Battle in L.A.’s bond world
A power struggle at one of L.A.’s biggest investment firms has many of the ingredients of a Shakespearean tragedy: frustrated ambition, a hero’s fall from grace, betrayal and revenge.
It also has left billions of dollars of investors’ hard-earned money stuck uncomfortably in the middle.
One week ago, TCW Group unexpectedly fired its veteran investment chief and star bond fund manager, Jeffrey Gundlach, asserting that he had threatened to quit the firm and leave it in the lurch.
With $110 billion in fee-generating assets, most of that in the fixed-income securities that are Gundlach’s specialty, TCW says it had no choice but to make a preemptive strike: It ousted the 50-year-old manager -- a former rock ‘n’ roll drummer -- and simultaneously bought a smaller crosstown money manager to take over his portfolios.
The surprise move triggered what one analyst called a “virtual earthquake in L.A.’s bond world” -- a reminder that Southern California has over the last two decades become a hot spot for fixed-income investing.
Gundlach, in fact, has long chafed in the shadow of the world’s best-known bond investor, Bill Gross of the Newport Beach-based Pimco funds. Gross, 65, is the acknowledged king of the bond world for his prescient investment calls and spectacular long-term performance with his Pimco Total Return bond fund.
But as Gundlach is never slow to point out, his biggest mutual fund at TCW, the TCW Total Return Bond fund, has beaten Gross’ record over the last 10 years: The TCW fund has risen 7.69% a year in that period, compared with the Pimco fund’s 7.56% average annual gain.
In the stock market’s boom days those numbers wouldn’t have impressed many investors. But after last year’s Wall Street crash, this will go down as a lost decade for stocks. The average return on the Standard & Poor’s 500 stock index is negative 0.6% a year over the last 10.
No wonder bonds have become so appealing to millions of American investors, who have poured record sums into bond mutual funds this year. That also raises the stakes in the feud between Gundlach and TCW.
Indeed, many of the clients Gundlach built up in his 24 years at TCW are waiting for his next step. He says he expects to quickly reemerge as an investment manager on his own, and steal his old clients from TCW.
Early this week, Gundlach set up shop on the 26th floor of the US Bank tower in downtown L.A. with five of his top TCW lieutenants and other loyal support staff who followed him out the door.
For its part, TCW’s move to protect its business as it sacked Gundlach was to buy Metropolitan West Asset Management, a 13-year-old West L.A. firm that manages about $30 billion in bonds.
In a Friday call with investors, Met West Chief Investment Officer Tad Rivelle, who also has assumed that role over most of TCW’s bond investments, said TCW Total Return Bond fund had suffered “substantial” redemptions in the first four days of this week as nervous investors yanked $3.5 billion, reducing the fund to $8.5 billion.
But he said redemptions had tapered off by Thursday, and he sought to make a case for investors to stay put -- stressing that Met West was “very comfortable” with the portfolio as Gundlach left it.
Investors’ concerns about Gundlach’s exit center on his expertise with a complex corner of the bond market: mortgage-backed securities.
His mutual fund performance of the last decade partly reflects that he avoided the worst of the mortgage dreck during the housing bubble -- and that, in the bust of the last two years, he was confident enough to buy mortgage bonds that had dived to rock-bottom levels and have since resurged.
Even as many investors refused to touch crumbled mortgage securities in 2007 and 2008, “he had the insight to say, ‘This stuff had gotten really cheap,’ ” said Eric Jacobson, a bond-fund analyst at Morningstar Inc. in Chicago.
But some of Gundlach’s rivals in the bond business say his approach to mortgages was contradictory during the boom years. While his mutual fund steered clear of the worst debt, TCW under Gundlach became the world’s largest manager of so-called collateralized debt obligations, or CDOs.
CDOs were a notorious example of Wall Street alchemy, seeming to turn bonds backed by subprime mortgages into AAA-rated securities. When the housing market collapsed, CDOs were among the biggest casualties.
Gundlach is unrepentant about TCW’s role in creating and managing CDO pools. They were, he said, what major institutional investors clamored for, and he believes the buyers fully understood the risks.
But that doesn’t wash with his critics. Even Jacobson, a fan of Gundlach’s mutual funds, says of TCW’s CDO binge: “In my world, that’s bad stewardship.”
Unlike many money managers who took the traditional path of a Harvard or Stanford MBA to break into the profession, Gundlach fell into the business by accident.
A math major at Dartmouth College in the late 1970s, his first job out of school was as an actuary at an insurance company. He hated it, he says.
His fallback was music: A drummer since fourth grade, Gundlach joined a rock band in the early 1980s and moved to L.A. The band played clubs of that era including the Music Machine and FM Station.
But in need of a steady paycheck, Gundlach began to look for a job where he could put his math knowledge to work. He says he knew nothing about the investment management business but decided to send resumes to firms he found in the phone book. He wound up in TCW’s bond investment unit in 1985.
His math base, he said, was the right grounding for mortgage-security analysis. “Mathematical training is really about taking very complex things and seeing what’s essential and simple about them,” Gundlach said.
By the late 1990s his career at TCW was accelerating as the mortgage-bond business expanded, and Gundlach became recognized for his mastery of the market. In this decade TCW’s bond unit became a driving force at the firm, bringing in tens of billions of dollars from institutional and individual clients. TCW named Gundlach chief investment officer in 2005.
But as TCW’s bond business mushroomed, control of the firm shifted an ocean away: In 2001, TCW founder Robert Day sold a majority stake in the firm to French banking giant Societe Generale.
As with so many high-profile marriages in the financial world, this one soured. By early this year, Societe Generale said it was planning to get out of the money-management business and expected to sell or spin off TCW within five years.
Rumors have circulated for much of this year that Gundlach believed that he should lead TCW or have a greater say in the firm’s direction. When Robert Beyer resigned as TCW’s CEO in June, Societe General named Vice Chairman Marc Stern, 65, interim CEO.
Gundlach says he was “distraught” by the appointment of Stern because he viewed it as a step back from the idea of handing control of the company to the next generation of managers.
To protect his own franchise, Gundlach said, in September he proposed leading a $700-million buyout of the firm.
Societe Generale said Gundlach “never made any formal or realistic offer.”
In the wake of Gundlach’s firing, neither side is budging from its version of the cause of his termination. Gundlach says TCW is wrongly implying he was disloyal by challenging the firm’s direction. TCW says it had to protect itself against what it viewed as Gundlach’s threat to quit.
For many of the longtime clients Gundlach has enriched, the reason for his split from TCW may be less important than whether he can get back into the business -- and whether he can replicate or surpass his TCW track record.
Gundlach, to the surprise of no one who knows him, is supremely confident.
In money management, he said, “I’m very capable and confident in looking at the facts and analyzing them. I come to a conclusion, and 70% of the time when it comes to investment ideas it seems to be right. And 70% of the time is a money machine.”
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Jeffrey Gundlach
Age: 50
Latest job: Chief investment officer of TCW Group Inc. starting in 2005. He was fired Dec. 4.
Career path: After playing drums in the 1980s with a band variously called Nuisance, the Greens and Radical Flat, joined TCW as a bond analyst in 1985. Four years later, helped launch the firm’s mortgage-backed securities group. Named a managing director in 1991.
Education: Bachelor’s degree in mathematics and philosophy from Dartmouth College.
Times research
