Yesterday I wrote to you about how the 10 largest bond funds are increasing risk by loading up on junk bonds. The only fund company of the group not doing this is Vanguard. No surprise there. Vanguard always seems to do the right thing for investors. But there’s another narrative inside this grouping of behemoths that I want to share with you today. Who is the biggest holder of junk and who will pay the price when markets turn?
DoubleLine Total Return bond fund has loaded its portfolio with 28% of its assets junk rated. You may recall this beauty of a quote from its manager. He said that investors “want exposure to these high-yield and distressed securities and they’ve become comfortable with what we’re doing.” Again, as I wrote to you yesterday, in my close to 20 years working with investors, no one is comfortable losing money. And that’s exactly what this fund is set up to do in a major way when credits turn.
But the big losers are not going to be the fund’s managers. They’ll be fine raking in their fat fees. It will be the firemen, police officers, and retired teachers that will take the hit. They’ve put their trust in the managers and the pension board to do the right thing with their hard earned money. But as is often the case in the institutional investing game, it’s simply a beauty contest to determine where money is invested.
DoubleLine Total Return happens to be the belle of the ball today. It has fattened up to $31 billion under management in only four years. Its assets have grown by 689% since inception. We all know how this fairy tale will end.