(CityWire) Star bond manager Jeffrey Gundlach has said the recent selloff in markets has been "exhilarating" and plays "right into the DoubleLine wheelhouse."
The founder and CEO of the Los Angeles-based bond shop has long been bearish on the corporate bond market, warning on the size and composition of the lower end of the investment-grade sector, as well as high yield and the US equity market.
US stocks were down more than 20% for the year through March 17, while investment grade corporate bonds and high yield corporate bonds were down 4% and 13%, respectively.
Speaking on a webcast about his Total Return Bond fund, which he manages alongside Andrew Hsu and Philip Barach, Gundlach said: ‘We haven’t seen this kind of action since the last financial crisis.’
The fund, and firm, famously made hay during the 2008 financial crisis, buying beaten up non-agency mortgage backed securities, which went on to rally. ‘We shined in the global financial crisis,’ he said.
Despite being excited about the opportunities presented by the current crisis, Gundlach cautioned investors against buying in when it appeared markets might be recovering.
‘Will it snap back, of course it will,’ he said. ‘But unless there is a [Jerome] Powell pivot like [after Q4] 2018, I wouldn’t buy on an up day of 4%.’
He added: ‘I’m getting less negative on the stock market. I was net short, and have now taken some of that off on some of those names that fell 50%. [But] things have to clean out and are going to take some time.’
Gundlach said he was not surprised to see the Federal Reserve cut rates and unveil further quantitative easing. He added that the government’s plans to boost the economy by handing out cash to people and small businesses to pay employees during times of hardship was likely open to abuse.
‘I can’t even imagine the kind of corruption that will go on,’ he said.
The Trump administration yesterday unveiled plans for around $1 trillion of stimulus to support the economy as the country increasingly goes into lockdown due to the spread of the coronavirus. Gundlach said $1 trillion was likely ‘just the ante’ and that more money would be spent.
The DoubleLine Total Return fund (DBLTX) is up 1.38% for the year through March 17, landing it in the top decile of Morningstar’s Intermediate Core Plus Bond fund category. The fund’s approach is to exploit inefficiencies in the mortgage market.
Since the financial crisis its portfolio has been split roughly between high quality agency mortgages and private label mortgage-backed securities that Gundlach snapped up at cheap prices. Gundlach has kept a leash on interest rate risk recently, and the fund’s portfolio averages 3.4 years in duration.
The fund had lagged some of its peers in 2019 in part because of its lack of holdings in high yield and corporate credit, with BB-rated bonds being a particular area of concern for Gundlach. The fund’s shorter duration hurt it against its Morningstar category peers in 2019 as well.
‘Sometimes it is what you don’t do that makes you succeed and the BB corporate bond market is about as unattractive as I have ever seen it in my career,’ Gundlach said in January.
During yesterday’s webcast, Gundlach described the high yield market as having been the ‘canary in the coal mine.’
‘High yield markets are screaming recession,’ he said. ‘And with a magnitude that looks to be wider than the great recession of 2007.’
