One of my favorite blog pieces that I have written was undoubtedly "Is DBLTX misunderstood? Is the fund victim of faulty analysis & biased research?" No, it wasn’t fun pointing out mistakes made by various individuals. Rather, the enjoyment was found in setting the record clear on an investment management start-up (DoubleLine) that was being unfairly scrutinized by faulty and shallow analysis.
Earlier today a friend forwarded by an article written by a former Morningstar analyst named John Coumarianos who worked at Morningstar for six years. His conclusion was hardly shocking as it lined up nearly exactly with what I had written last December.
Gundlach accuses Morningstar of not understanding his approach to fixed income, and it’s a good bet that Morningstar’s analysts aren’t capable of analyzing a mortgage-backed security to the point of understanding which cash flows are owed to which tranche of a debt security Gundlach might own, what the FICO scores of the underlying borrowers are, what the loan-to-value characteristics of the security or tranch are, etc…Morningstar’s response conveyed by Don Phillips is that it’s “reprehensible” for Gundlach to demand that senior fixed income fund analyst Eric Jacobson be fired for misunderstanding the fund.
There’s an old saying in the bond market: “There are no bad bonds, only bad prices.” That means that some or all of the non-agency mortgages Gundlach owns may be excellent investments purchased at the right price, but it’s not clear that Morningstar knows how to judge the price Gundlach paid versus underlying or intrinsic value of a mortgage-backed security. Certainly Moody’s and S&P couldn’t perform that task adequately prior to the implosion of AAA-rated subprime CDOs. Morningstar, having achieved a largely unblemished reputation for protecting and assisting the individual investor and many advisors who, in turn, serve individual investors, may have to rethink its enterprise if it can’t analyze mutual funds on a security level basis. It’s not as clear that Gundlach’s request is reprehensible as it is that Morningstar is holding itself out as delivering analysis that isn’t worthy of the name.
The team at Morningstar is human, and I am by no means stating that any sort of mistakes are unacceptable. Unfortunately, in the line of business that Morningstar is in, they are perceived to be a trusted source of mutual fund analysis. My analysis from last December clearly showed that Morningstar missed the mark with respect to DoubleLine, and the post from the former Morningstar analyst only appears to confirm this thesis.