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Past performance rules for unrated Gundlach fund

Tit-for-tat with Morningstar leaves big fund without a rating, but investors can't get enough of it

Aug 8, 2014 @ 12:24 pm

By Jeff Benjamin

Star bond fund manager Jeffrey Gundlach's celebrated ride on his solid recent performance stands out as the latest example of past performance trumping all else in the mutual fund industry.

The $34 billion DoubleLine Total Return Bond Fund (DBLTX) has been raking in assets and outperforming its mortgage-backed-security strategy peers, even though Morningstar Inc. has sent up its rarest of red flags by deeming the fund “not ratable.”

There is some odd history and a bit of childish bickering behind the “not ratable” status, which Morningstar applied last month after DoubleLine Capital refused to respond to inquiries from a Morningstar analyst. But by dropping the fund's neutral rating, which it has had since the analysts' ratings were rolled out in 2011, the DoubleLine fund stands out as the only U.S. mutual fund to be labeled not ratable.

“They declined to do the interview, or to provide any of the information we requested,” Morningstar fund analyst Sarah Bush said in justifying the rating change.

Ms. Bush, who took over coverage of the fund in 2012, said the initial neutral rating was because “we were seeing sizable risk with exposure to some mortgage-backed tranches that can turn quite illiquid, and the fund's yield was running way ahead of the category's yield.”

But when Ms. Bush began preparing for a review earlier this year, “some of our initial concerns that led to the neutral rating were gone, but we continued to ask some questions and they have declined to answer.”

Mr. Gundlach did not respond to multiple requests for comment, but his company's spokesman, Loren Fleckenstein, cited an ongoing communication gap between Morningstar and DoubleLine.


“In a sense, it's accurate to say the fund is not ratable in that Morningstar fund writers are acknowledging that they don't understand our fund,” he said. “For two years, Morningstar writers mischaracterized our fund and we still kept an open-door policy in trying to work with them, but in 2012 we finally threw in the towel and decided to have no further communication with the fund writers.”

Mr. Fleckenstein traces the rift to the 2009 firing of Mr. Gundlach by TCW Group Inc., in which Mr. Fleckenstein claims Morningstar sided with TCW.

Meanwhile, even though logic might dictate that being dubbed “not ratable” by Morningstar's forward-looking analyst rating system should give pause to investors, it turns out the fund's higher-profile five-star rating based on past performance carries much more weight.

“I'd love to tell you that I think investors go beyond the popular star ratings and want to go deeper in their research, but we know that as long as the DoubleLine fund has a five-star rating from an independent source, investors will continue to invest,” said Todd Rosenbluth, senior mutual fund analyst at S&P Capital IQ.

According to Morningstar, investors plowed $1.2 billion into DoubleLine Total Return in the six-month period through June 30, five times the $265 million they invested in the second-most popular fund in the category, the TCW Total Return Bond Fund (TGLMX).

Those investors have been rewarded as DoubleLine Total Return gained 4.8% this year, ahead of 89% of peers, according to data from Bloomberg, which also showed that the fund has gained an annual return of 5.2% over the past three-year period, beating 96% of rivals.

Like Morningstar, S&P Capital IQ also has a five-star rating on the DoubleLine fund, but the S&P rating is based on both historical performance and forward-looking analysis.

In 2011, when Morningstar introduced its new analysts' ratings system — including gold, silver, bronze and neutral ratings — the goal was to help investors and advisers focus on investment risk as opposed to just the past performance indicated with its famous star ratings.


But as the DoubleLine snub clearly indicates, investors aren't really paying attention to analyst ratings, which leads to speculation about whether other fund companies will follow DoubleLine's lead.

“This is a big deal because this is a large fund that is saying, 'We disagree with you and we prefer to tell our own story,'” Mr. Rosenbluth said. “It could be a one-off thing, but it wouldn't surprise me to see other funds with strong star ratings and less-than favorable qualitative ratings close their doors to qualitative assessment.”

To be clear, DoubleLine is still providing Morningstar with all the information it needs to maintain the funds' five-star performance rating, and Morningstar has not stopped covering the fund in any way.

“Jeffrey Gundlach doesn't like our analysts' opinion of his fund,” said Morningstar spokeswoman Nadine Youssef.

“Our analysts are trying to help investors make better, informed decisions,” she added. “In fact, we currently have a positive rating for the performance and price pillars. We just don't have sufficient information from DoubleLine to give the fund a forward-looking analyst rating.”

That sounds almost like an olive branch offering from Morningstar. Now all we need is for Mr. Gundlach to start answering his phone.


Would you invest in a fund not rated by Morningstar?

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