Jeffrey Gundlach and Bill Gross have been wrestling over the bond king crown for more than a decade, but they are about to start competing in a new area: enhanced-index funds.
Mr. Gundlach's DoubleLine Capital LP filed an initial prospectus with the Securities and Exchange Commission Thursday for its first enhanced-index fund.
Such funds use derivatives, likely swaps or futures contracts, to get the returns of an index. Because derivatives don't require a lot of capital, the majority of the fund's assets are free to be invested in a range of bonds to boost the fund's overall performance beyond the index's return.
It is a formula that Mr. Gross' Pacific Investment Management Co. LLC has used to great success.
The $2.7 billion Pimco Fundamental Enhanced IndexPlus Absolute Return Fund (PXTIX), for example, is in the top 1% of large-cap-blend funds over the past three- and five-year trailing periods, according to Morningstar Inc.
Its 16% annualized five-year return trumps the S&P 500's 7% returns and the 10% returns of the $2.2 billion PowerShares FTSE RAFI U.S. 1000 ETF (PRF), which tracks the same underlying index, without the added returns of the bond portion.
DoubleLine's first enhanced-index fund will track the Shiller Barclays CAPE U.S. Sector Total Return Index, which is built around Yale University economics professor Robert Shiller's cyclically adjusted price-earnings ratio.
The index invests equally in the four most undervalued U.S. stock sectors based on their CAPE ratio and their price momentum over the past 12 months. Historical returns for the index weren't immediately available.
Mr. Gundlach and co-portfolio manager Jeffrey Sherman will manage the fund's bond holdings.
The fund also intends to use leverage, according to the SEC filing.
This isn't the first foray into equity investing for DoubleLine, which had more than $56 billion of assets under management as of June 30.
The company launched the first of its three actively managed equity funds just over four months ago.
Although it is still early, the DoubleLine Equities Growth Fund (DBEGX) and the DoubleLine Equities Small Cap Growth Fund (DBESX) are off to good starts, having outperformed their respective benchmarks.
The DoubleLine Equities Technology Fund (DBETX) was just launched last week.
Still, the funds haven't attracted much in the way of assets yet. The small-cap fund has about $12 million and the growth fund has about $1.3 million, which shouldn't be surprising, given how new the funds are and the fact that DoubleLine is best known for bonds.
Given the general disdain for actively managed mutual funds in general, however, an enhanced-index fund could be much more appealing to investors.
Actively managed equity funds have had net outflows of more than $350 billion since the financial crisis as investors, burned by underperformance during the crash, turned to index funds in droves, according to Lipper Inc.
At Pimco, which also offers both enhanced-index funds and actively managed equity funds, the enhanced-index funds have proven the bigger draw.
The company's four IndexPLUS funds have a total of more than $12 billion in assets. Its actively managed equity funds, the first of which was launched in 2010, have about $3.5 billion total.
Equities have taken on greater importance at bond shops this year as investor fears over rising interest rates cause a loss of faith in intermediate-term bond funds.
In June, Mr. Gundlach's flagship $27.6 billion DoubleLine Total Return Fund (DBLTX) had its first month of net redemptions since its launch in 2010, after interest rates spiked about 100 basis points in two months.
That is despite the fact that the fund outperformed the Barclays Aggregate benchmark by more than 200 basis points year-to-date, according to Morningstar Inc.