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TCW Makes Strides Toward a Healthier Culture

The firm takes meaningful steps to remake itself after painful divorce from a star manager.

Sonya Morris, 06/09/2010

TCW took its lumps after it fired star fixed-income manager Jeffrey Gundlach in December 2009. Since that time, the firm's culture has been transforming. While the picture isn't quite clear yet, there are some encouraging signs that suggest that the firm is becoming more shareholder-focused than it was before.

The impetus for this change began with Gundlach's dramatic ouster. Fearful that he would jump ship and take a significant portion of the firm's clients and assets with him, TCW made a preemptive strike: It sacked Gundlach and accused him of stealing proprietary client and investment information. Over the next few days, the vast majority of Gundlach's team followed him to a new firm that he set up very quickly after his dismissal.

Immediately upon discharging Gundlach, TCW announced that it would purchase Metropolitan West Asset Management and that MetWest's bond team would take over the fixed-income side of TCW's business, including the management of the firm's flagship bond fund, TCW Total Return Bond TGLMX.

Investors reacted to the news of Gundlach's dismissal by yanking $5.8 billion out of the fund over the month following the announcement. Although outflows have slowed considerably since then, TCW Total Return Bond's total net assets have declined from just less than $12 billion in November 2009 to $5 billion at the end of May 2010. The announcement had an impact on TCW's institutional business as well. According to some reports, total redemptions out of all accounts formerly managed by Gundlach reached $18 billion.

Clearly, the stakes were high for TCW, and it's fair to question the firm's handling of the situation. Dismissing a talented and experienced manager who had delivered outstanding results for investors hardly seems like a shareholder-friendly move. Moreover, one could see the firm's actions as an attempt to protect its asset base rather than fund shareholders.

Officials at TCW and its parent, French bank Societe Generale, argue that they took responsible steps to address key-man risk both at the firm and at the fund level. If Gundlach were to leave abruptly, as TCW legitimately feared, that very likely would have provoked even more massive withdrawals, forcing the firm to make distressed sales in order to meet redemptions, which in turn would have hurt fund shareholders.

While some might question the firm's ultimate motivation, it's difficult to argue with TCW's choice for Gundlach's replacement. MetWest's investment team is successful and experienced in its own right, and it was one of the few shops with the degree of mortgage expertise necessary to take over TCW Total Return Bond. The handover to the team was seamless and immediate.

In addition, it's hard not to see TCW as a healthier place without Gundlach. Now that they have come out from under his shadow, the firm's equity managers are more involved and appreciated. There's more interaction between the equity and fixed-income sides of the business and more sharing of ideas. The MetWest team has always been a close-knit, collegial bunch, and it quickly reached out to TCW's equity managers. Now, fixed-income CIO Tad Rivelle and equity CIO Michael Reilly meet weekly and encourage the sharing of ideas between teams.PAGEBREAK

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