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Rivelle: TCW Total Return Strategy Intact

Eric Jacobson

Eric Jacobson: Hi. I'm Eric Jacobsen with Morningstar. I'm the director of fixed income research, and I'm here with Tad Rivelle. Tad is the chief investment officer of Metropolitan West Asset Management, and as a result of a recent combination of his firm with TCW, also in charge of the high-grade bond area at TCW, as well. Tad, thanks so much for joining us.

Tad Rivelle: Thank you, Eric. Appreciate it. Thank you.

Jacobson: Tad, let me start with a few questions just about the combination of the firms. I know you've been asked some of these things before, but for now anyway--and you can explain that if necessary--is there any difference in the way that any of the portfolios on either side are being managed in terms of their mandates as a result of your team coming in?

Rivelle: Our prime directive is to maintain stylistic consistency, both with respect to the Met West portfolios as well as the TCW portfolios. So though the team is now able to draw upon the combined resources of both the TCW half as well as the Met West half, the management of the portfolios has been very consistent.

Jacobson: I know that with some of the changes that happened when you came in here, in particular the TCW Total Return Fund, it's been widely reported, had some pretty swift redemptions early on. I gather that it's tapered off some, but the numbers, they change from day to day, so maybe you can kind of give us an update as to where it stands now relative to day one when that started happening, and how you are feeling about managing that.

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Rivelle: The flows have been very manageable, as was widely reported in the press. The numbers were very large for the first couple of days after the management changes. They have tapered off to a very small fraction of that number.

We were able to maintain a high degree of consistency with respect to the expression of the strategy in that fund. As we also reported, perhaps two-thirds, approximately, of the TCW Total Return bond fund was invested in agency-mortgage backed securities with the residual, the one-third, being in non-agency mortgage backed securities.

So we did have to engage in sales of both agency as well as non-agency mortgages, though sales went very smoothly. So from our standpoint, the flows are very manageable. And from the standpoint of being able to maintain the same expression of strategy, nothing has been altered.

Jacobson: You know, there's one issue that's very obvious, because of the TCW Total Return having a history as being a very mortgage-focused fund, a lot of questions coming up about your mortgage capabilities, and I know that they're extensive.

Maybe tell us a little bit about the development of those. I know that Mitch Flack and Brian Whalen--Mitch being an agency mortgage specialist, Brian more on the non-agency side--both came into the firm X number of years ago. And my impression certainly is that a lot of capabilities have been built up since then.

Maybe give us a little bit of narrative as to how the decision to make those changes, adding them, and also the investments that went into the firm to do so. Give us a little background.

Rivelle: Yeah, I'll give a little bit of a background and history of the team and the mortgage-backed market. For those that might be a little bit less familiar with the history of Met West Asset Management, we represent a team of portfolio managers that actually began our careers at PIMCO nearly 20 years ago. And our experience with mortgage-backed securities actually began at that shop, and then was further developed at another L.A.-based firm, Hotchkis & Wiley.

So the team has been managing agency as well as non-agency mortgages for decades. Additionally, you are quite right, the team was significantly augmented in terms of its skill and capabilities with the addition of Mitch Flack in 2001.

He brings with him roughly 25 years of experience in the mortgage-backed industry. I think he knows just about everything there is to know about agency mortgage-backed securities. You've spoken with him, you probably can confirm that. And he's a principal and a co-head of the mortgage desk here at TCW.

Brian Whalen is his co-head who focuses more on the non-agency, the more credit-intensive aspects of the mortgage market. He and the various PMs and traders and analysts that support him is the tip of the spear from the standpoint of analyzing non-agency mortgage-backed instruments on the desk.

His background includes having joined Met West about six years ago. Prior to that, he was a director at CSFB, Credit Suisse First Boston, and before that at Donaldson, Lufkin & Jenrette.

Brian was the individual who was primarily responsible for overseeing our effort as it related to development of proprietary analytics in non-agency mortgage-backed securities. Most specifically our loan level database, that absorbs 30 million residential mortgage loans from, roughly speaking, 12 or so servicers around the country, which combine with the existing TCW analytical systems, both of which, I think, have represented a very, very considerable CAPEX from the standpoint of both firms.

It gives us nearly 100% coverage of all of the residential mortgage loans in the country, and therefore, a highly detailed granular knowledge of how those loans are priced, or should be priced, and valued.

Jacobson: Well, I appreciate your time today, Tad. Thank you.

Rivelle: Thank you.