DoubleLine Joins State Street On Active Bond ETF

ETF giant State Street Global Advisors teamed up with DoubleLine Capital, the firm of famed bond investor Jeffrey Gundlach, to launch SPDR DoubleLine Total Return Tactical ETF (TOTL) last week.

The actively managed ETF is DoubleLines first foray into the ETF space.

One of the most respected bond fund managers in the market, Gundlach ran $12 billion TCW Total Return Bond Fund until 2009. At the time, Morningstar said it was in the top 1% of all funds invested in intermediate-term bonds for the five years ended in 2009.

Gundlach left TCW after a management dust-up and formed DoubleLine in 2010. Hes DoubleLines CEO and chief investment officer.

Its not a clone of any existing strategies, said Jeffrey Sherman, a DoubleLine portfolio manager, during a webcast this week. Sherman will co-manage the ETF with Gundlach and firm President Philip Barach. Its a new product created just for this offering, but it draws upon the views of Jeff Gundlach and the DoubleLine team.

While not identical to the firms flagship DoubleLine Total Return Bond Fund. ETF investors will be getting a deal. The ETF charges an expense ratio of just 0.55%, compared with the funds 0.72% fee for retail investors.

By going with a name-brand fund manager, State Street (NYSE:STT) is making a calculated effort to take advantage of the problems at Pimco. It looks like it wants to become the leading bond ETF in the country by taking on $2 billion Pimco Total Return Bond ETF (BOND).

BOND has seen more than $1 billion in outflow since Bill Gross, Pimcos bond maven, left the firm in September. This caused BOND to fall to second-largest active bond ETF.

TOTLs investment objective contains elements of both DoubleLines total return and core fixed-income strategies. The ETF aims to have a low interest-rate risk profile.

At the same time it expects to maximize returns through active allocation and selection of securities its analysis determines to be mispriced in the market.

DoubleLine Total Return Bond Fund has focused on mortgage-backed securities. But the ETF can hold any bond, including U.S. Treasuries, investment grade corporate credit, high-yield bonds, collateralized loan obligations, asset-based securities, bank loans and sovereign debt from both developed and emerging markets.

The portfolio must contain a minimum of 20% in mortgages, but it isnt required to hold anything else. While high-yield, emerging market and CLO securities can each only take up as much as 25% of the portfolio, as much as 85% can be held in government bonds.

The duration of a single bond can range from one to eight years and no security can have a bond rating below BBB-.

State Street Getting Active

State Street, which has a reputation for running passively managed funds, has slowly moved into the active ETF arena. The new fund is its third active bond ETF and 10th overall.

While active equity funds have a hard time beating their benchmarks, the less transparent bond market creates more opportunities for managers to beat their index.

Passive does best in U.S. equities, but in investment grade fixed-income 65% of managers outperform their benchmark, said Dave Mazza, head of research at SPDR ETFs. A skilled fixed-income portfolio manager can find inefficiencies across the market because it is illiquid and opaque.

Execs Departure Latest In Pimcos Bad Year

Paul McCulleys announcement last week that he would be stepping down as chief economist at Pacific Investment Management Co. was just the latest note in the giant bond fund companys annus horribilis.

Early last year, Chief Executive Mohamed El-Erian, Pimcos heir apparent, left over disagreements with Bill Gross, Pimcos founder and portfolio manager of the firms flagship Total Return Fund. At the time, Total Return was the largest bond mutual fund in the world and Gross the most famous bond investor on the planet.

Then in September, after the fund shrank by $65 billion over the previous 16 months, Gross also abruptly quit, shocking the mutual fund world and sending Pimco into turmoil. Hes now at Janus.

McCulley, a close friend of Gross, had left Pimco in 2010, but returned in May to help Gross calm investors nerves amid the outflow.

McCulley had been brought in by Gross when things were unraveling in the management ranks, said Jeff Tjornehoj, head of Lipper Americas Research. Bringing Paul in was like bringing the band back together. He came back so Bill could show Its not as bad as the newspapers say.’

With Grosss departure, there wasnt much reason for McCulley to stay, and management made that clear with the recent hiring of Joachim Fels, Morgan Stanleys chief economist, as the new global economic adviser.

New Pimco Team

In the wake of Grosss departure, Daniel Ivascyn, who has been at Pimco since 1998 and is head of the mortgage credit portfolio team, was named group chief investment officer. In 2013, Morningstar named him Fixed-Income Fund Manager of the year.

Pimco also named deputy chief investment officers Mark Kiesel, Scott Mather and Mihir Worah as portfolio managers of Total Return Fund.

Kiesel, named Morningstars Fixed-Income Fund Manager of 2012, is the global head of corporate bond portfolio management with oversight for the firms credit research. Mather was previously head of global portfolio management, and before that led portfolio management in Europe.

Before running the real return and multi-asset portfolio management teams, Worah was a postdoctoral research associate at the University of California, Berkeley, and the Stanford Linear Accelerator Center.

In the four months since Gross left, Pimco said, the fund delivered a net after-fee return of 3.99%, outperforming its benchmark by 1.11 percentage points.

Will Inflow Follow?

The strong performance of the Total Return Fund since Scott Mather, Mark Kiesel and Mihir Worah took over management of the fund is a reflection of the talent of our seasoned portfolio management team, said Douglas Hodge, Pimcos CEO, in a statement January.

Still, it doesnt look like the new team is instilling much confidence in investors. January was the 21st consecutive month of withdrawals, with net outflow of $12.5 billion, although this was significantly lower than the $32.3 billion pulled out the month after Gross left, according to Morningstar. Over the past 21 months, Total Return Fund lost $159.3 billion in net assets, down 54% from its 2013 peak of $293 billion, according to Morningstar. It is now the worlds second-largest bond fund.