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Jeffrey Gundlach Planning Return to Fund World

Former TCW manager says more information could come in a few days.

Eric Jacobson, 12/10/2009

Perhaps the most surprising thing Jeffrey Gundlach said during a quickly assembled conference call Tuesday was that he didn't think investors had any particular need to unload their shares of TCW Total Return Bond TGLMX, the flagship mortgage fund that he managed until being forced out of TCW on Friday.

Noting that his team's style never relied on high-frequency trading, leverage, or short-term strategies, Gundlach argued that the portfolio ought to be able to absorb moderate or above-average volatility, assuming that it still looked much like it did before he left TCW last week.

In fact, he remained quite positive about the prospects for all of the portfolios he ran, even saying he had no immediate plans to unload shares of a closed-end fund in which he is the largest shareholder, given that it's now trading at a discount to its net asset value. That's particularly notable given an L.A. Times report from early Tuesday citing unnamed sources claiming that the Total Return Bond fund suffered $1 billion in redemptions on Monday, or roughly 8.3% of the portfolio's $12 billion in assets.

There's no question that Gundlach wants to get back into the money management game, though, and that he'd like very much for his former clients to bring him their dollars as soon as he is. Gundlach said that he and his team thought of their former funds as their children, for which they had provided care and feeding, and which they want to come home from being out on the street and be tucked safely in bed. Although he may have been joking about a reported overture to TCW offering to subadvise his former funds, Gundlach also said that discussions were under way with other parties that could facilitate his return to managing client portfolios as soon as 30 to 45 days from now. He noted emphatically that his intent was to manage both institutional accounts and mutual funds available to retail investors.PAGEBREAK

While Gundlach wasn't specific about the shape of his future plans, he did say that a number of options were in the works, and that some discussions were even beyond the preliminary stages. When asked whether he was likely to join an existing organization or start up a new management firm, Gundlach responded cagily that he was thinking about a combination of the two. That would suggest the possibility that he and his team, which would ostensibly include all of the portfolio managers and senior analysts who worked with him at TCW and who he says have all resigned, might form a small firm that would manage assets as a subadvisor for a new or existing fund of a larger organization. The aforementioned L.A. Times article put the departures at roughly 15, though Gundlach believes there may have been more.

Gundlach also sought to reassure potential investors that the mortgage market would likely still harbor plenty of opportunity once his new operation is up and running. When asked about the prospects for the leveraged bank-loan market as compared with nonagency mortgages, Gundlach was incredulous, arguing that nonagency mortgages clearly had better return potential. He cited the fact that most leveraged bank loans were now pricing close to 95 cents on the dollar and offering interest payments of LIBOR plus 250 basis points (which equates to roughly 2.76% as of Tuesday), while the average nonagency mortgage security--including many that remain beaten down from last year's sell-off--carried a price of roughly 70 cents on the dollar and a 6% coupon.

Anyone concerned that the ordeal of being dismissed and seeing his funds taken over by a rival firm might have dented Gundlach's confidence, meanwhile, can be reassured. While describing how he had managed his former fund, Gundlach said that his style had been book-ended by those of Vanguard GNMA VFIIX and PIMCO Total Return PTTRX, which he said were both good funds. He even complimented PIMCO skipper Bill Gross, who Gundlach said is one of the few managers who understood how hard his job was, because Gundlach's team had performed just slightly better than Gross' over the long term.

Eric Jacobson is a mutual fund analyst with Morningstar.

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