TCW under pressure to perform after split
As chairman of the Los Angeles Opera, Marc Stern went out on a limb to back the group’s ambitious staging of Richard Wagner’s “Ring” cycle this spring.
But for high drama, that couldn’t top the gamble Stern took last December in his day job as chief executive of TCW Group Inc., the downtown Los Angeles firm that manages investments for some of the nation’s largest pension funds, universities and other big investors.
Like most money managers, the 40-year-old firm with patrician roots relies on an image of strength and stability to attract and keep clients. That image suddenly exploded the day Stern fired TCW’s investment chief and star bond fund manager, Jeffrey Gundlach, forcing into the open a bitter internal power struggle.
Stern said he ousted Gundlach to save TCW. To outside observers — and some of the investors who had entrusted $110 billion in assets to TCW — it looked like potential suicide.
Gundlach had become nationally recognized as a hot hand with bonds, at a time when nervous investors were turning to fixed-income securities in unprecedented numbers. With the bulk of TCW’s investments in bonds, Gundlach oversaw more than 60% of the firm’s total assets.
Within days of his forced exit, Gundlach set up his own company, DoubleLine Capital, to compete with his former employer. Within weeks, more than 40 of Gundlach’s TCW staffers left to join him.
And by mid-February, TCW had lost $25 billion in assets as some stunned investors fled.
But seven months after the split with Gundlach, the 65-year-old Stern says he has no regrets about his decision. He is trying to pitch a revamped TCW to clients as “really a new organization,” and has laid out an ambitious growth plan.
In part, Stern admits that TCW was lucky: To fill the huge talent void left by Gundlach and his team, Stern found a ready replacement in Metropolitan West Asset Management, a Westside bond-fund manager with a strong track record. TCW bought MetWest as Gundlach was shown the door. MetWest executives immediately took over Gundlach’s portfolios.
“The merger has gone better than I ever anticipated — and I anticipated it would go well,” Stern said.
Company insiders and some outside analysts credit Stern with moving quickly to protect TCW’s franchise, in part by persuading the firm’s parent since 2001, French banking titan Societe Generale, to give equity stakes in TCW to its top fund managers to keep them in the fold.
Stern has “pushed the train in the right direction,” said Eric Jacobson, a bond fund analyst at research firm Morningstar Inc. But he said that without being able to turn to MetWest to substitute for Gundlach, “I think TCW could have imploded.”
TCW managed about $109 billion for clients as of June 30. That’s about the same as before Gundlach’s departure, but only because about $30 billion came in with TCW’s purchase of MetWest. TCW acknowledged in February that clients yanked $25 billion soon after Gundlach was pushed out.
Tad Rivelle, who was MetWest’s founder and investment chief and now oversees most of TCW’s bond accounts, concedes that TCW’s clients “were in a state of shock” when MetWest came in.
But remaining clients have largely stopped asking questions about the corporate upheaval, Rivelle said. “It’s now about what it’s always about: Are you performing?” he said.
One critical test for the MetWest team was how it would handle the TCW Total Return Bond mutual fund, the firm’s flagship under Gundlach. Although the portfolio lost more than half its $12 billion in assets as some investors sold out after Gundlach was dumped, the fund has earned 6.9% year to date, beating 85% of the funds in its category, according to Bloomberg data.
Rivelle said cash has been flowing back into the fund for the last eight weeks.
MetWest’s own flagship mutual fund, the $9.8-billion MetWest Total Return Bond fund, has remained a stellar performer, with an 8.3% year-to-date gain that beats 96% of its peers.
But Gundlach — who earned a reputation at TCW for brilliance and arrogance — is literally trying to give his ex-firm a run for its money with his own new mutual funds. His DoubleLine Total Return Bond fund has sharply outperformed its TCW rivals since launching on April 6.
While they continue to battle for investors, TCW and Gundlach also are waging a vicious legal war.
TCW said it fired the 50-year-old Gundlach because he had threatened to quit and take his team with him. A month after he was booted, TCW sued Gundlach, alleging that he set up his new firm by using information stolen from TCW.
In the suit, TCW also said it found hard-core pornography and drug paraphernalia in Gundlach’s offices and called him “unfit” to serve as a senior officer.
In a countersuit, Gundlach alleged that TCW and Societe Generale dumped him to cheat him of his share of future fees on assets he was managing.
Gundlach first came to L.A. in the early 1980s, seeking fame and fortune as a long-haired rock ‘n’ roll drummer. He has responded to TCW’s porn and drug allegations by saying that whatever the firm found were “vestiges of closed chapters of my life.”
The sides remain at loggerheads. Stern said no settlement talks were underway. Gundlach declined to be interviewed, although he said in June that he would consider a settlement.
Even as Stern seeks to show clients and potential clients that TCW has stabilized, fund-industry analysts note that the company is likely to face another high-level departure soon: A well-regarded unit that provides debt financing to public and private firms is expected to split off. That business accounts for $11.5 billion of TCW’s client assets.
Mark Attanasio, one of the principals of the debt-financing unit, said a separation would be amicable and that he expected to maintain a long-term relationship with TCW.
Still, his exit would put more pressure on TCW to show that it can retain its client base — and grow.
“If you pull away these groups that were big drivers of profits, how profitable is what’s left?” asked one industry consultant.
Stern’s answer is to pitch TCW to investors as a firm that has undergone a major cultural change, one that he says will make the firm more responsive to clients’ needs in a time of extreme uncertainty in the markets. He has set a goal of doubling TCW’s assets in four years.
TCW had long operated as a collection of “silos”: The firm brought top money managers under its roof and let them operate essentially as entrepreneurs, with TCW providing an infrastructure for marketing and other functions. The managers and TCW shared fee income on assets.
That was the model set up by Robert Day, who created TCW in 1971 as Trust Co. of the West. Day is the scion of two of modern L.A.'s blue-blood business families. He is the grandson of Superior Oil founder William M. Keck on his mother’s side and of Addison Day, president of Los Angeles Gas Co., on his father’s side.
Gundlach, a math whiz hired by TCW in 1985, was a product of Day’s star system. His expertise with mortgage-backed bonds brought TCW tens of billions in new money in the last decade. That rain-making earned him $135 million in compensation from 2005-2009, according to TCW.
But the silo model didn’t foster communication among managers of different types of assets at TCW.
That has changed with the MetWest merger, TCW insiders say. Rivelle has encouraged dialogue between the company’s stock and bond teams on economic and market issues, said Michael Reilly, an 18-year TCW veteran and the firm’s investment chief for equities.
“In all my time here I haven’t witnessed the degree of collaboration we’re seeing now across the firm,” Reilly said.
Whether more sharing of ideas within TCW will produce higher investment returns for clients remains to be seen. But that collegial, give-and-take atmosphere has been a hallmark of one of the most successful money managers, Newport Beach-based Pimco.
Rivelle, 49, got his start at Pimco in 1990 and launched MetWest in 1996. The firm’s investment performance won it Morningstar’s bond manager of the year award for 2005 — the same award Gundlach won at TCW for 2006.
“They are smart people who enjoy working together,” Morningstar’s Jacobson said of Rivelle and his team. “They’re not driven by individual egos.”
Stern says his decision to turn to MetWest to take over TCW’s bond assets “started as pretty much defense, but I came to the realization that this could be a culture-buster, A, and that, B, in terms of what we could offer clients, it would broaden-out our fixed-income capability.”
While Gundlach built TCW’s bond reputation on mortgage-backed securities, MetWest has taken a broader approach, diversifying among Treasury, foreign and corporate bonds as well as mortgage issues.
The merger with MetWest paved the way for another major change at TCW: employee ownership. To bring the MetWest team on board, Societe Generale gave the firm’s principals a 7.5% equity stake in TCW. Stern then pushed the bank to extend ownership to key executives and fund managers already at TCW.
Veteran TCW stock fund manager Craig Blum, one of about 150 employees who now have stock in TCW, said the plan had “real value. … Stern has got people re-engaged with this.” When fully vested, employees’ stakes will amount to 20% of TCW’s equity.
This is Stern’s second time around at TCW’s helm. A lawyer rather than a money manager, the New Jersey native had been TCW’s president from 1992 to 2005 under Day, who sold a controlling stake in TCW to Societe Generale in 2001. Day and Stern stepped down in 2005, elevating a younger team of TCW executives, including Gundlach, to top roles.
But when Robert Beyer quit as CEO in June 2009, Societe Generale asked Stern to step in as interim CEO. Gundlach was outraged, saying TCW had reneged on a promise to hand control to a younger generation. That set up a showdown between him and Stern.
Now, Stern says he is planning to shepherd the firm for the foreseeable future. The “interim” was removed from his title last December.
“We’ve reached a place where I am finally having fun at work again,” he said.