Jason Stipp: I'm Jason Stipp for Morningstar. On Dec. 4, asset manager TCW announced that it was dismissing former CIO and portfolio manager Jeffrey Gundlach and purchasing fellow L.A. shop Metropolitan West and bringing it in to run its bond funds.
Here with me to talk about the details of the deal and the future of TCW and Metropolitan West funds, is Metropolitan West CIO Tad Rivelle. Tad, thanks for joining me.
Tad Rivelle: Thank you, Jason. Appreciate the opportunity to be here.
Stipp: So Tad, tell me, why was this deal attractive for Metropolitan West team as well as Metropolitan West shareholders? What was the impetus behind this?
Rivelle: Well, I think that there were several. The ultimate goal here, of course, is to take two highly credible fixed income firms, two highly credible franchises, and by melding the capabilities and integrating the resources of both, what we hope to have is a world class fixed income management firm capable of managing a wide range of fixed income assets.
And from our standpoint, it was a very exciting opportunity to build a franchise with more significant scope and depth and more capabilities than previously existed in either platform.Read Full Transcript
Stipp: And whenever there's any sort of merger or an acquisition, there's always some integration risk. And some investors might say managing both the Metropolitan West and the TCW portfolios could potentially make you less nimble, and perhaps by extension hurt the performance of your funds. How would you respond to a concern like that?
Rivelle: Well, the primary accretion of assets from the standpoint of the view from the Met West asset management side of the team is in the mortgage-backed securities market. The mortgage-backed securities market as we know is gargantuan in size. The agency mortgage universe exceeds $5 trillion in terms of size and is a highly liquid environment, replete with a variety of structures with which to express views.
And consequently for the most part, we don't view the challenge of integrating the additional $55 billion or so of mortgage assets that come over from the TCW side as being an inherently difficult challenge when given the bench strength that exists here at TCW, as well as the addition of new talent and systems and infrastructure on the Met West side.
There is a very capable group of individuals that perform very detailed and very skilled analysis on the mortgage-backed securities front utilizing systems that TCW has developed over the years, comprising investments that I'm sure are many, many millions of dollars and required a great deal of talent and expertise.
And we think that using those systems, using those teams, and integrating them with the Met West half of the team, we will be able to continue to do what we have hopefully successfully done in the past, which is to say identify market inefficiencies, utilize bottom-up issue selection, and express a value proposition that hopefully over time is accretive to the investment strategies of our shareholders.
Stipp: Now, Tad, from my understanding, and hopefully with everything going well with the Met West and TCW combination, it will have solved TCW owner Societe Generale's concerns about some stability issues at TCW. But going further from that, you could say that Societe Generale was worried about stability at TCW, because they were potentially looking to sell TCW. Is a possible sale of TCW in the future a concern that fundholders should have?
Rivelle: Well, I think that it is always the case that one should judge a business as a person by their actions, not so much their words. Now, Societe Generale has in essence re-upped its commitment to the asset management business by the outlay of capital for the purchase of the Met West asset management franchise and by the injection of additional talent and resources into the TCW organization.
The key members of the management team have executed or are executing long-term employment contracts and will be incented through long-term ownership in the TCW franchise. I think it's all very indicative, again, judging Societe Generale by their actions, of a firm that is committed to the asset management business.
Stipp: And Tad, last question for you. In all the news that has come out since these announcements have been made, one firm that hasn't been mentioned a lot in the reports is PIMCO. Some people may argue that PIMCO could come out of this looking like the stable option for bond funds right now.
How would you respond to a statement that PIMCO is the stable bond place to be now and potentially building up their competitive position in your marketplace?
Rivelle: Well, again, I don't know that I can comment directly on the state of affairs at any other firm in the industry, just because I'm just not knowledgeable. But what I can say is that the TCW franchise is very stable, particularly in light of some of the features and characteristics of this transaction that I spoke to a few moments ago.
And I think from the standpoint of shareholders and other sponsors of the TCW franchise, I don't think that there's supposed to be any concern about organizational instability at TCW or at Met West asset management.
Stipp: Tad, thank so much for joining me and answering our questions today.
Rivelle: Well, thank you, Jason. Appreciate it.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.