At least one institutional investor in TCW Asset Management Co.'s embattled Special Mortgage Credit Funds I and II has decided to move on.
The $4.2 billion Fairfax County (Va.) Retirement Systems chose Feb. 18 to liquidate its $62 million total in the SMCF I and II strategies, Larry Swartz, chief investment officer, said in a telephone interview.
“We got most of the upside (out of the investment) that we were going to get,” he said.
Mr. Swartz said the decision was based on “our analysis of the market and how far those securities have appreciated recently.” The retirement system made its first investment to the SMCF Fund I in July 2007; it invested in Fund II in October 2008.
The Fairfax County system made its decision one day before the Feb. 19 deadline set by TCW to remain in the funds, which had been managed by Jeffrey Gundlach. Mr. Gundlach, chief investment officer and chairman of TCW's multistrategy fixed-income committee, was ousted by TCW on Dec. 4.
The decision followed a highly public battle between TCW and Mr. Gundlach, who subsequently launched his own firm, DoubleLine Capital LP, Los Angeles, with former TCW employees.
Mr. Gundlach's departure triggered the “key-man” provision, requiring TCW to find a new manager to run the funds. Specialist portfolio managers from TCW and Los-Angeles-based Metropolitan West Asset Management LLC were chosen to oversee the investments, according to a letter sent to limited partners of the two funds.
Those who remained in the fund were to receive reduced management fees — dropping to 1% from 2% — and a reduced carried interest percentage — dropping to 5% from 20%. They also could keep their investment or add more to it. TCW also said it is shortening the term of the fund to Feb. 28, 2013, compared with the original term of July 10, 2015. Those choosing to stay also will have the option to liquidate after 18 months, according to a letter sent to limited partners on Jan. 25.
Some investors decided earlier to stay with TCW.
“We are comfortable that the new portfolio managers are fully capable of responsibly managing an orderly wind-down of the portfolios,” Michael Sacks, CEO of Grosvenor Capital Management LP, Chicago, said in a Feb. 5 letter to Grosvenor clients with exposure to the two funds. The letter said the decision was made after an extensive evaluation of the MetWest team.
“The significant reductions in the management and incentive fees are meaningful economic benefits, while the termination of the investment period and reduced duration of the term of the funds are important changes that improve liquidity and align the investment horizon of the portfolios with our view of the opportunity set,” the letter said.
It could not immediately be learned how much exposure Grosvenor clients had to the two funds. Mr. Sacks did not return calls.
Neil Rue, managing director of Portland, Ore.-based Pension Consulting Alliance Inc., said in a telephone interview two days before the deadline that he was not aware of a single client moving to DoubleLine from TCW.
“Clients that wanted to exit have already done so,” he said.
Mr. Rue declined to disclose how many clients decided to stay with TCW, but noted the $11.8 billion Kansas Public Employees' Retirement System, Topeka, dropped the firm in January because of the key-man provision.
“KPERS pulled assets out of TCW because they had retained Gundlach's team, and Gundlach's team was no longer there,” Mr. Rue said. The Kansas fund had $463 million in TCW exposure in core-plus fixed income, not in the two mortgage credit funds. Trustees are expected to discuss next month what to do with the money that had been managed by TCW.