DoubleLine Capital CEO Jeffrey Gundlach doesn’t hold back on opinions that he feels can help investors, and the bond king didn’t disappoint on Tuesday when he addressed a crowd of about 700 advisors and other guests at the FPA NorCal Conference in San Francisco.
“I would never use a robo-advisor,” he said. “That could be the cause of the next crash.”
Gundlach spoke about robos while discussing the broader issue of the investors’ herd mentality. He also highlighted the surge of passive investing, and he laid out his case for going with emerging markets and other non-U.S. equities at a time when the domestic equities have seen their prices hit new highs on a regular basis.
“The passive mania will soon end,” he said, “with reports of the death of active management being greatly exaggerated.”
Passive investing has “distorted” the markets’ behavior and have played a role in the high valuations of the S&P 500 index and other U.S.-based indices. “I would think about this and how to benefit from the pendulum swing” when passive funds fall out of favor, he said.
Gundlach described the recent blog post of David Blitzer, chair of the of the S&P Dow Jones Indices’ Index Committee, in which Blitzer shared how the 500 index components are not determined by how big companies are.
“The committee decides … which is active management,” the DoubleLine executive said. “There are lots of myths” about passive investing.
Passive investments are working because they have been attracting large inflows, their values then increase, and the cycle becomes self-perpetuating …. “and they go up and up,” Gundlach said.
While not speaking to the performance of equity funds, he added, “Passive bonds are not beating the market.”
Advisors have an “important role” in helping clients to not follow the herd, “but it is so hard for people to do this,” Gundlach said, especially when the herd “looks right for a long time.”
Robo-advisors, he says, are “the strangest thing. They are the ultimate definition of herd mentality — one size fits all.”
When it comes to tailoring portfolios, the fixed income specialist told the audience about people who ask him which DoubleLine funds they should own. “How many weeks do you have?” he quipped.
“Advisors have a strong role to play,” Gundlach said. “But is hard to scale [portfolios], and you cannot customize [them] all.”
In terms of using model portfolios, advisors need to be able to offer a lot of them. “You need a spectrum,” he said.
The fund manager says he interacts regularly with advisors using DoubleLine funds. “Some are very successful,” he explained.
Rates & ‘Unwinding’
In response to a question about the Federal Reserve’s next interest rate hikes and the “unwinding” (or reduction) of about $4.5 trillion on its balance sheet, Gundlach says it’s likely the Fed “will raise rates one more time this year.”
“They could stop [raising rates] in June and if so, I don’t see the unwind [coming]. All the talk about the unwind is tortured and over-complicated,” he explained. “It is just a spreadsheet.”
The bond king says that Chinese sales of about $300 billion in U.S. bonds late last year did not concern him.
“What does concern is what happens three or four year from now, when the deficit will be bigger — much bigger due to Social Security … and other factors,” he explained. “Then, you will also have corporate bonds, junk bonds and bank loans [coming to maturity], along with QE one, two and three … that is the biggie.”
U.S. vs. Rest of the World
When it comes to investing in equities, Gundlach points out that the U.S. “makes up 53% of market cap[italization] but only 24% of [global] GDP. This doesn’t seem right.”
His take? “Try investing overseas — it’s a good time,” he explained.
“About 30 to 40% of outperformance is tied to [rising] market cap rather than GDP growth, because largely U.S. equities have been propped up for years by passive management” and passive flows, Gundlach said.
He points out that the 115% upside in the S&P 500 is getting close to its 120% rise before the tech bubble burst: “Maybe there’s more S&P upside, but … it looks high.”
In comparison, the emerging markets and Europe looks cheaper.
While you don’t want to invest in something that is cheaper and likely to get cheaper, Gundlach said, “The emerging markets are outperforming, and there’s still a lot room here” for more upside.
He advices investing overseas in non-U.S. dollar products and says the greenback is likely to move sideways or even slightly weaker.
As for gold, it has been good for investors this year — rising about 10%, the fixed-income specialist points out — as can be a beneficial part of most portfolios over time. Gundlach also reiterated his bearish view on oil and energy prices.
— Check out Gundlach: Get Ready for Higher Yields, Summer Selloff on ThinkAdvisor.