Gundlach answered by touting himself as the best of the bunch and highlights his consistency in outperforming his peers with less volatility. He even goes on to call it "a vintage year over at the DoubleLine funds" on his June 9 live webcast. On June 3, Gundlach said that DoubleLine manages funds to capitalize on rising interest rates and that these funds are doing well. He also differentiated between absolute return and relative return. It is possible to have a capital loss on paper but to have made money on an investment overall. Gundlach quoted an old joke with the punchline, "I don't have to outrun the bear; I just have to outrun you!" which coincided with one of his opening remarks about bad bond yields elsewhere making U.S. bonds look good. If inflation and rising interest rates are the bear, maybe this U.S. bond manager thinks he only has to outrun zero and negative yields.

"Rising interest rates aren't as scary as you think if you have a reinvestment component in your portfolio," he said. This sounds good, until I remembered the fixed-income trio discussion 30 minutes prior about the total lack of liquidity and structural snafu of the bond market. If successful bond managers used to turn a portfolio at a rate of 400 percent per year, and now they can't easily get the trades they want, the managers are going to have to change the game. Otherwise, they may fall victim to the inherent truths of bond trading amidst an ever-changing patina colored by QE and broad-based balance sheet expansion, electronic Robo trading, and investors' current insatiable hunger for yield.

Gundlach clarified his strategy further on his June 9 webcast by saying, "Get very scared (of rising interest rates) if the 10-year Treasury gets above 260." He told advisors that DoubleLine will use this indicator of "260-ish" to determine duration in portfolio holdings.

Repackaging The Risk

In insisting that there is no logical reason for the Fed to raise interest rates, the DoubleLine founder said, "They want to get off zero so they can at least do something; they just repackage the risk." We know from Janet Yellen's November 2013 confirmation hearings that the U.S. Fed would never push interest rates into negative territory because she said at the time that if this were to occur, Americans would stash their money under their mattresses. It is safe to assume that with almost $12 trillion in retail deposits at U.S. banks, that there isn't much cash under our mattresses. Even though for many investors, real return taking into account inflation, equate to negative. Investors have money. It is sitting on the sidelines. Surely DoubleLine knows that people desperate for diversification and promising investment opportunities have their cash “parked.”

Gundlach explained that the government has already repackaged the risk with quantitative easing, balance sheet expansion and zero interest rates. Santelli likened this risk repackaging to wallpapering over live termites.

Profiting Off Of Inflation And Rising Interest Rates

Jeffrey Gundlach has already reinvented himself by going from a behind-the-scenes bond manager at a company owned by a French bank to arguably the most successful bond entrepreneur of this century. While the DoubleLine founder, CEO and CIO may seem like a reluctant star, he knows he is on a roll, and it is likely we have only seen the beginning of his capabilities.

Reading between the lines, it becomes clear that Jeffrey Gundlach will not be satisfied outrunning his northwest-quadrant peers in an M.C. Escher world. It seems more likely that he is trying to set the table to have DoubleLine feast on some bear. His team at DoubleLine has been training hard together for the bear marathon for five years and counting.

While inflation and rising interest rates are not good for bond buyers, they could be profitable for DoubleLine as debt issuers and originators. It is true that one cannot easily short bonds and certainly cannot short negative yielding bonds with leverage. However, DoubleLine issuing junk, non-rated and private debt is a convenient proxy for shorting bonds with negative yield with leverage by becoming the debt dealer.

To make a supply-and-demand analogy, a person is not likely to make much money selling cannabis in his neighborhood. But, to become the dealer or issuer to the drug cartels solves the liquidity problem because the dealer is the one creating the liquidity and profiting as a result.

In terms of possible bond issuance, DoubleLine has already stated publicly that it supports funding public infrastructure projects. The company has new funds set up for commercial real estate financing, collateralized loan obligations and securitized collateralized loan obligations.

In recent weeks, DoubleLine has confirmed its intention to offer middle-market commercial property bridge loans of a two- to five-year duration through a new partnership with Los Angeles-based Thorofare Capital. Thorofare will originate the loans, which DoubleLine will buy for its related portfolios. Just last week, Bloomberg's Lisa Abramowicz reported that DoubleLine will offer its first collateralized loan obligation (CLO), reported by Abramowicz to be a $400 million offering in conjunction with Morgan Stanley. Last year, a leading technology provider of CLO data announced that DoubleLine had licensed its customizable software.

In recent months, DoubleLine has registered with the SEC as a commodity pool operator, and as an Equity LP to offer equity strategies. In the alternative investment space, DoubleLine has incorporated a handful of new CRE and CLO companies, as well as a CMBS Fund, a CMBS servicing company and an Equity Healthcare Fund. Key DoubleLine brokerage employees have recently switched to Foreside Fund Services, according to Finra’s BrokerCheck. Foreside is a specialist in distribution and compliance services for the alternative investment industry. Previously, DoubleLine had an almost five-year partnership with Quasar Distributors, a subsidiary of U.S. Bancorp that specializes in mutual fund solutions.

Jeffrey Gundlach assured advisors of his experience and tenure (via webcast) versus "a lot of people running hedge funds that have never seen an interest rate hike" as well as "a lot of senior people in this business that have only seen declining interest rates." He makes it seem like much of his competition run their portfolios in a vacuum.

"I am not afraid of the high-yield bond market in 2015 or even in 2016; I am fairly copacetic on the high-yield bond market," said Gundlach. He said via webcast that he has long-term skepticism. Gundlach sees companies possibly borrowing at 15 percent come 2019-2021. He says that default rates could go from the historical 4 percent to 8 percent if companies have to roll over loans, driving some portfolio yields less than Treasurys. Gundlach says that by that time, we could see a $1 trillion to $2 trillion deficit spurred by the demographic problems, and he includes Obamacare in the anticipated entitlement blowup.

The bottom line, he said is, "It's OK to be dancing in the high-yield bond market, but I suggest we all dance near the door." Jeffrey Gundlach can dance anywhere he wants because he seems to be building dance halls throughout the financial services industry.

Lisa A. Ditkowsky, CFP, is an investment advisor representative at LPL Financial LLC in Evanston, Ill.
 

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