Speaking before the results of the presidential election were known, Jeffrey Gundlach commended Donald Trump for his campaign and the results he achieved. Gundlach did not, however, reiterate his prediction that Trump would win and, as in the past, he neither endorsed Trump nor said that he would vote for him.
Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital. He spoke to investors via a conference call at 4:15pm on Election Day, November 8. The focus of his talk was DoubleLine’s closed-end funds, DBL and DSL.
“I went on record when Trump was a 500-to-1 shot,” Gundlach said. “I didn’t think he would go this far.”
Gundlach said that Trump “massively outperformed expectations” and thanked him for “all of the effort he put in.”
Gundlach said he has never met Trump, but acknowledged the challenges of a presidential campaign. It must be “grueling and a horror show,” he said, to put up with the barrage of criticisms from opponents and the media.
“He should be commended for going all the way to the goal line,” Gundlach said.
In lieu of predicting the presidential winner, Gundlach said, “We’ll find out later tonight.”
DoubleLine’s closed-end funds
The bulk of Gundlach’s comments were about the risks and opportunities in the firm’s closed-end funds.
Gundlach said he was “not terribly fond of interest-rate risk,” which he contrasted with his position in May, when he was bullish on rates. Of the two funds, he said DSL is better positioned relative to interest-rate risk, and he advised investors to sell DBL and buy DSL.
He said DBL has an 8.3% yield (net of fees), versus the Barclay’s Aggregate index (AGG), which has a 2.1% yield (less fees). He described DBL as a “riskier version of DBLTX [the firm’s flagship total return fund] with prepayment and credit risk.” Indeed, he said DBL has triple the risk of DBLTX, although its performance has been two- to three-times that of DBLTX, giving the two roughly the same risk-adjusted results.
He said that DSL is approximately 10-times the size of DBL and has more credit risk and less interest-rate risk. It trades at a 10% discount to its net-asset value (NAV), versus DBL, which trades at a 4% premium to its NAV. He said that difference is one of the reasons he first recommended DSL over DBL in May, and he said that recommendation is still valid, given the 14% spread relative to the funds’ NAVs. Relative to DBL, DSL has a higher yield and is trading at a discount to NAV; DSL's interest-rate risk is also less than the AGG.
He said that DSL trades at a discount to its NAV because it was initially sold to a “small group of concentrated investors.”
A year ago, Gundlach said he was “pounding the table” to buy closed-end funds, and the return on DSL has been approximately 23.5% since then (versus 7% for the AGG).
DSL has a 9.76% yield and a duration of 5.3, versus 1.3% and 6.9 for the AGG, according to Gundlach. He said that the AGG has an “incredibly bad Sherman ratio,” which is a term coined by his co-manager, Jeffrey Sherman, as a metric to measure the yield relative to risk for bonds and bond funds.
Gundlach noted that he has reduced the leverage in both funds over the course of the year. Gundlach was asked whether the leverage in the funds constituted a “reach for yield.” He said it was an attempt to increase yield while also increasing risk. But it is “not a reach for yield,” he said, because he has also adjusted the leverage in the fund. He said that management of the leverage is done “thoughtfully, carefully, constantly and with great focus.”
As for the funds’ holdings, Gundlach said that DSL has been concentrated in dollar-denominated emerging-market debt almost since its inception three years ago. He said he is still positive on that debt because of the favorable GDP and demographic characteristics among emerging-market countries, and because of commodity prices. He said emerging markets are generally safer than their developed counterparts.
