For the few bond junkies out there, the names Jeffrey Gundlach and Bill Gross are household names.  I thought it would be fun to see how the two funds have stacked up since the inception of Doubleline.  Below is the Comparative Returns of Pimco Total Return and Doubleline Total Return.

Now let’s be fair to our friend Bill.  There are a number of advantages that Doubleline has including:

-From inception in April 2010, DBLTX has built up assets from under $1bil to $6.8bil.  Gundlach’s team can obviously be a lot more nimble and selective in the bonds they buy.  As he used to say, he goes after the cheapest 1% of bonds

-PIMCO is over $240bil in assets, a monster of a fund that is hard to move in and out of certain sectors.

Duration & Composition:

• Doubleline has a duration of 3.79 and is very barbell in nature.
• The 44% they hold in non-agency is very low duration (Gundlach even argues some are negative duration).
• The 33% they hold in Agency CMO’s are very long in nature.  They are buying a lot of last cash flow and Z pieces which are locked out for a number of years.  One example would be a 10yr sequential off of jumbo collateral priced in the 80’s.  If prepays end up being greater than expected, they get a yield pop and the bonds end up being shorter.
• 15% of DBLTX has a weighted average life of more than 10yrs, something that is explained by the above mentioned long CMO’s.  Pimco has less than 5% longer than 10yrs.
• Not only will these long CMO’s roll the curve, but they obviously have greater carry and performance in rates down than shorter bonds.
• PIMCO has

37% in cash as of 4/30.  Should a dramatic rise in rates occur quickly, they will be able to re-invest at more opportunistic yields.

Outlook:

• Doubleline is heavily invested in non-agency MBS which is purchased with very stressed loss adjusted yields.  So even if housing continues to get worse, their purchases have a built in margin of safety something I would argue that PTTRX’s corporate holdings don’t have.
• If rates continue to stay flat, down, or even up modestly Doubleline should continue to outperform.  They additional carry they have on their longer holdings and credit impaired RMBS provide a big difference versus Pimco.
• Pimco will win if emerging credits and corporates continue to perform well, and rates make a substantial move up.
• Doubleline would be hurt if spreads blow out of non-agency mbs, and the long end of the curve sells off.  Their long CMO’s are priced based off the 10yr part of the curve (where their highest key rate durations are), so they are obviously most sensitive to that point.
• Similarly, Doubleline is getting additional yield from a small amount of inverse IO and inverse support pieces.  The coupons of these leveraged bonds are based off of libor, so a spike to libor would be detrimental.  If it continues to stay low, they will keep clipping insanely high coupons.

Conclusion:

It is clear from above that Gundlach has dramatically outperformed Gross.  That being said, it’s tough to make an argument that Pimco will outperform Doubleline going forward.  While there are situations where that can occur, the numerous advantages and high carry of Doubleline make that unlikely.

David Scawhel is a husband and father of two living in Raleigh/Durham NC. Currently works as a fixed income portfolio manager. Spent time in NYC in both investment banking and equity research. Current CFA charterholder.

Disclosure:  Long DBLTX

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