(PUB) Investing 2015

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TCW/MetWest Benefiting From PIMCO Fallout Income Strategist | Karin Anderson

Generalist portfolio manager Laird Landmann argued that the reduction reflected full valuations given nonagencies' strong recent performance, not capacity constraints. However, the team upgraded the credit quality of the nonagency stake during the past two years, and adding to that position may have been harder in the current environment. The portfolio's biggest change since last October was an increase in its U.S. government bond stake to 33% from 27% . Landmann argues that Treasuries offer the most compelling risk/reward profile given late-stage credit-cycle dynamics, though clearly this was an easy source of liquidity. A ballooning cash stake would have been concerning, but that position halved to 3% over the six months through the end of March. All told, the team has dealt with the flows reasonably well, though we will continue to monitor its ability to traffic in less-liquid markets. the investment team, which has been able to add staff as necessary. In our meeting, Landmann indicated that there are no near-term plans for an ownership transition. TCW management has ruled out a leveraged buyout of Carlyle's majority ownership stake in the firm. Instead, Landmann mentioned that one possible outcome would be an IPO , which would allow for the investment staff to increase its share of the firm and for Carlyle to make a gradual exit. This would avoid the risks associated with bringing in a strategic buyer who might seek to aggressively cut costs or cause turnover in the investment ranks. We have also been paying close attention to the integration of the two teams since MetWest was brought in to run TCW Total Return Bond. Although several non-investment-team employees have left, CEO David Lippman seems to be doing a good job of maintaining stability in the investment ranks. He has also pushed for greater collaboration among investment teams. K Contact Karin Anderson at karin.anderson@morningstar.com How Has the Firm Shaped Up? It appears that Carlyle's involvement has not impeded

In mid-March, Morningstar analysts met with several of the portfolio managers behind Metropol- itan West Total Return Bond MWTRX , TCW Total Return Bond TGLMX , and Metropolitan West High Yield Bond MWHYX . Below we provide some background on TCW and the conclusions we drew from our visit. Taking a Look Back Private equity giant Carlyle Group and TC management combined to acquire TCW from Societe Generale in February 2013 . The firm saw some non-investment- team employees depart following the deal, but the portfolio manager and analyst ranks have remained stable. That said, TCW 's corporate culture has undergone a shift since it dismissed Jeffrey Gundlach and acquired Metropolitan West Asset Management to take over several fixed-income strategies, including TCW Total Return Bond in December 2009 . MetWest had not run a mortgage- focused fund prior to taking over TCW Total Return Bond, though its flagship offering, Metropolitan West Total Return Bond, devoted roughly two thirds of assets to mortgages at that time. Metropolitan West Total Return Bond has received the most inflows of any actively managed fixed-income fund following Bill Gross' September 2014 departure from PIMCO . The open-end fund had $64 billion in assets at the end of March 2015 , up 88% since last September. In contrast, Metropolitan West High Yield Bond has been in outflows since 2013 . Basking in PIMCO's (Diminished) Glow Given Metropolitan West Total Return Bond's signifi- cant growth, a related issue is whether the inflows will impede the fund's successful investment process. Morningstar has noted its shrinking stake in less- liquid nonagency mortgages (to 11% at the end of last year from 14% as of mid- 2014 ), raising the concern that the fund's size has crowded it out of that niche.