(September 2012) Jeffrey Gundlach, the portfolio manager behind The DoubleLine Total Return Fund, is swimming in investor cash to invest. The family of funds that he created attracted over $20 billion this year, with the majority going into the DoubleLine Total Return Fund. (View our rating of the DoubleLine Total Return fund here)
This fund specializes in mortgage backed securities. As a portfolio manager that has a great track record in bonds and no background in stocks, the latest pronouncements made by Jeffrey Gundlach are curious:
I like the way equities are out of favor and I like doing things when they’re unpopular . . .Equities are a superior investment to bonds for an inflation hedge and I like the ability to diversify and broaden the firm.
- Interview with Bloomberg, September 12, 2012
On the face of it, the statement that equities are out of favor is silly! The S&P 500 is at its highest level since 2007, which not incidentally was an all-time high. Perhaps, Gundlach is comparing the relative yields of stocks versus bonds. The ten year treasury note has historically yielded more than double the dividend yield of S&P 500. From 1990 – 2012. Now, the yields are the same. On this basis, bonds look very expensive compared to stocks.
I don’t know if stocks are a good hedge against inflation. However, I do know that inflation at this point has been very mild – under 3.0% per year. However, Jeffrey Gundlach is not the only bond manager that believes the US and global economy is about to have a surge in inflation. Bill Gross, PIMCO’s founder and legendary manager has announced the we are about to enter the “Age of Inflation”.
The simple truth is when yields rise, bond prices go down. As interest rates are tied to inflation, a long-term inflationary period will lead to falling bond prices and negative returns for bond funds. Bill Gross has suggested that investors buy gold, commodities real-estate or TIPS to prepare for inflation. Is it coincidental that PIMCO has TIPS, real-estate and commodity funds. In other words, PIMCO has an alternative in place for investors in its bond funds to migrate to when the returns on its main bond funds start to falter.
On the other hand, DoubleLine does not have any funds that won’t be negatively impacted by inflation. While Gundlach is not an expert on stocks, he knows that the money that has flowed into his funds while returns were great will flow in the opposite direction when returns are negative or low single digits. Establishing stock funds prior to his bond market funds floundering is a smart move.