DoubleLine Capital’s Jeff Gundlach has become one of the most visible critics of market complacency, revealing his purchase buy five- and eight-month S&P 500 put options. Now, the legendary bond investor is touting his bet on a spike in equity market volatility as one of his “highest conviction” trades, according to an interview with Bloomberg.
"Volatility is about to go up," he said. "That’s my highest-conviction trade right now."
As a result, Gundlach - who does not anticipated a crash (yet) - says his fund is quietly moving toward the exits on riskier assets, which is also his recommendation to traders.
“I don’t see the big drop, unless there’s something out of left field, like some sort of really escalating conflict,” he said. “I think you’re supposed to be gradualistically moving toward the exits.”
Speaking to Erik Shatzker, Gundlach says he’s reducing DoubleLine’s positions in junk bonds and EM debt and moving to safer high-yield credits. With US equities looking increasingly overvalued with each successive all-time high, Gundlach says being defensively positioned is worth sacrificing a few quarters of higher returns.
In the interview, Gundlach echod recent bearish views expressed by investing legend Howard Marks, who said that markets have crossed into “too bullish” territory according to his latest investor letter, discussed here previously.
“If you’re waiting for the catalyst to show itself, you’re going to be selling at a lower price," he said in a phone interview Monday from DoubleLine’s office in Los Angeles. “This is not the time period where you say, ‘I can buy anything and not worry about the risk of it.’ The time to do that was 18 months ago.”
When asked about his business plans, Gundlach revealed that DoubleLine’s AUM increased to an all-time high of $110 billion in 2017.
However, he unlike so many other managers, he has no intention of growing his AUM exponentially, and insisted that he may soon close the fund to new money, adding that he doesn’t want DL to become an industry behemoth like BlackRock or Vanguard.
“Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today.
‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’
That attitude is out of step with an industry that prioritizes asset growth, both as a means to generate more revenue and as a way to defray fixed expenses such as technology and compliance. Janus Capital Group and Aberdeen Asset Management Plc each combined with other firms in part to gain scale. Vanguard Group has more than quadrupled its assets to $4.4 trillion in less than a decade, and in an interview in March, Larry Fink, whose BlackRock Inc. oversees $5.7 trillion, said ‘scale has become a greater necessity - and for us a greater advantage.’”
As a result, Gundlach may soon shut his flagship $50 billion Total Return Fund to new money, saying that continued growth would make it more difficult to invest in some less-liquid high-yield markets.
“Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.”
While many hedge funds are slashing fees in a desperate attempt to attract new capital, Gundlach sees high fees as a way to regulate growth.
“I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’”
Of course, there’s probably no better strategy to ensure that every major institutional investor will show up at your door, check in hand, begging for you to take their money than telling Bloomberg that the door to new money is closing quickly.