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TCW Acquires Metropolitan West, Gundlach Out

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. On Friday, asset manager TCW announced that it is acquiring fellow California bond shop Metropolitan West, and as part of that deal, TCW CIO and manager, Jeffery Gundlach is being let go.

Here with me to offer some details on this and what it may mean for shareholders is Morningstar's Eric Jacobson. Eric, thanks so much for joining me.

Eric Jacobson: Great to be with you, Jason.

Stipp: So big news from California. I think you've been calling it a virtual earthquake. Tell me a little bit about the story here. What are the details of this acquisition and this news?

Jacobson: We've never really heard anything like this before. Versions of it have happened at other places. But essentially, TCW, this big shop in Los Angeles, they manage about a $100 billion, a big chunk of it, about two-thirds is run by their CIO, Jeffrey Gundlach.

They decided, they announced today, they're letting him go, and they're going to replace him with the entire team from Metropolitan West on the other side of town. Met West is a privately owned firm, owned by its senior partners, essentially.

And they're being bought out, and of course, they're going to have some sort of package to incentivize them to stay and so forth at TCW. But they're going as a group and as a firm, they're going to move across town over to TCW and run the entire high-grade bond business for TCW.

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Stipp: Gundlach is a very well-known manager, someone that we've spoken with for a long time here at Morningstar. The timing of this and the reasons behind it, I mean, why let him go? What's going on there?

Jacobson: Right. And one thing that I've said is in hindsight it's almost obvious, but at the time it was so unimaginable. And what I mean by that is around September there were stories in the press, and in the institutional financial press in particular, about TCW looking for strategic alternatives as a firm. TCW itself is owned by SoGen, or Societe Generale, from France--wholly owned by them.

And there was a lot of talk around the summer and fall about them looking for strategic alternatives, either to sell the firm, have some sort of buyout, something like that. At the time, there was a lot of speculation around Gundlach, that he was either having conversations with private equity firms or with other asset managers, some of them in Los Angeles, about potentially leaving or bringing a whole team with him.

Well, he made denials at that time, but some of those denials also involved statements that had to do with the fact that, "Hey, I'm running most of the money here. I think I would know if these discussions were going on." I think some of those conversations that he was having, whether in or out of the press, started to make the management at TCW a little bit nervous.

Stipp: So they almost want to act first and forestall a situation where Gundlach walks and takes all of those clients and all those assets with him.

Jacobson: Exactly. And frankly, just as big a risk perhaps is that even if Gundlach walked tomorrow and didn't have another place set up, if TCW either didn't have Gundlach or didn't have someone able to really fill his shows reputationally, even if he didn't wind up going anywhere, one can imagine in this world where institutional money can be turned on and off that quickly, big, big pools of money leaving the firm very, very quickly.

They would've really been sort of left in the lurch with no options at that point, and essentially a very, very big danger to their entire franchise, because Gundlach runs so much of that money.

Stipp: Interesting. So, OK, looking at the business level now. I'm sort of understanding why this may be happening now. Looking at the business level, what's going to happen with the employees and the management staff and the analysts? Do you know anything about how they're going to combine the operations?

Jacobson: We have some idea of some of it, but not all of it. And what that is, is that essentially, my understanding is that Metropolitan West as an entire firm is going to pick up, move very, very closely across town to downtown Los Angeles where TCW is.

The chief investment officer, Tad Rivelle, is going to become the chief investment officer of the high-grade fixed income area at TCW. And his team, which includes partners of his that he has been building that firm with over the years, they're going to take over pretty much that entire part of the TCW business. And that's going to mean that they're bringing over about $30 billion of money that they run.

The money that's in their funds is going to stay Met West funds for now. The money at TCW is going to continue to get run the way it's being run now at TCW, but it will all be under that team. And so as far as the group that's already at TCW, that's a little bit of an unknown still, I think.

I imagine we're going to find out potentially that a few, maybe top lieutenants of Gundlach's that are perhaps pretty loyal to him, maybe they go out with him. Whether it's voluntary or not, we don't know.

My sense is that for the rest of the team, and it's a pretty large fixed-income group there that Gundlach runs, I think that they would probably prefer that most of those folks stay. And I imagine they're going to be given that option.

And so I think it probably remains to be seen a little bit though how that integration works. The reason I think they made the choice that they did for Met West though is you've got this cohesive, very successful group, and if need be, they can go in there and do the whole thing themselves if they absolutely have to.

Stipp: If they needed to. So for investors, for mutual fund holders in both of these bond shops, what's the implication? What should they be looking out for, and what should be on their mind given this news?

Jacobson: Right. I think any type of big change like this is going to be concern to anybody. At the moment, I don't think that people need to panic, certainly.

My sense is that especially the folks that are at Met West right now probably aren't going to see much of a change at all. Because they're almost certainly going to continue to run things the way they do, and I don't see a concern there.

The folks at TCW, the folks who have money invested with TCW, they can be reassured to some degree by the fact that Metropolitan West has a pretty substantial mortgage expertise of its own. A little bit different in orientation maybe than Gundlach historically, but they have a lot of commonality. And especially in the last year or so, there's a lot of overlap in the parts of the market that they've both been working in.

And so the plan, I believe, is to continue managing those mortgage assets at TCW the same way that Gundlach has been managing them. And at this point, we don't know if there's any change intended there. And so again, capability-wise, I think they're pretty solid, and I don't think most people need to worry.

But it's something that people will want to keep an eye on, because at some point, without Gundlach there, they may make a strategic decision as a firm to adjust some things. But they tend to be pretty good stewards of capital over there at Metropolitan West, and they're going to want to transmit or telegraph those intentions ahead of time.

Stipp: Eric, thanks so much for your insights. I know that you'll be following up on this story, but thanks for the initial bit of insight on that news.

Jacobson: Glad to be with you, thanks.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.