Gundlach Finding Footing after 'Sucker Punch'

Jacobson: What can you tell us about the ownership structure of the new firm?

Gundlach: Well, DoubleLine is majority owned by its principals. In fact, the principals have a controlling interest in DoubleLine. It was reported in The Financial Times that Oak Tree has a 22% interest in Double Line, and that is true, so it's 78% owned by employees.

And everyone, basically, that works at DoubleLine right now is an equity stakeholder in the firm. I'm the largest shareholder. Phil Barach, my longtime partner, who could easily run any mortgage department in the world and be well respected there, is the second largest shareholder. Joel Damiani is the third largest shareholder. He has been a portfolio manager at TCW at a senior level for a long time.

Again, at our team, I think the top--and I'm really not trying to gild the lily here. I think the top 8-10 people at DoubleLine could run virtually any mortgage department in the world and be the senior person. So our expertise in that area, based on the record, speaks for itself. And the team just loves working together. That's the other thing.

It was incredibly gratifying. When I was terminated by TCW Dec. 4, the very next day, the 15 key most people came and said, "We resigned from TCW. We want to join you." And at that time, we didn't even know what we were going to do, because we didn't have any such plan.

But one of my skills is reflexes. Some people think I'm good at predicting the future. I don't think that is exactly right. I think I'm very good at taking variables and seeing what is essential in them, it's kind of the mathematical training, and then reacting in a way that is right more than wrong.

So this was a good test of those reflexes. I was pretty much sucker punched on Dec. 4 and had to find my footing pretty fast. And the team is pretty proud that in one week we were able to put together financial backing with one of the world's leading investment firms and be up and running. It was almost like we were on a Florida vacation for one week. But I can assure you it didn't feel like that.

Jacobson: Well, you bring up a good point, which is the speed there. Can you give us a little more understanding, not necessarily a prediction, but an understanding of what the process is, to the degree that you are familiar with it, about getting that investment advisory stamp from, I guess, the SEC, and then in addition to that, what it might look like in terms of turning around and doing something that will have a fund of a public nature?

Gundlach: Yeah, those variables are somewhat out of our hands. As you mentioned, it's an SEC issue. But we know that the outside edge of that process would take us into probably late January, and will probably accelerate beyond that.

Given the year-end nature of the world right now, it's almost like it's Jan. 5 already, because people are, understandably, on holiday and the like. So really, if we think of it Jan. 5, I think we could be up and running in a week after that date. And the license of the mutual funds will come. Certainly we have every expectation of launching a family of DoubleLine funds. Obviously, the Total Return Bond Fund will be the flagship.

But we also see room for several other funds, including--we have an excellent Core Plus team at DoubleLine, which is basically intact from TCW, that had a 5-star Morningstar fund in the Core Plus space.

We also have an outstanding emerging markets team that has been attracting some notoriety, deservedly. And we also think that there is room in the market today for what I call a bear market fund, one that is shorter duration with the type of alpha generation that my team has been known for, to orient towards investors that think interest rates are going to rise. I know that that's a popular idea. Maybe people are right.

And so this is something that my team has been doing for a long time, managing funds that are absolute return-oriented as weall as substantial out-performance relative to an intermediate bond fund. So a rising rate fund seems to make sense.

And also we want to establish a closed-end fund. I managed a fund called TSI for three and a half years. It was number one its peer group. I'm the largest individual shareholder of TSI, and I certainly want that management done by the team that I hired, which of course is my team. And we'll intend on doing funds of that nature, as well.

Jacobson: Just for a minute, to veer back to absolute return, sort of rising rate concept. Strategically, what do you think a portfolio like that would look like in terms of the kinds of things that would be in there to help it achieve those goals?

Gundlach: Sure. First of all, you're going to use various short duration securities, of course, floating rate securities. But also, in the world of mortgages, one can use securities that actually have negative durations. Some of them are premium mortgages and they don't perform well when rates fall. But remember, this is for a rising rate themed fund, and they actually have improved returns if interest rates are to rise.

There are also things that are called super floaters, which actually have a coupon that goes up very rapidly if interest rates, say a LIBOR rate, would rise. And also, TIPS in the Treasury market would be reasonable from time to time. We are not fond of TIPS presently, but from time to time, they would be one way of taking advantage of the potential for rising inflation, rising rates.

Jacobson: So some of the mortgage securities you are talking about are sort of structured off of CMOs or something like that, typically, right?

Gundlach: There would be two types. There would be the pass-throughs that are an adjustable rate market, and there would be very short-term pass-throughs, say old, seasoned 15-year loans or balloon mortgages.

But also, as you correctly point out, in the CMO market is where you would have the super floaters and perhaps interest strips and the like, or more super premium mortgages that would actually benefit from higher income flows should the prepayment rates drop, which is the type of thing that is predictably going to happen if interest rates were to start to rise meaningfully.