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By Michelle Ward, CFA | 09-05-2013 10:00 AM

Patience Paying Off for This Bond Fund

MetWest Total Return Bond has run ahead of its peers this year, with help from its nonagency mortgages and utilities exposure, says comanager Laird Landmann.

Securities mentioned in this video
MWTRX Metropolitan West Total Return Bd M

Michelle Canavan: Hi. I'm Michelle Canavan, a mutual fund analyst for Morningstar. I am here today with Laird Landmann, co-director of fixed income for MetWest/TCW.

Thanks for joining us today, Laird.

Laird Landmann: Thank you, Michelle. It's wonderful to be here.

Canavan: To get us started, it's been a volatile couple of months in the fixed-income markets. It would be great just to get your thoughts and see if you can put that turbulence into a little bit of context.

Landmann: Sure. This has been coming for quite a while. Clearly Federal Reserve policy has been one that has artificially influenced investors to bring interest rates much lower than they normally should have been. It's likely that this was justified to try to get employment gains in the economy. I think as the Fed has realized that the employment gains aren't necessarily following just from quantitative easing and certainly the wage gains have been rather poor, they've backed away from these policies. As they continue to back away from them, we expect that interest rates will continue to be volatile and biased higher. But long-term investors should be wary as we get into the [3% range] and maybe closer to the [4% range] on 10-year interest rates in the U.S. Some value will begin to accrete to investors who are willing put their toes back into the water or closer to those levels.

Canavan: Your flagship fund, MetWest Total Return Bond, has been shorter-duration relative to the benchmark for the better part of two years now. Now that interest rates have ticked up a little higher, has that changed how you are thinking about the duration positioning of the fund?

Landmann: Normally with our value-based approach, we'd almost immediately begin to add some duration back to the fund, given how short we've been versus our benchmark. This case is somewhat unusual, in that the Fed really artificially pushed rates lower than they naturally would have been, and so we're being a little more patient this time. So as rates approach 3%, I think that's the point where we begin to add back a little bit duration, and I think we'd hope to be close to neutral versus our benchmarks as we guide into the mid- to high 3% range in terms of 10-year interest rates. That gives you a real rate of maybe 1.5% to 2.0% and inflation component within that rate of 1.5% to 2.0%. We think that is where fair value probably resides within the U.S. market.

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