Gundlach: Robos Could Cause Next Crash; Passive Mania Will Wane

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’ Impact

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.