Thursday, September 20, 2012

DoubleLine Capital Valuation Hint

So here's another followup post, this time for my OAK/DoubleLine post (here).

Jeffrey Gundlach was on CNBC yesterday and talked about the markets and surprisingly talked about what he sees for the future of DoubleLine.    Gary Kaminsky conducted the interview and he asked a really good question that lead to Gundlach's discussion of DoubleLine's future which may have implications for DoubleLine's valuation (for OAK shareholders).

Anyway, firstly, here is what he said in general about the markets:

  • The 10 year treasury yields bottomed out in July.  What more is there to gain here?  How much lower can rates go?   Even if rates go down a little more, there isn't much gains to be had.
  • This feels like the mirror image of the mid 80's when treasury yields were very high and everybody hated it.
  • 10 year rates can go up 100 bps from here even before year-end.  People ask him what the catalyst for rising rates would be and he says that they are already going up; the catalyst is simply the bad return the low rates provide.
  • QE3 is not going to be effective.  Can't see any connection between QE3 and increasing employment.
  • Quotes Jim Grant; the markets now is a "hall of mirrors" due to the extensive market manipulation by central banks around the world.
  • Wouldnt' buy equities now as risk assets are at a high level.  So short term not positive on stocks, but over the long term due to the central bank actions there will be inflation so real businesses and assets would be good.   Gundlach doesn't think there will be another lost decade in equities.
  • He liked Spanish stocks in May because they were bombed out.  Liked it not because he thought Europe would solve problems, but just because it was bombed out.  Now the market that is bombed out to a scary extent is the Shanghai composite.  World markets at their highs and yet Shanghai and some other emerging markets are at multi-year lows.
  • Apple obsession / fixation means it is over-bought and over-believed.
  • Would (or said in the past) short Apple and the S&P and be long things like natural gas and commodities.  Apple is up 14% since he said that but natural gas is up 40%, so please don't look at only one leg of the long/short, pair trade idea.
  • Where to invest?  Get away from traditional ideas and indexation.  He likes bank debt for the first time in a long, long time.  International bonds are interesting as U.S. treasuries are no good.  Some mortgages around the edges.  Also, really, really safe dividend paying stocks.  Not tech stocks, but really safe ones (he later mentioned Campbell Soup).
  • Returns going forward, 5%.  Buy-and-hold is out the door.  Investors have to be more active, or have to find someone to do it for them.
  • Bank stocks not short but wouldn't own them for dividends.  They are not safe.  If something happens in Europe they are still vulnerable to significant shocks.
So that's the sort of things he said.

DoubleLine's Future
But what really got my attention was when Kaminsky asked Gundlach what level of assets is too much for a bond fund.  What AUM level would his investors have to start to worry as it might be getting too big.

At first Gundlach went off on this tangent about counterparty risk but Kaminsky got him back on track and asked the question again.  And then Gundlach said:
  • Maximum AUM is $100 billion, probably south of that.
  • For the Total Return fund (their flagship fund), they probably won't be open after $50-60 billion in assets.
  • Not interested in having offices in Singapore and Mumbai, travelling around the world.
  • Sees DoubleLine as a company with "mid-size staff and a mid-size culture".
  • Wants a manageable business, know what they're doing with people working together.
  • Maybe 100 employees, they now have 80.
  • Current AUM north of $45 billion.
  • Will probably close fixed income strategies at $60 billion.

So there you have it.  For those hoping for DoubleLine to become the next Pimco, this may not be very encouraging (Pimco AUM is over $1 trillion).

DoubleLine's Valuation
So going back to my other post and looking at the table there, if $100 billion AUM is going to be the maximum, DoubleLine would be worth $1.47/OAK share or $2.93/OAK share (at 1% of AUM or 2% of AUM respectively).

Of course, this doesn't mean that AUM can't keep going up with performance; just because they close funds doesn't mean AUM won't grow, so over time they can still get much bigger than Gundlach envisions at this point.  But it is one (and pretty significant) input we can use to value DoubleLine.


  1. Do you have a take on the bank debt recommendation/point than Gundlach made?

  2. Hi, no. I'm not too familiar with bank debt. I think there are closed end funds that invest in bank debt, but I don't know much about them so I don't know how you would play it.

  3. The bank debt call is curious in my view. Most bank debt is floating rate and senior secured which means the coupon should be lower than high yield (or sub debt)and adjusts with LIBOR. Therefore, either there is a dearth of capital resulting in single CUSIP opportunities or he thinks short rates are moving higher which doesn't make any sense! I thought it was a very curious call.

  4. There is the BKLN ETF, which invests in senior bank loans.

    Maybe he thinks bank loans are the only game in town when you look at his comments about treasuries etc.

  5. While I generally find Gundlach's opinions insightful, if you had listened to him in Jan 2011, you would have missed a great run in the municipal debt market. This was around the time of Meredith Whitney's 60 Minutes appearance, when Bill Gross was buying muni CEF's and muni credit experts were calling her analysis into question. His view on senior loans seems (to me) similarly misguided, but then again maybe it's the only yield sanctuary left outside of Campbells Soup.

    I also find it strange that he name drops Jim Grant, but so has Seth Klarman.

    1. Yes, I agree; I like to listen to these people but wouldn't necessarily put too much emphasis on their 'calls'. Gross was wrong big on treasuries too last year.

      Grant's is very popular with money managers and is sort of the flag bearer of the gold standard movement and has been highly critical of the central banks around the world.

      I don't know the debt markets well enough to know anything about bank loans...