How Much is Enough for Jeffrey Gundlach?

Jennifer Ablan of Reuters has been all over the interesting happenings in the fight for bond manager supremacy between Bill Gross and Jeffrey Gundlach. She recently interviewed DoubleLine’s Gundlach and posed an important question about the size of the firm. Specifically, now that DoubleLine manages over $60 billion, Ablan asked him about future growth plans for asset under management.

Here’s Gunlach’s answer:

I was told that Charles de Vaulx (of International Value Advisers, LLC, IVA, since May 2008) had the record for the most successful mutual fund complex start-up in the one-year mark. In May 2011, for some reason, Charles and I had some line of communication through the president of my mutual fund company. So I went to visit him and he was open to the meeting.

I went in and I said: “Hey, I’ve got this great idea. We’re looking for sub advisories and joint ventures to help build our firm. How about if we do this, You, Charles, do the stocks. And I do the bonds. We’ll take over the world. You’re the most successful stock start-up and I’m the most successful bond start-up. It is a winning combination. This is great.”

And Charles says, “I love it, I love it. I’m not doing it!” And I said: “What? Why?”

He said: “I’m closed. I like it the way it is. I manage $18 billion. I have a manageable firm. I like what I am doing. I like the people I work with. Enough is enough.”

And it just opened my eyes. I said: “Wow. You know what. I think there is something to this ‘closed’ concept.” Most people think the definition of success is more. It’s gotta be more all the time.

Charles de Vaulx opened my eyes and said, “That’s not true.” There’s a quality of life aspect and a way of maximizing the probability of success.

What you don’t want is to raise a bunch of money and go around the world saying: “I’m sorry” because of poor performance.

I love de Valux’s answer (in bold) to Gundlach on a possible partnership. Not many portfolio managers can resist the temptation to grow for the sake of growth when you can simply add more fees to their bottom line. But Gundlach himself has shared similar sentiments in the past. Here’s what he said in an interview in 2013 on the subject:

“I don’t think we can add another $50 billion to [Total Return Bond] and still manage it the way we want to mange it,” Gundlach says. “What you really don’t want to do is what the young guys do, and that is take every single dollar that is dangling in front of you.”

From reading these quotes you really get the sense that Gundlach has put a lot of thought into this. On the one hand, he could go for world domination and gain a huge share of the fund management industry. On the other hand, you can tell he has a great amount of respect for the fact that as fund size increases, investment opportunities start to dwindle.

This reason this is a fascinating subplot because you have arguably the greatest bond fund manager in world sitting in the catbird seat, just waiting to take cash from investors that are fleeing PIMCO from Bill Gross’ exit from the firm. Gundlach could easily raise billions upon billions from investors looking for the heir to the bond king throne. But he’s also an intelligent business man who knows the problems that can arise from trying to outperform with too much capital at his disposal.

I’m not pretending to know what Gundlach should or shouldn’t do here. Gross was able to outperform with a much larger fund at PIMCO than Gundlach currently manages. But It will be very interesting to see how this all plays out considering Gundlach is one of the few star mutual fund managers remaining. You also have to think about this not only from an investing point of view, but from the standpoint of running a business. It appears Gundlach is paying attention to both, not an easy thing to do for most portfolio managers.

This is the kind of stuff that makes the investment business interesting — it will always require a delicate balance between doing what’s best for the business and doing what’s best for the clients. In an ideal world, investors would work with firms that are able to do both.

Jeffrey Gundlach, on his year as new ‘King of Bonds’ (Reuters)
DoubleLine Total Return Fund Will Likely Close to New Investors (US News)

Further Reading:
The Secret Sauce of the Investment Business

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  1. Mac. commented on Jan 12

    Solid piece. Thanks. I would offer a nuance the statement that Pimco outperformed while being significantly larger. They did that pre Dodd-Frank. They may be able to do it again using derivatives but I am not all that sure you will be investing in a portfolio that is more cash bonds than CDX and swaps going forward. That may or may not be a good thing. But size will not be anywhere near as easy to swing around going forward as it had been.

    • Ben commented on Jan 13

      Good point. And Gundlach has stated in the past that he’s not a huge fan of using large amounts of derivatives because of the counterparty risk.