The new bond king might be about to be dethroned.
DoubleLine CEO Jeffrey Gundlach’s flagship DoubleLine Total Return Bond Fund (DBLTX) is having its longest streak of underperformance on record, lagging most of its peers as well as the Barclays Aggregate Bond Index. After ranking second among comparable funds in 2015, the $61 billion fund now ranks in the bottom 7% so far in 2016, according to fund research firm Morningstar.
The poor returns come after years of stellar returns for Gundlach, especially after the financial crisis. Those returns had unofficially allowed Gundlach to rise to the title of “Bond King”—especially after the previous longtime “Bond King” Bill Gross of Pimco stumbled, and quit that firm for Janus Capital (JNS), taking only a small percentage of the assets he used to manage with him.
But after years of turning in some of the best returns in the industry—and walloping his benchmark—King Gundlach is struggling. This week Morningstar dinged DoubleLine Total Return Bond with a “neutral” rating. The bond research firm said that while it didn’t mean for the ratings change to be “scathing,” Morningstar’s analysts “do not have enough conviction to recommend” the fund, either. Adding insult to injury, even Gross’ current fund, the Janus Global Unconstrained Bond Fund, which has mostly underperformed since Gross took it over nearly two years ago, is slightly ahead of Gundlach’s fund this year.
“This is just about the worst possible environment for DBLTX,” Gundlach lamented during one of the fund’s regular webcasts in June, using the ticker symbol for his main fund. “When I accumulate all the things that have gone wrong, it’s like a perfect storm of negativity for DBLTX.”
Indeed, this year has proved to be a remarkable disappointment for a strategy that earned Gundlach his renown—and “Bond King” crown. DoubleLine Total Return Bond fund is essentially a continuation of Gundlach’s previous fund, TCW Total Return Bond, which returned nearly 8% annualized for the last decade Gundlach ran it—better than 99% of his competitors—until TCW fired him in 2009.
But the employment dispute didn’t take any shine off Gundlach, who started his next act off strong: Backed by legendary investor and Oaktree Capital (OAK) founder Howard Marks, Gundlach launched DoubleLine Total Return Bond in the spring of 2010; it returned 27% over the next year and a half.
Now, for the first time in its history, Gundlach’s DoubleLine Total Return Bond has underperformed for two quarters in a row—let alone the first time it has underperformed for more than two months in a row. This year, it has fallen short of the Barclays index every month except May, when it barely edged out the benchmark’s returns by .07 percentage points.
Outside of investing, Gundlach has also made several questionable calls relating to politics this year. He wrongly predicted that the Brexit vote would fail. And on Tuesday, he reaffirmed his belief that Donald Trump would win the presidential election, saying on another webcast, “I am quite certain that Trump will be elected.” The latest RealClearPolitics poll still puts Democratic candidate Hillary Clinton in the lead. (In June, Gundlach even suggested that a Trump victory could be good for the stock market, saying, “When Mr. Trump is near inauguration and you’re really scared to death, that’s probably going to be the buying opportunity.”)
To be sure, Gundlach’s fund isn’t a total loser, by any means. DoubleLine Total Return Bond is still up more than 3% year to date. But Barclays Aggregate Bond Index is up nearly twice as much—almost 6%.
Gundlach attributes his underperformance to the fact that DoubleLine Total Return Bond, by design, does not own any corporate bonds, which have rallied unexpectedly this year, returning nearly 9% (accounting for a substantial amount of the benchmark Barclays Aggregate Bond Index’s returns). Instead, more than 70% of the fund is in mortgage-backed securities, which have turned in some of the lowest returns in the bond market this year (only about 3%). Gundlach has also constructed his portfolio to be less sensitive to interest rates, keeping the duration of his bonds at about half the index average—a smart position if you expected, as most investors did, that the Federal Reserve would raise interest rates this year. But as the prospect of a Fed rate hike has since become less and less likely, the longer-duration bonds and Treasury bonds (which only make up about 3% of Gundlach’s fund) have performed much better than Gundlach’s bonds.
All that considered, Gundlach is still pretty pleased with his fund’s performance. “It’s actually a huge win,” Gundlach said on the June webcast, noting that the fund had still managed decent returns with “vastly lower risk” than the Barclays index. Since inception through the end of June, the fund has returned 7.5% annualized, compared to just 4.3% for the benchmark.
Still, Morningstar’s “neutral” rating, which it changed from its earlier designation of “not ratable,” wasn’t entirely motivated by the performance of the fund, which it said had “an impressive record” despite “a rare bout of underperformance.” Rather, Morningstar analysts said they were frustrated by DoubleLine’s secrecy and the firm’s refusal to answer their questions about where it finds investment opportunities, how it manages risk and how big it would be willing to grow the fund, among other questions (on a list of more than 70). While Morningstar admits that it does not need firms to grant it access in order to conduct its research, it said DoubleLine denied it access after Morningstar first rated the fund “neutral” in 2011, suggesting that DoubleLine could be acting in retaliation. (On the Morningstar issue, DoubleLine referred Fortune to an external spokesperson, who did not respond to requests for comment.)
