The Mind of Jeffrey Gundlach

Jeffrey Gundlach is a prophet, a mathematician, an art aficionado and occasional dabbler in painting, a former drummer in a failed rock band, a sometime student of philosophy, a reciter of poetry, a blowhard, a consumer of sports automobiles and crossword puzzles, and an egotist of striking dimensions.

He’s also a man with a genuinely original mind, as well as the manager of one of top-performing bond funds on the market. His firm, DoubleLine Capital LP, is the fastest-growing mutual fund startup in history. Its DoubleLine Total Return Bond Fund has yielded an annual average of 11.50% since its inception and amassed some $50 billion in assets. (For comparison, bond king Bill Gross’s $290-billion Pimco Total Return Fund netted an average of 6.96% for the same period.) Gundlach is also a man who inspires fierce loyalty in his subalterns. When he was fired from Trust Company of the West, his old employer, in December of 2009 and went off to start his own firm, 45 of his 65 team members quit their very comfortable jobs to step out into the great unknown with him.

He is, in short, an individual, in the honorific sense of the word. If his pronouncements are frequently over the top, his uncanny penetration makes him hard to write off. Blowhards are quickly forgiven if they have the chops to back up their swag.

His beginnings are ordinary enough. A Buffalo childhood in a modest, middle-class home (father an industrial chemist, mother a housewife); near-perfect SATs, back when that was a real accomplishment; four years at Dartmouth on a scholarship; summa cum laude in philosophy and mathematics. All par for the course among America’s best and brightest. After that, Gundlach enrolled in a Ph.D. program in theoretical mathematics at Yale, seemingly for lack of anything better to do.

In an alternate universe, he would have gone on to a respectable professorial career, and his weekend gigs with his new-wave band would have made him the cool prof in the eyes of his students. But there were problems. First, there was his thesis. When he told his dissertation adviser that he wanted to prove that infinity didn’t exist, he was told that his topic was outside the “mainstream interests” of Yale’s mathematics faculty. Second, his expansive side was getting restless. Yale and the academic game were too confining. So he dropped out and moved to California, where he gigged with a couple more bands and slowly went broke.

Suddenly, he decided he wanted to be rich. It was the 80s, and in the 80s if you wanted to be rich, you were an investment banker. So he called up Trust Company of the West, offered them his services as a mathematician, landed an interview, and started his first real job. He would stay at that job a quarter of a century, becoming manager of a $500-million fund at age 28 and pulling down a million dollars a year by age 30. When the financial crisis hit in 2007, his TCW Total Return fund still averaged an amazing 9.1% annually for the next three years. His team was by now managing almost all of TCW’s assets. Gundlach had made himself into that rarest of creatures in American business: someone who is irreplaceable.

Except that TCW didn’t understand that. In December of 2009, in what seems an act of incomprehensible self-sabotage, they fired him, charging he was conspiring to pilfer the company’s staff, steal its databases and client lists, and start his own firm. The charges were unjust, thus impelling Gundlach to…raid the company’s staff, reconstruct its client lists, and start his own firm. TCW filed suit; Gundlach filed a countersuit—and won, collecting $67 million in unpaid wages for himself and his associates. Meanwhile, he and they were frenetically scrambling to scrape together capital for their new mutual funds. Even with the litigation cloud hanging over them, they still succeeded in aggregating $7 billion inside their first year, largely on the strength of Gundlach’s reputation for delivering results.

How those results are obtained principally involves mortgage-backed securities, of both the guaranteed and the non-guaranteed variety. The former are insured by the government corporations Fannie Mae and Freddie Mac and yield lower returns, making them more popular when the market is bearish, while the latter are issued directly by banks and other financial institutions and thus carry more risk, causing them to yield higher returns when the market is in its bull phase. Thus far, Gundlach’s distinctive blend of the two in his bond portfolio has continuously trumped other players in the game.

But Gundlach isn’t given to boosterish optimism. Lately his thinking has taken a prophetic turn, and a gloomy one at that. He’s always been one to look at the big picture—he’s one of the analysts who correctly predicted the subprime-mortgage debacle—and in the next few years he foresees several national economies entering what he calls “Phase Three,” which entails defaulting on their national debts and receiving further government stimulus-spending as triage. This, he says, will cause inflation to spike, but also create unprecedented opportunities. Other of Gundlach’s views are equally visionary: he advocates, for example, abolishing the Fed. Not exactly received wisdom, but Gundlach’s keenness and conviction can make almost any idea interesting.

Gundlach has consciously cultivated a flamboyant style: Mondrian paintings in his office, quotations from the Great Books at meetings, unflagging self-promotion. But these mannerisms are mere epiphenomena of a mind unafraid to voice its ideas, or to call nonsense when it sees it. As such, he is a rare commodity, an American original. Ralph Waldo Emerson: “A man or a company of men, plastic and permeable to principles, by the law of nature must overpower and override all cities, nations, kings, rich men, poets, who are not.”

(Click here to sign up for my free weekly newsletter.)

Posted by Eddy Elfenbein on April 22nd, 2013 at 11:27 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.