(PUB) Investing 2015

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In mid-March, Morningstar analysts met with
several of the portfolio managers behind Metropol-
itan West Total Return Bond MWTRX , TCW
Total Return Bond TGLMX, and Metropolitan
West High Yield Bond MWHYX. Below we provide
some background on TCW and the conclusions we
drew from our visit.
Taking a Look Back
Private equity giant Carlyle Group and TC management
combined to acquire TCW from Societe Generale
in February 2013. The firm saw some non-investment-
team employees depart following the deal, but
the portfolio manager and analyst ranks have
remained stable. That said, TCW 's corporate culture
has undergone a shift since it dismissed Jeffrey
Gundlach and acquired Metropolitan West Asset
Management to take over several fixed-income
strategies, including TCW Total Return Bond in
December 2009. MetWest had not run a mortgage-
focused fund prior to taking over TCW Total Return
Bond, though its flagship offering, Metropolitan
West Total Return Bond, devoted roughly two thirds
of assets to mortgages at that time. Metropolitan
West Total Return Bond has received the most
inflows of any actively managed fixed-income fund
following Bill Gross' September 2014 departure
from PIMCO. The open-end fund had $64 billion in
assets at the end of March 2015, up 88% since
last September. In contrast, Metropolitan West High
Yield Bond has been in outflows since 2013 .
Basking in PIMCO's (Diminished) Glow
Given Metropolitan West Total Return Bond's signifi-
cant growth, a related issue is whether the inflows
will impede the fund's successful investment process.
Morningstar has noted its shrinking stake in less-
liquid nonagency mortgages (to 11% at the end of last
year from 14% as of mid-2014), raising the concern
that the fund's size has crowded it out of that niche.
Generalist portfolio manager Laird Landmann argued
that the reduction reflected full valuations given
nonagencies' strong recent performance, not capacity
constraints. However, the team upgraded the
credit quality of the nonagency stake during the past
two years, and adding to that position may have
been harder in the current environment.
The portfolio's biggest change since last October
was an increase in its U.S. government bond stake to
33% from 27%. Landmann argues that Treasuries
offer the most compelling risk/reward profile given
late-stage credit-cycle dynamics, though clearly this
was an easy source of liquidity. A ballooning cash
stake would have been concerning, but that position
halved to 3% over the six months through the end of
March. All told, the team has dealt with the flows
reasonably well, though we will continue to monitor
its ability to traffic in less-liquid markets.
How Has the Firm Shaped Up?
It appears that Carlyle's involvement has not impeded
the investment team, which has been able to
add staff as necessary. In our meeting, Landmann
indicated that there are no near-term plans for an
ownership transition. TCW management has ruled out
a leveraged buyout of Carlyle's majority ownership
stake in the firm. Instead, Landmann mentioned that
one possible outcome would be an IPO , which would
allow for the investment staff to increase its share
of the firm and for Carlyle to make a gradual exit. This
would avoid the risks associated with bringing in
a strategic buyer who might seek to aggressively cut
costs or cause turnover in the investment ranks.
We have also been paying close attention to the
integration of the two teams since MetWest was
brought in to run TCW Total Return Bond. Although
several non-investment-team employees have
left, CEO David Lippman seems to be doing a good
job of maintaining stability in the investment
ranks. He has also pushed for greater collaboration
among investment teams. K
Contact Karin Anderson at
TCW/MetWest Benefiting From PIMCO
Fallout
Income Strategist | Karin Anderson