At TCW, it’s time for damage control
When L.A. money management giant TCW Group Inc. fired its investment chief in December, it sought to end a bitter internal struggle that threatened to rip apart its $100-billion business.
But the vicious legal battle that has ensued between the two sides has had unintended consequences for TCW: Its own image has been tarnished, aggravating some of its key asset managers and raising the risk of a talent drain.
TCW and its French bank parent, Societe Generale, now are launched on a plan to avoid a wider mutiny by finally offering equity stakes in TCW to its top managers -- a move the bank had put off for years.
The question is whether that will be enough to keep marquee talent on board.
“The TCW name is damaged at the moment,” said one veteran TCW manager who spoke on condition of anonymity. “What we have to figure out is, how permanent is that damage?”
TCW, founded 40 years ago by the scion of two of L.A.’s blueblood families, has been a hot subject in financial rumor mills in recent weeks as Wall Street has speculated about who among its senior people managing bonds, stocks, real estate and other assets might jump ship.
On Friday TCW sought to dispel those rumors, at least about five managers I specifically asked about: stock fund managers Tom McKissick, Husam Nazer, John Snider and Brendt Stallings, and Mark Attanasio, who heads the firm’s lucrative investments in high-yield bonds and loans.
“In the case of these professionals, they have made it unequivocally clear to TCW about their ongoing commitment to the firm and TCW’s clients,” spokeswoman Erin Freeman said in a statement.
She also confirmed that the company was “in the process of developing a plan to provide equity to TCW professionals. By providing them with an ownership stake in their firm, we are further aligning the interests of TCW’s professionals with TCW’s performance and future.”
The same day it jettisoned investment chief and star bond-fund manager Jeffrey Gundlach in December, TCW agreed to buy a rival L.A. bond-management firm, Metropolitan West Asset Management, to replace him and whoever might join him. It’s believed that the MetWest principals got a total stake of about 10% in TCW.
That raises another challenge: how to distribute ownership of the rest of the firm in a way that doesn’t alienate some executives in order to please others.
The banter on Wall Street about possible desertions from TCW has been stoked in part by the actions of consulting firms that are hired by big-money investors to pick fund managers. Many of the firms have in effect blacklisted TCW for the time being, fearful that any portfolio manager they recommend might soon depart.
“Nobody’s going near [TCW] now,” said one consulting firm executive.
What’s more, when TCW ousted Gundlach, more than 40 of his staffers fled with him to form a rival firm, DoubleLine Capital. That has left many of TCW’s bond clients in limbo: Do they leave their tens of billions of dollars with Gundlach’s replacements at TCW, follow Gundlach to DoubleLine or shift their assets to a third party?
One big test looms for TCW: It is trying to hold on to more than 200 institutional investors who put $3 billion into two mortgage-bond funds Gundlach launched in 2007 and 2008. TCW is offering to slash management fees on the funds for clients that stay -- but they must make up their minds by this Friday.
“We’re obviously not too happy about being stuck in the middle of this nasty divorce,” said Larry Swartz, chief investment officer for the Fairfax County (Va.) Retirement Systems, which has $321 million in the mortgage funds and hasn’t yet decided what to do.
Although it isn’t unusual for money managers to change firms, the circumstances of Gundlach’s departure, after his 24-year tenure at the firm, have created a particularly difficult dilemma for investors.
A lawsuit TCW filed against Gundlach last month sought to portray him as “unfit” to remain a TCW officer, alleging “erratic” behavior in his final months at the firm. The suit, which accuses Gundlach and other former staffers of stealing massive amounts of confidential information from the company, also said the firm discovered marijuana and dozens of pornographic magazines and DVDs in his TCW offices after it terminated him.
Gundlach, 50, shot back in a countersuit this week, alleging that TCW illegally fired him because it didn’t want to share up to $1.25 billion in management fees he contends that he and his team stood to earn over the next few years under a 2007 agreement.
One investment consultant said he viewed the war between TCW and Gundlach as unseemly even by Wall Street’s low standards, and wondered whether a Superior Court judge might just toss out the case.
“Why should the state take its time to mediate a fight between rich people shooting junk at each other?” the consultant said.
Some TCW insiders have expressed similar sentiments. “I can’t imagine that this was the only way to do things,” said one fund manager, referring to the court battle.
Gundlach, who over the last decade earned a reputation as one of Wall Street’s sharpest investors in complex mortgage securities, was the embodiment of TCW’s star-system business model fostered by the company’s founder, Robert Day.
Day, the grandson of Superior Oil founder William M. Keck on his mother’s side and Addison Day, president of Los Angeles Gas Co., on his father’s side, created TCW in 1971 as Trust Co. of the West. He sought to bring top money managers under the firm’s roof and let them operate essentially as financial entrepreneurs, with TCW providing an infrastructure.
That’s the opposite of the unified cultures developed by two other well-known Southland money management titans: Capital Group Cos. in L.A. and Pimco in Newport Beach.
The danger in fostering a star-system, or “silo,” business model is that the individual money managers may never develop loyalty to the corporate umbrella firm -- particularly if they don’t hold equity in the company.
Day, who at 67 remains chairman of TCW, retained equity control of the firm until he sold it to Societe Generale in 2001. The French bank owns 100% of TCW (the MetWest deal has not yet closed). Since 2001, periodic discussions within TCW about sharing that equity with top fund managers went nowhere.
Then, a year ago, Societe Generale abruptly signaled its intent to get out of the money management business and said it planned to sell or spin off TCW within five years. That obviously raised huge questions about the firm’s future.
Gundlach, riding high from his success managing TCW’s giant mortgage-bond portfolio, thought he should be chief executive of TCW. He says he made an offer to Societe Generale in September to buy TCW for $700 million. The bank later asserted that the offer wasn’t “serious.”
Gundlach’s mutiny set in motion the chain of events that led to his ouster. TCW maintains that it fired him because he was threatening to leave and set up a competing firm -- which, of course, he did, within days of being fired.
Now Gundlach, posing a direct competitive threat to TCW, may have finally forced the issue of turning TCW’s fund managers from independent contractors into owners of the business. In theory, ownership by the key players would make TCW a stronger company over time.
“Employee retention is one of the keys to the success of our business, ensuring that we can continue to work together as a team and build for the future,” Societe Generale’s Jacques Ripoll, head of the bank’s global investment management unit, said in a statement Friday.
But what took the French so long to figure that one out?
For TCW, next week’s stay-or-go decision by investors in the $3-billion mortgage funds will speak volumes about its standing with clients.
After that, said Eric Jacobson, a bond fund analyst at investment research firm Morningstar Inc., “the bigger issue is how the rest of TCW’s investment base reacts.”