Gross versus Gundlach: Who Has More Skill?

By Robert Huebscher

November 25, 2014

Mankind has landed a spacecraft on a comet 300 million miles away. Yet, after decades of academic research, the challenge of distinguishing skill from luck among actively managed mutual funds has remained largely unsolved.

Much is at stake in this challenge. If skill can be identified, then it is likely to persist, affording clients superior performance. But a manager who is merely lucky will eventually succumb to underperformance.

If rocket science has a counterpart in financial analysis, it is in the quantitative analytics from companies like Boston-based Northfield Information Services. Last week, I spoke with Dan di Bartolomeo, founder and CEO, to see if he could detect skill or luck among the two biggest fixed-income managers: Bill Gross, when he managed the PIMCO Total Return Fund (PTTRX), and Jeffrey Gundlach, manager of the DoubleLine Total Return Fund (DBLTX).

Northfield has been providing risk analysis and tools for portfolio construction to institutional asset managers for 30 years. Among its noteworthy accomplishments, Northfield’s analysis was used by Harry Markopolos to confirm that Bernie Madoff was engaged in a massive Ponzi scheme.

Scores of academicians and commercial vendors have attempted to identify skillful managers. The problem, di Bartolomeo said, is that most people “do this badly” and don’t deal with all the issues in sufficient detail.

Northfield’s methodology was originally published in this 2006 paper. Di Bartolomeo said the published results documented predictive power that was three times stronger than what was previously reported in the academic literature. It was both economically and statistically significant.

I’ll discuss the results of the Gross versus Gundlach analysis, but first let’s review Northfield’s system for distinguishing skill from luck.