Chuck Jaffe: Star’s new fund isn’t an automatic buy
If Jeffrey Gundlach were a famous chef, he’d be the star behind a famous steakhouse.
Instead, he’s a star mutual-fund manager, running the hottest bond shop in the business, DoubleLine Funds, a firm that has attracted more than $55 billion into its bond funds in three years, largely on the strength of Gundlach’s sparkling track record.
But if Gundlach suddenly added a fish dish to his steakhouse menu, you might wonder whether it was worth a try — and worthy of your money — when you know it’s not what he does best.
And that’s precisely how investors should be thinking with the news that DoubleLine has opened stock funds.
DoubleLine Equities Small Cap Growth will be run by Husam Nazer, who — like Gundlach himself — is a former manager for TCW, having run TCW Small Cap Growth (TGSCX) from 2005 through 2012.
The new small-cap growth fund (DLESX) is the first of three planned DoubleLine stock offerings.
According to filings, plans are to add DoubleLine Equities Growth and DoubleLine Equities Technology, which Nazer will run along with Brendt Stallings, who comanaged TCW Growth Equities (TGGEX) for eight years, and ran TCW Growth (TGGIX) with Nazur for four years before they left the firm at the end of last year.
That’s a reasonable pedigree, but no one is anxious to throw money at guys whose last funds carry two- and-three-star ratings from Morningstar.
Instead, this is all about Gundlach — who is DoubleLine’s chief investment officer and who sets the tone at the firm — and his mojo.
When he broke out and started his firm, it was a hot new issue that had superior performance from the get-go. (Full disclosure: I invested with DoubleLine shortly after the firm opened in 2010, and remain a shareholder today.)
The one bond fund manager with a bigger reputation than Gundlach right now would be Bill Gross of PIMCO, whose firm has had mixed success with its equity offerings.
Listen to Gross discuss the stock market and, to be honest, he sounds like a guy who runs bond funds; it would not inspire you to invest in the firm’s equity issues.
Said Russel Kinnel, director of mutual-fund research at Morningstar: “PIMCO’s move into equities has been pretty successful, but that’s not so much about Bill Gross as about the managers and analysts and traders that the firm hired. Bill Gross is a bond-fund manager, and you just shouldn’t factor his presence at the firm into what you think about the firm’s stock funds.
“When you think DoubleLine, you think Gundlach, but if he’s not going to be running the funds, then the question is ‘How good is the team he is putting together and is it worth investing with them now,’ ” Kinnel added. “I don’t think [DoubleLine Small Cap] is a fund you buy on Day One.”
That’s an important distinction because studies show that new funds — and particularly those run by hot shops — tend to experience “new fund phenomenon,” where being small and nimble leads to superior performance.
The problem is that those same studies say the effect is completely gone by 18 months, meaning that if you wait for a new issue to prove itself, you sacrifice any possible bonus from being in at the start.
The expansion into equity funds makes tremendous sense for DoubleLine.
From a business perspective, using their bond success to bootstrap equity funds should help them reach critical mass quickly. But what makes sense for a fund firm isn’t always best for investors.
Fidelity, for example, is known as a stock shop, though analysts argue if the firm’s greatest strength might be in bonds — particularly municipals — today; thus, an investor who uses Fido as a one-stop shop is well-served.
By comparison, PIMCO, Janus and many others have met nothing better than mixed success when expanding away from their core investment prowess.
Moreover, DoubleLine’s new equity issues aren’t unique; if you own a small-cap growth fund, the only reason to jump to a new issue is if does something different, or if you are dissatisfied with what you own now.
“It’s not like this fund is doing something new or you can say ‘These are great managers — just like Gundlach himself on the bond side — who I really want to follow,’ ” said Jerry Tweddell of Tweddell Goldberg Investment Management in Sonora, Calif., who specializes in analyzing new funds. “They may do a yeoman’s job, but nothing that would draw me toward it right from the start — not even new-fund effect — until it’s proven. I’ll stick with funds that already have a good record in the same space.
“If your reason for buying DoubleLine’s new funds is Gundlach,” he added, “then you’re buying your next stock fund because you like a bond-fund guy. It may turn out great, but that doesn’t make it a smart move now.”
Chuck Jaffe is senior columnist for MarketWatch.
He can be reached at firstname.lastname@example.org or at P.O. Box 70,
Cohasset, MA 02025-0070.
Copyright 2013, MarketWatch