TCW sees assets reach all-time high on bond fund growth

Assets under management at Los Angeles-based money manager TCW Group Inc. have reached an all-time high of more than $180 billion as the firm has capitalized on William H. Gross' departure from rival money management firm PIMCO.

TCW's MetWest Total Return Bond Fund had assets under management of $74.6 billion as of March 31, making it the second-largest actively managed fixed-income mutual fund in the world. PIMCO's Total Return Fund remains in the No. 1 position with $89.7 billion.

But if the current trend continues, based on flows at both funds in the past 12 months, the MetWest fund will surpass PIMCO's fund as the world's largest actively managed bond fund by August or September, said Jeff Tjornehoj, head of Americas research for financial data firm Lipper Inc.

The MetWest fund's AUM has surged 500% since 2011 and assets have more than doubled since September 2014, when Mr. Gross left PIMCO, the firm he co-founded. It notched more than $35 billion in net inflows between Oct. 1, 2014, and March 31, 2015, Lipper data show, while, during the same period, the PIMCO fund saw more than $100 billion in net outflows.

Flows have slowed for the MetWest fund during the first three months of 2016, to $2 billion in net inflows, while the PIMCO fund saw more than $3 billion in net outflows, according to Lipper.

Tad Rivelle, TCW's chief investment officer, fixed income, said institutional separate accounts following the bond fund's strategy account for about $30 billion, a number that has remained relatively stable.

TCW Group CEO David Lippman said in an interview that the turmoil at Pacific Investment Management Co. LLC has helped the MetWest fund gain much of its inflows since 2014, but he said it is impossible to determine an exact percentage.

“I suspect quite a bit of the inflows have been PIMCO related,” he said.

The core-plus fund, which favors a bottom-up investment approach, and invests across the fixed-income spectrum, has topped the Barclays Aggregate Bond index on a three-, five- and 10-year-basis, although its one-year numbers have been more challenged.

The fund had an annualized 2.69% return for the three-year period ended Dec. 31, compared with the benchmark's 2.5% return; an annualized 4.87% return for the five years, vs. the benchmark's 3.77%; and an annualized 6.62% return for the 10 years, against the benchmark's 4.89%, Lipper data show.

But for calendar 2015, the fund underperformed the benchmark: 1.31% compared with the benchmark's 1.96%.

TCW, which is 60% owned by private equity firm Carlyle Group and 40% by employees, does not disclose net profits or revenue. But Mr. Rivelle said the additional fees from the MetWest Total Return Bond Fund and other growing fixed-income funds have enabled the firm to hire 10 fixed-income investment professionals in the last six months alone, building capabilities in areas such as distressed credit.

“We have grown and we have more revenue to attract people,” he said.

The firm's asset growth comes a little more than three years after TCW's former owner, French bank Societe Generale, sold the asset management firm to Carlyle Group as part of a deal that also gave employees a minority ownership stake in the firm.

The Carlyle deal followed a tumultuous period at the firm. In late 2009, an internal dispute at TCW resulted in the firing of then-CIO Jeffrey Gundlach, who ran the firm's flagship product at the time, the TCW Total Return Bond Fund.

Mr. Gundlach then started his own investment management firm. Litigation ensued, with the two parties reaching an out-of-court, confidential settlement in 2011.

TCW also lost its two main alternatives teams during that period.

Crescent Capital, an alternatives investment team, left the firm and became independent in 2010, and the firm's energy and infrastructure group left in 2011 to form its own firm, EIG Global Energy Partners.

Mr. Rivelle and 114 other employees of Metropolitan West Asset Management, joined TCW when it bought the firm in 2009. Mr. Rivelle later became TCW's CIO, fixed income and Mr. Lippman, who was MetWest's CEO, became TCW's CEO.

Investment consultants and analysts now cite TCW's stability as a positive. Mr. Rivelle and the two other top fixed-income officials at TCW, Laird R. Landmann and Stephen Kane, worked together at three firms before joining TCW.

The stability of the TCW fixed-income leadership and team approach have been a major plus for the firm's fixed-income offerings, said Philip Schmitt, a senior consultant with consulting firm Verus Advisory Inc. in Seattle.

Mr. Schmitt said TCW has moved past the dispute with Mr. Gundlach and the consistency of key team members on both the investment and management side is helping the firm attract fixed-income assets.

One institutional investor, the $11.1 billion Ohio Deferred Compensation Plan, Columbus, tapped the MetWest Total Return Bond Fund to replace the PIMCO Total Return fund in its 457 plan lineup in early 2015 following Mr. Gross' departure.

Executive Director Keith Overly said in an interview that the TCW fund was chosen because of the firm's solid investment staff and because the senior portfolio management team had worked together through many market cycles, had solid risk/return statistics and competitive fees.

Karin Anderson, Morningstar Inc. senior analyst in Chicago, noted in a January report that the MetWest fund has received more inflows than any other intermediate bond mutual fund since Mr. Gross' departure from PIMCO.

“The team did a good job investing the money and keeping performance on track, and its patient, valuation-based approach has delivered strong results over the trailing five and 10 years,“ she said of the TCW fund.

Mr. Rivelle said the fund sacrificed returns in 2015 because of its defensive position avoiding riskier assets.

He said the approach was to own AAA securities while staying way from BB and BBBs as well as structured credit and high-yield bonds.

But that might be changing. Mr. Rivelle said the investment team is looking at investing in distressed credit opportunities because of pending bankruptcies of energy companies.

CEO Mr. Lippman also said he is looking to rebuild TCW's alternatives business.

In late 2012, the firm bought a $2 billion AUM direct-lending business. The business has since grown to $3.5 billion AUM.

Mr. Lippman said Jess Ravich, who serves as TCW's group managing director and head of alternative products, has evaluated about 200 alternative offerings but is moving slowly.

“We have to extremely focus on TCW's reputation of doing well for our clients,” Lippman said. “Not trying new things and creating danger.” n