Download Gundlach: Trump Should be Commended

Gundlach: Trump Should be Commended
November 8, 2016
by Robert Huebscher
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
Page 1, ©2017 Advisor Perspectives, Inc. All rights reserved.
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 riskadjusted results.
He said that DSL is approximately 10-times the size of DBL and has more credit risk and less interestrate 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.
Emerging-market debt constitutes approximately 45% of DSL’s holdings, he said, and this has been
true since its inception. That debt yields approximately 8% with a duration of 5, he said. Gundlach said
he is “absolutely positive it was the right decision” to overweight that asset class. Since the inception of
the fund, the annualized return for the emerging-market ETF, EMB, was 13% and the return for the
high-yield ETF, JNK, was 8%. High-yield has the second highest allocation in DSL, at approximately
20% of the fund with a yield of 7% and a duration of 4.
“It’s clear that the decision to overweight emerging markets over high yield has had a big payoff,”
Gundlach said.
Page 2, ©2017 Advisor Perspectives, Inc. All rights reserved.
Gundlach said he would personally be a long-term investor in DSL.
Stocks, Bonds and Trump
As for the recent nine-day decline in stocks and the pending election results, Gundlach wasn’t sure
whether investors should expect a more pronounced “equity sell off.” “Tomorrow will give us more
insight,” he said, “depending on the election results.”
He also commented on a few fixed-income asset sub-classes.
Energy MLPs will do well if inflation picks up, he said. REITs are “nowhere as cheap as they were
earlier in the year,” Gundlach said, and their risk is that borrowing costs go up. He said Puerto Rican
bonds will eventually return “100 cents on the dollar” and he is extremely positive on them. TIPS is the
“number-one sector” in the bond market, he said, and a “no-brainer versus nominal Treasury bonds.”
He doesn’t like investment-grade corporate bonds because they have too much interest-rate risk
relative to their yield.
Gundlach said the credit cycle is “okay for the near term,” since commodity prices bottomed at year
end.
He said he wouldn’t be surprised if the 10-year Treasury bond is at 6% in four to five years. That would
mean that nominal GDP growth would be 6%, he said, constituting approximately 2% real growth and
4% inflation. Nominal GDP growth will go up if there is a fiscal stimulus, he said.
Gundlach said he turned negative on interest rates on July 6 when it was clear the U.S. was at the end
of its “bizarro” monetary experiment and had handed the challenge over to fiscal side, “which is bond
unfriendly and potentially inflationary.”
During the question-and-answer period, Gundlach was asked why he supports Trump when half of his
listeners don’t like him.
“Since when have I cared what the consensus thinks,” he said.
Page 3, ©2017 Advisor Perspectives, Inc. All rights reserved.