Can Jeffrey Gundlach survive success?

No one has stormed the mutual fund stage in the wake of the financial crisis quite like mortgage-backed-securities mastermind Jeffrey Gundlach.

Mr. Gundlach, a native of Buffalo, N.Y., has gone from being relatively unknown to a household name over the last five years, thanks as much to his stellar long-term track record and famous foretelling of the housing collapse in 2007 as to the soap-opera-like drama that surrounded his firing from The TCW Group Inc., the founding of his own firm, DoubleLine Capital LP, and the ugly lawsuit that followed.

“There are star performers and there are star personalities,” said Joshua Brown, vice president at Fusion Analytics Investment Partners LLC. “Right now, he fits both.”

Last month, Mr. Gundlach’s flagship DoubleLine Total Return Fund (DLTNX) caused investment research firm Morningstar Inc. to ponder if any mutual fund had ever grown as fast when it stood at $22 billion in assets April 6, the two-year anniversary of its launch. In related news, the $15.4 billion of net inflows the fund drew over the past 12 months is more than any other mutual fund and even most entire mutual fund groups.

It’s helped DoubleLine, which doesn’t even crack the top 50 mutual fund firms as measured by assets, attract more net investor dollars over the past 12 months than household names such as Fidelity Investments, Franklin Templeton Investments and T. Rowe Price Associates Inc.

SEEKING TRANSPARENCY

Perhaps what’s more impressive is that the fund is selling based mainly on Mr. Gundlach’s reputation alone. DoubleLine doesn’t have a traditional wholesaler force and has no plans to start building one, he said. Instead, Mr. Gundlach reaches out to investors through webcasts on the DoubleLine website. The last one drew more than 1,500 advisers.

“We’re trying to be transparent in what we’re doing,” Mr. Gundlach said. “It’s turned out to be an extremely effective way of servicing investors.”

The insatiable appetite for income brought on by the Federal Reserve’s near-zero interest rate policy has given the fund a considerable tail wind. Its hefty 7.5% yield, along with Mr. Gundlach’s track record, has given it a sizable leg up over other bond funds.

A $10,000 investment at the fund’s inception would be worth $13,167 today, or nearly 16% more than the same amount invested in the Pimco Total Return Bond Fund (PTTAX) would have returned.

Some advisers are concerned over the amount of attention the fund is getting, though.

“When you have a hot manager, people tend to get in after the fact,” said Steve Rudolph, managing director at HW Financial Advisors.

Mr. Gundlach is keeping a close eye on inflows, as well.

“We’re growing at a level that is beyond satisfactory, but we’re not looking for infinite growth. We don’t want to emulate trillion[-dollar] fund companies and have to invest using swaps and derivatives because we’re too big,” he said.

Mr. Gundlach is confident that the fund could easily handle twice the current amount of assets, but beyond that, “there needs to be something of a ceiling if we’re going to deliver the same type of return experience our investors are used to,” he said.

FALLEN STARS

The struggles of Bruce Berkowitz of Fairholme Capital Management LLC and Bill Gross of Pacific In-vestment Management Co. LLC last year serve as a fresh re-minder of the perils of following a star manager.

“Look what happened with Berkowitz last year,” Mr. Rudolph said. “He said his fund was conservative, but then it blew up.”

The sheer amount of inflows may seem surprising to some, but not to Mr. Gundlach. In fact, he’s more curious about why it took investors so long to come around in the first place.

“What’s most surprising to me is how long it took investors to realize the merit of the ideas we developed in the “80s and “90s,” Mr. Gundlach said.

Today, it’s hard to imagine this Dartmouth College graduate, who majored in mathematics and philosophy, as toiling away in obscurity, but that’s what he did for his first 14 years as a mutual fund manager.

“Strangely, everyone was interested in bond funds that followed an index in the “80s,” he said. “We took a different approach. We looked at the risk-adjusted returns of different bond markets and found that the agency mortgage market had [the best] risk-adjusted returns of any bond market.”

That led Mr. Gundlach to launch the TCW Total Return Fund (TGMNX) in 1993. Despite the data supporting him, Mr. Gundlach had a hard time convincing anyone to invest with him. Seven years after the fund’s launch, it had accumulated only $60 million in assets.

“People were scratching their heads, saying, “What is this thing?’” Mr. Gundlach said.

As the fund invested only in agency mortgages, some investors were put off because they thought it was undiversified and therefore more risky than the average intermediate-term-bond fund, according to Mr. Gundlach.

The perception of the fund and Mr. Gundlach changed dramatically in 2007 at the Morningstar Investment Conference. He had just won Morningstar’s fixed-income manager of the year award and was scheduled to give the conference’s keynote speech.

Mr. Rudolph was at that conference, and he recalls thinking, “Boy, this guy seems pretty negative.” In hindsight, though, Mr. Rudolph concedes that “he painted the whole credit and mortgage crisis to a T. After the fact, he’s probably the only person who was able to call the crisis and articulate what caused it.”

After Mr. Gundlach’s predictions were proved true, the fund took off.

“After 15 years of telling our story and showing the performance, it took a total collapse of the bond market for people to start taking us seriously,” Mr. Gundlach said.

The TCW Total Return Fund went from just under $1 billion in assets at the end of 2007 to almost $12 billion at the end of November 2009, the month when Mr. Gundlach was nominated for Morningstar’s top fixed-income manager of the decade.

Just two weeks later, however, TCW fired Mr. Gundlach, claiming he was planning to set up his own shop.

The firm filed a lawsuit against Mr. Gundlach, accusing him of stealing trade secrets on his way out and breaking his fiduciary duty to TCW. He denied the charges.

The trial ended in split verdicts that allowed both sides to claim they’d won.

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