Is TCW Set To Become A Ghost Town?

Remember this org chart?

Now chop off 40 people, or about 30%, of the headcount. This is a little less than TCW has lost in AUM in its Total Return Bond Fund since it told Gundlach to take a hike. Will TCW's arrogance end up costing it not just an ever increasing number of people, but virtually all of its assets? With Gundlach already up and running, and Oaktree as an investor, it is likely that ever more investors will realize that the strategic mix of the two credit titans, who only lag "4th branch of government" PIMCO on the west coast, will be a far better proposition than giving their money to the unproven pro-cyclical Metropolitan West replacements and an organization in turmoil.

And speaking of the 4th branch, earlier it was announced that PIMCO managing director, derivatives specialist and member of the firm's investment committee, Changhong Zhu is leaving the firm to become CIO of Chinese sovereign wealth fund: the State Administration of Foreign Exchange. So with PIMCO having already offloaded its MBS crap to the Fed, now it just needs to jettison its Treasuries. And what better way than to land its own insider in the natural buyer of US-denominated toilet paper. Well played Mr. Gross. Well played.

Comments

[Anonymous]

Bill Gross was probably the biggest nerd as a kid,
but now he's playing chess with the financial world
and seemingly unable to lose.

[Steak]

If one is inclined to call Gross' manuevering evil, at least it is evil that helps his clients.  This as opposed to GS's shorting the crap they sold their clients.  Upon hearing this news about Zhu I am most pleased yet again to be holding PTTRX.

[Green Sharts]

Now chop off 40 people, or about 30%, of the headcount.

40 people departing TCW of roughly 65 that were in Gundlach's group is over 60%, not about 30%.

With Gundlach already up and running

He's not already up and running.  He has made an application to the SEC for DoubleLine LLC to be licensed as an investment advisor.  He can not yet manage money.  He and his team don't have the systems in place to track and value the "MBS crap" that made up virtually 100% of the largest fund he managed at TCW and most of the total money he managed.  He has no mutual fund infrastructure in place nor does he have an agreement yet with any fund company with systems that would allow DoubleLine to operate as a subadvisor.  It will likely be a few weeks to a few months before Gundlach is up and running.

the unproven pro-cyclical Metropolitan West replacements

A couple of the unproven Met West replacements, including the CIO, go back about 20 years to working at PIMCO with Bill Gross.  They started Met West in 1996 and built AUM up to $30 billion.  Their primary fixed income mutual fund has done pretty well (though not as good as Gundlach's primary fund) and is rated 5 stars by Morningstar.  These unproven replacements won Morningstar fixed income manager of the year in 2006 and are nominees for it this year along with Gundlach and 2 or 3 others.  About $18 billion of the $30 billion they manage in Met West funds is in "MBS crap", including a lot of the crap that's very similar to the crap Gundlach had in his funds.  But Met West didn't have an MBS crap only fund like Gundlach's so the track records aren't completely comparable.

Here are some of the comments from the "pro-cyclical" Met West fixed income CIO from an investor call last Friday:

- Discussed how asset appreciation had created the "illusion of wealth" that fueled excess consumption

- Should have had a more severe recession in 2002 and started the process of rebuilding savings but the Fed moved the asset bubble from stocks to housing by cutting rates too far and holding them down too long

- It took 10 years to get into this mess and it will probably take a long time to get out of it

- This recession can be viewed as the result of previous misallocations of capital; we had far too many mortgage bankers and brokers, real estate agents, etc.  It is a long and painful process to retrain, restructure and reorient the economy

-  The jobless rate will likely remain very high for an extended period

- Housing probably hasn't bottomed

- Policy makers can not prevent housing prices from declining to a market clearing level; but they recognized allowing a quick and disorderly liquidation and repricing of housing would have wiped out the capital of the banking industry and taken us to a 1930's type economic scenario; they are trying to slow the decline

So with PIMCO having already offloaded its MBS crap to the Fed

As of 9/30, the most recent disclosure of its portfolio composition, PIMCO Total Return Fund still had 22% of its assets in MBS crap.  But that was down from 54% at 6/30.  I doubt they ever had 54% of the assets of their flagship fund invested in stuff they thought was crap. 

[Anonymous]

I don't think "jettison"'ing treasuries is gonna be any kind of issue. Gross could be feeding billions a day into this market and it wouldn't make a dent. Hell, two year notes are only 15 bps off the dead lows in rates and there doesn't seem to be any kind of panic in the treasury market, not matter what the bears (or the geniuses at Zero "profits" Hedge) say.

And I don't believe the Chinese will be big buyers of the stuff - they already own a metric ass-ton of treasuries and probably don't want or need a whole lot more exposure.

[Roy Batty]

PIMCO is selling TYH0 vol like nobody's business....the 115/120 strangle most recently.  What position are they really setting up.

[Anonymous]

They're replicating the mortgage trade without having exposure to the mortgage basis, ie short vol and long rates...seems like they are setting up for a basis widener given that Gross thinks the mortgage basis may widen by up to 70bps