By BEN LEVISOHN

The separate uncovering in a causa and countersuit between bond-fund trainer Jeffrey Gundlach and his happening employer, Trust Co. of the West, mitt neither lateral a clear-cut winner. The aforementioned can't be said for the newborn money Mr. Gundlach launched terminal year, DoubleLine Total Return Bond.

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The money trounced competitors over the 12 months finished September, backward 10.3%, nearly threefold the Barclays Capital Aggregate Bond index. It vex the cipher intermediate-maturity stick money by nearly heptad proportionality points, swing it in the crowning 1% of that category, according to Morningstar Inc. Adding to the fund's allure: a dividend consent of 8.4%, most fivesome proportionality points higher than the collection average.

How has Mr. Gundlach finished it? He has shapely an intermediate-bond money that is farther from typical.

The prototypal suggestion that Mr. Gundlach is doing something different: DoubleLine Total Return owns nearly no tralatitious bonds. While the cipher intermediate-bond money fresh had 31% of its assets in joint bonds and 14.7% in U.S. Treasurys, according to Morningstar, the DoubleLine money has meet 1.2% of its assets endowed in joint bonds and owns no Treasurys.

But assorted Pacific Investment Management Co.'s Bill Gross, who famously countenance against Treasurys and whose Pimco Total Return today lags behindhand the cipher intermediate-bond money by threesome proportionality points over the happening 12 months, Mr. Gundlach hasn't been concerned by his selection to refrain Treasurys. That's because of what he does own: mortgage-backed securities—and lots of them.

A Complex Bet

Mr. Gundlach has nearly 14% of the portfolio endowed in authority mortgage pass-through securities, roughly in distinction with the collection average. These are bonds issued by a consortium that owns a bet of bag loans hardback by Fannie Mae, Freddie Mac or Ginnie Mae. The mortgage payments are then funneled to bondholders.

John Kanuit Photography

Jeffrey Gundlach's DoubleLine Capital is soured to a brawny start.

But the magnitude of Mr. Gundlach's portfolio is endowed in a more complex, potentially riskier modify of mortgage section famous as a collateralized mortgage obligation, or CMO. Rather than exclusive expiration along the modify line from the inexplicit mortgages, these trusts separate the payments among individualist classes of securities, apiece with assorted commercialism schedules and fashioned for assorted purposes, from floating-rate and oppositeness floating-rate bonds to "very accurately circumscribed maturity" and "accrual" bonds, apiece of which has its possess commercialism scheme and risks.

The cipher intermediate-bond money fresh had more than 17% of its portfolio endowed in these bonds, patch DoubleLine Total Return has 64.6%, most half of those in privately issued mortgages not hardback by the U.S. government. The exemplary money has nearly no danger to privately issued CMOs.

Trading in these bonds is what gives Mr. Gundlach his edge, but it also makes it arduous for run-of-the-mill business professionals, permit lonely retail investors, to see what he is doing and how the portfolio will advise low assorted scenarios. "Very some grouping hit the noesis ordered to see the poetics that intend the credit-exposed mortgage market," Mr. Gundlach says.

That's not needs a problem, says saint Shelton, honcho assets tar at Kanaly Trust in Houston. Mr. Gundlach shapely his estimation at Trust Co. of the West, or TCW, on his knowledge to manoeuver these Byzantine markets. In 2008, TCW Total Return Bond returned 1.1%, 5.8 proportionality points more than the cipher intermediate-bond fund, and Mr. Gundlach shapely DoubleLine Capital LP around that know-how. His aggroup analyzes the individualist loans in a section downbound to the ZIP Code, uncovering bargains where some another assets advise to tread.

"They're rattling old in what they do in mortgage-backed securities," says Mr. Shelton, who has endowed with Mr. Gundlach since his TCW days. "It's no assail that the fund's finished well."

The circumstances close Mr. Gundlach's onset from TCW in 2009 are what led to the effort that ended in terminal month's separate decision. The Los Angeles commission said Mr. Gundlach illegal modify secrets and desecrated his retentive obligation to his happening employer, but it also definite TCW unpaid him $66.7 meg in backwards wages.

Mr. Gundlach says his fund's portfolio is safer than a tralatitious stick money because exclusive one-third of the portfolio is unclothed to "credit risk"—the unfortunate of an issuer to pay—in the privately issued CMOs, patch the rest of his bonds hit polity backing. "If you ease conceive that the polity has no choice risk, then 63% has no danger to assign risk," Mr. Gundlach says. "The venture is greater [in another stick funds] than in a money same ours."

A Treacherous Period

The risks, however, are farther assorted from those in a plain-vanilla stick fund, where the direct concerns are the content of welfare rates and assign quality. For starters, the privately hardback CMOs are highly illiquid and their prices start during periods of venture aversion. The government-issued mortgage-backed securities support equilibrise the venture by gaining in value when investors panic. The money also fresh had more than 17% of its assets in cash, up from most 7% in 2010.

But modify that isn't a indorse that Mr. Gundlach will manoeuver the unsafe genre unscathed. He is retentive more venturous assets than he did during another unsafe periods—and a double-dip recession, a boost motion in structure prices or a choice in aggregation could alteration his privately hardback securities, says Eric Jacobson, administrator of fixed-income investigate for Morningstar. "He's staggeringly overconfident that he crapper advise around this," Mr. Jacobson says. "But it haw not concern how active he is if we modify up with a bounteous selloff likewise quickly."

Complicating matters is the fund's rapid growth. DoubleLine Capital had assembled $15 1000000000 in assets low direction by Aug. 31, up from $500 meg at the first of 2010. Of that, more than $10 1000000000 is in DoubleLine Total Return Bond. As the money grows, it will intend harder for Mr. Gundlach to encounter bonds at affordable prices. "More noesis to DoubleLine for art the assets," says blackamoor Brakke, chair of TJB Advisors. "But it will attain it harder for them to move to outperform."

One venture is that investors will countenance at the fund's action and its powerful consent without discernment what the money is doing. Investors should verify the consent in portion with a flourishing pane of skepticism, Mr. Brakke says, because it crapper modify when the trainer buys or sells bonds in the portfolio. "People conceive it will be an 8% yield, and it belike won't be," he says.

That's ground some advisers pay happening disagreeable to see what Mr. Gundlach does before purchase the fund. saint Holtzman, a business authority at Legend Financial Advisers Inc. in Pittsburgh, for instance, bought the money most digit months ago, after outlay months studying the portfolio and how it behaved. Even then, it's meet 7% of his clients' portfolios.

Too some investors, however, acquire the money on faith, says Mr. Jacobson. "As daylong as the drawing countenance good, they don't tending what he does," he says. "People requirement to see the venture or venture existence disappointed."

Mr. Levisohn is a body communicator for The Wall Street Journal in New York. Email him at ben.levisohn@wsj.com.