based on Gundlach's aggressive subtweeting since the start of August:

Late last year and earlier this year, some at DoubleLine Capital’s offices in downtown Los Angeles say, they were told bonuses might drop in 2017, according to people close to the matter. The firm says the guidance was aimed at creating a “pragmatic assessment” of 2017 after a big year in 2016.

 

Mr. Gundlach’s fund’s performance has been solid. But some investors say they are leaving because the fund has cooled from its previously white-hot pace.

 

Total Return Bond Fund topped 90% of peer funds over the past three- and five-year periods. In 2017, though, it is besting 59% of competitors, with a 3.15% gain through Aug. 17, Morningstar says.

That said, in the the article's weakest link, and rather bizarre argument, one is somehow expected to extrapolate from the behavior of a few investors (in this case a retired orthodontist), what billions in capital will do momentarily.

"Among those bailing are individual investors, who helped fuel the fund’s growth but can be quicker than institutions to pull their funds when performance lags. Barney Rothstein, a retired orthodontist in Tucson, Ariz., withdrew $250,000 from the fund over the past 18 months and shifted the money to individual bonds that carry similar yields but can be held to maturity, unlike a bond fund, potentially giving an investor more cushion if the market turns down.

 

“The extra return wasn’t there anymore,” he said."

Well, Barney, the only "extra return" these days is if you buy tech stocks on leverage... or Ethereum and Bitcoin, of course. Furthermore, it appears that the WSJ's entire "outflows" thesis is based on the assumption that once a fund reaches a "normalized return"inflection point, investors will flee. We are hardly convinced, especially in a time when 90% of hedge funds can't outperform the S&P:

Some investors in Pimco’s once-giant Total Return fund left it in 2013 and 2014 when the fund, led at the time by Bill Gross, stopped trouncing rivals. A spokeswoman for Mr. Gross’s current firm, Janus Henderson Investors, said he outperformed his benchmark during that period.

 

“This is part of having exceptional returns—at some point there will be less-than-exceptional returns,” said A. Michael Lipper, who advises investors in mutual funds. Mr. Gundlach, he said, “wouldn’t like the comparison, but the same thing happened to Bill Gross.”

 

Now investors like Castle Financial & Retirement Planning Associates Inc. in Hazlet, N.J., are shifting to Pimco from DoubleLine. “Performance has been waning,” said Al Procaccino II, president of the firm, which pulled money from the DoubleLine fund this year.

Doubleline's response was well-telegraphed, the bond manager said it isn’t troubled by the outflows or the performance of the fund, which is nearly $45 billion larger than DoubleLine’s next biggest fund.

“Many well-known, actively managed bond funds that have been around long enough go through periods of net outflows, some far more dramatic than Mr. Gundlach’s fund has experienced,” a DoubleLine spokeswoman said. "There are only so many opportunities for actively managed funds. DoubleLine stopped marketing the fund two years ago, and the firm is pleased with where the asset level is.”

Of course, whether DoubleLine's outflows are "controlled" will become obvious shortly: ultimately the single best predictor of future capital flows is today's performance, and for now DoubleLine has nothing to worry about. Perhaps the only interesting aspect in the entire WSJ piece is the additional insight into why Gundlach's twitter account has recently become rather more... colorful:

One former employee says Mr. Gundlach aims to stir debate and focus attention on his fund.

 

“Even if the inner Jeffrey is truly composed and collected, the outer Jeffrey is the actor—he’s a rational creation who understands how to rattle the cage,” says Claude Erb, a former portfolio manager at DoubleLine and TCW. “He’s seen client enthusiasm ebb and flow. When it’s waning, you have to redouble your efforts to get the message out.”

 

René Bruer, the co-chief executive at Smith Bruer Advisors, which manages $80 million, withdrew all of his clients’ money from the fund in 2015 partly because of concerns about its reliance on the outspoken manager. “He can create controversy. If that’s what floats his boat, great,” Mr. Bruer says. “But for my clients and for me, I can’t take much of that.”

Quoted by the WSJ, Jordan Edwards of Avier Wealth Advisors in Bellevue, Wash., which keeps about 10% of clients’ bond allocation in the fund, cited Mr. Gundlach’s investing skills and said, “I would prefer that he would not be as provocative as he is.” 

And yet, Jordan - and most other investors- will gladly keep their funds with Gundlach as long as he continues to outperform, which is why the whole point behind this "fake news" article is quite lost on us.

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