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Southern California Bond Managers: Big Smoke, Small Fire

Much personal drama, not much investment disparity.

John Rekenthaler, 09/22/2017

Making the Headlines
They don't operate quietly in the City of Angels. Back in the day, Mike Milken rivalled Fidelity Magellan's Peter Lynch as the most famous investment personality of the late 1980s. (Although, to be sure, not the most popular.)

Twenty years later, Jeffrey Gundlach and his former employer TCW became embroiled in one of the loudest, most-acrimonious portfolio manager breakups in fund-industry history--only to be matched, and perhaps exceeded, by Bill Gross' resignation from PIMCO five years later.

That is a whole lot of "mosts" for one place.

Milken's headlines didn't lead to investment decisions: When he left Drexel it was to serve prison time, and his funds were en route to extinction. But the exits of Gundlach and Gross certainly did. When Gundlach left TCW, many articles were written about whether shareholders should follow him, or stay where they were. Gross' move generated even more concern, with PIMCO Total Return PTTRX shedding half its assets since his departure.

Behaving Modestly
Overall, the investment results haven't warranted the commotion.

To be sure, DoubleLine Total Return Bond DBLTX roared out of the gate. During its first three years (as measured from its first full month, starting May 1, 2010), the fund earned an annualized 11.15%, a breathtaking result for a high-grade bond fund in this era of low interest rates. The relevance for shareholders was somewhat lessened by TCW Total Return Bond's TGLMX success, as that fund also performed very well at 8.75%. Still, those who jumped TCW's ship for Gundlach gained an extra 240 basis points per year for their effort, which made the journey well worth taking.

In the years since, though, the performance gap between the DoubleLine and TCW funds has narrowed, with the former outpacing the latter by around 0.35% per year. And with the second case, the question of whether to follow Bill Gross to Janus Henderson Global Unconstrained Bond JUCIX, the results never have diverged greatly. To be sure, the funds have not behaved identically; real dollars have been won (or forgone) because of decisions to stay or go. However, it's hard to argue that the differences have justified the amount of spilled ink.

(Including, it must be confessed, ink spilled in this column, which addressed the PIMCO/Gross situation on two occasions.)

By the Numbers 
Below are the annualized returns for the trailing three years through this Wednesday, along with those of the Bloomberg Barclays U.S. Aggregate Bond Index. They are tightly clustered.

  - Source: Morningstar Direct

In first place--narrowly--is the fund that the consensus would have picked to finish dead last. Three years ago, DoubleLine was the industry's most highly regarded bond fund, TCW had retained its positive reputation after the shock of Gundlach's departure, and Bill Gross was expected to shine after being given the freedom to manage as he pleased, with a small asset base. The big worry was PIMCO Total Return, which had performed somewhat poorly even before Gross left, and figured to fare even worse as it was hit with redemptions.

So much for the forecasts. PIMCO Total Return has performed quite nicely, if not spectacularly. Close on its heels has been DoubleLine, which cooled off after its blisteringly hot start. (That DoubleLine has also been in net redemptions, albeit mildly, demonstrates how expectations for the fund had grown dangerously high; there's no way to call the past three years a problem, given the fund's strong trailing-three-year risk-adjusted returns, which handily exceeded PIMCO Total Return's.) The TCW and Janus Henderson funds have disappointed: the TCW fund mildly, and the Janus Henderson fund somewhat more.

However, it must be said that these distinctions are somewhat tenuous. Barely more than 1 percentage point per year separates first from last, though the gap widens after accounting for risk (with DoubleLine besting the others). If I were to measure the relative results one month from now, I could easily get a different order. In the grand scheme of things, viewed purely from a returns standpoint, the four funds have behaved largely similarly during the past three years.

Counting the Dollars
Another way to gauge the results is in dollar terms. Fund performance is customarily charted as the growth of $10,000, but that figure is rather modest for this day and age. Those who purchase their funds for retail accounts, as opposed to 401(k) plans (where the investor has no voice in bond-fund selection), will likely invest a larger sum. Thus, I'll make the starting point $100,000, to better draw out the differences among the funds.

  - Source: Morningstar Direct

The two winners put their investors about $1,700 ahead of the benchmark, the largest loser is about $1,700 behind, and the modest loser $600 in the relative hole. Are those big numbers? Well, it depends. If somebody were to hand you a $1,700 envelope after you finished reading this article, you'd be delighted (and would likely read my columns more often). On the other hand, on a $100,000 investment that's but a portion of a larger portfolio, that amount isn't terribly meaningful. The next day the financial markets dip, you'll lose more than that.

Another way of putting the matter: Had I selected another benchmark, then all four funds would be in the relative hole. Vanguard Intermediate-Term Bond VBILX, which uses the Bloomberg Barclays U.S. 5-10 Year Government/Credit Float Adjusted Index rather than the industry standard Aggregate Index, gained an annualized 3.41% during the same time period: 17 basis points better than PIMCO Total Return. That doesn't mean the four funds failed. Indeed, because the Vanguard fund was considerably more volatile than the other funds, its risk-adjusted returns lagged all but the Janus fund's. Rather, it illustrates the perils of drawing conclusions from such closely bunched performances.

Wrapping Up

  1. When a manager leaves, it's difficult to make the correct investment decision. As it turned out, it was best to move with Jeff Gundlach and stay put with PIMCO. Not many people got both those decisions right.
  2. Fortunately, for those who own high-grade bonds, the consequences of being wrong are generally not severe, because such funds tend to perform similarly.
  3. That precept has held particularly true in recent years, with interest rates and credit spreads being low.
  4. The events at TCW and PIMCO were bigger personal-interest stories than they were investment stories.


John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.


is vice president of research for Morningstar.

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