Internal breakup at TCW gets ugly
For the second time in 15 years, Los Angeles-based money management giant TCW Group is involved in an ugly public divorce that is forcing its clients to choose sides.
The $110-billion-asset firm on Friday fired its chief investment officer, star bond-fund manager Jeffrey Gundlach, after asserting that he had threatened to leave and take other top personnel with him.
TCW Chief Executive Marc Stern opted for a preemptive strike: He sacked Gundlach and on the same day replaced the 24-year TCW veteran by acquiring a rival L.A. investment firm -- Metropolitan West Asset Management -- and putting Met West’s team in charge of the bond funds that Gundlach had overseen.
Gundlach, 50, isn’t going quietly: He said Sunday he was “inappropriately ousted” and had never threatened TCW. Even so, he said he was exploring whether to jump back into money management, either by starting his own firm or by joining another, and expected he could lure many of his longtime clients away from TCW.
Over the weekend, Gundlach got support from some of his lieutenants at TCW. Philip Barach and Louis Lucido, two senior managers of TCW’s mortgage-backed securities funds, said they had resigned rather than remain at the firm without Gundlach.
A number of other TCW staffers also quit, but the firm declined to say how many other than that the total was “a handful of people,” according to spokeswoman Erin Freeman. She said TCW “fully anticipated” some departures.
The stakes are high for TCW: If significant numbers of pension funds and other institutional clients defect to Gundlach or other firms, TCW’s management-fee income would slump. About 60% of TCW’s assets are in fixed-income securities, Gundlach’s specialty.
TCW also must persuade thousands of individual investors to stay put: The firm’s $12-billion-asset Total Return Bond mutual fund, which was co-managed by Gundlach and Barach, has far outperformed nearly all of its peer bond funds over the last five years.
The nasty breakup between TCW and Gundlach is reminiscent of another divorce in 1995: In March of that year five key officers of TCW quit the company to form their own firm, Oaktree Capital Management.
The five, including “junk” bond experts Howard Marks and Bruce Karsh, had sought an amicable split. They proposed setting up their own venture and transferring $7 billion of TCW’s then-$48 billion in assets to the new firm, while sharing management fees with TCW for a number of years.
That idea was angrily rejected by TCW founder Robert Day, who said the move by Marks, Karsh and the three other managers was “disloyal at the very least.”
Stern, who was president of the firm in 1995, backed Day, saying at the time that the proposal “didn’t make sense to us.”
Oaktree has since become a major global player in junk bonds, private equity and other investment strategies, with about $67 billion in total assets under management.
In part, TCW’s rebound from the loss of the Oaktree managers was driven by Gundlach’s success investing in mortgage-backed bonds, bringing billions of dollars in fresh assets to the firm over the last decade.
Although TCW’s clients have taken lumps in some mortgage-related investments, including so-called collateralized debt obligations, Gundlach still is considered one of the country’s premier investors in complex mortgage securities.
Even as many mortgage bonds exploded in the last few years, Gundlach steered the TCW Total Return Bond fund clear of that mess. The fund has gained an average of 9.1% a year over the last three years, beating 99% of its peer bond funds, according to Morningstar Inc.
Gundlach has scored much higher returns than that via riskier institutional funds that have taken advantage of the crash and subsequent rebound in many mortgage bonds since 2006.
Last month, Morningstar named Gundlach one of its nominees for “fixed-income manager of the decade” on a list that also included bond guru Bill Gross at Newport Beach rival Pimco.
Why would TCW want to jettison Gundlach?
Gundlach asserts that TCW’s French parent firm, banking titan Societe Generale, decided to oust him “in an ill-advised cost-saving measure.”
Societe General bought control of TCW from Robert Day in 2001, but the bank has since decided to let go of the firm. The Paris company announced this year that it planned to sell or spin off TCW in the next five years.
That has fueled speculation that TCW’s management would lead a leveraged buyout of the firm.
Amid uncertainty about TCW’s direction, rumors circulated on Wall Street this year that Gundlach might jump ship to another firm.
TCW is standing by its statement Friday that Gundlach had given Stern an ultimatum, although the firm didn’t specify what kind of demands Gundlach had made, or when.
“Mr. Gundlach threatened to leave TCW and take key personnel with him,” spokesman Freeman said. “This would have impaired our ability to manage clients’ fixed-income assets and we were left with no choice but to look for an alternative to ensure continuity and stability in managing clients’ assets.”
For his part, Gundlach says that “the idea that I threatened TCW is untrue.” He said he made an offer to Stern in September to lead a $700-million leveraged buyout of TCW, but that he didn’t present it as an ultimatum.
Gundlach said Stern never responded to his offer. Freeman declined to comment on Gundlach’s buyout offer.
Now on his own, Gundlach said he was exploring the “best platform” to quickly get back into the business of managing bond assets. He said that could involve launching his own firm or joining an established company.
Since Friday “my phone has been ringing off the hook” with calls from TCW clients, Gundlach said.
Meanwhile, TCW and Met West executives spent the weekend trying to assure clients that the transition from Gundlach’s management role would be “seamless,” Freeman said.
Although Met West is far smaller than TCW, managing about $30 billion in bonds, in mortgage securities “we feel that [Met West] matches skill for skill” with Gundlach’s team, Freeman said.
That judgment now will be up to TCW’s big-money clients.
