The new TCW Income Fund

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  • 08 mins 25 secs
Laird Landmann, Group Managing Director, Co-Director of Fixed Income at TCW, discusses TCW's approach to managing fixed income, how the new income fund has evolved, the team behind the fund and also gives his view on the current fixed income market and where he sees opportunities.



PRESENTER: Well joining me now is Laird Landmann, Co-Director of Fixed Income and Generalist PM for TCW to discuss their new income fund. So, Laird, it’s good to have you back on

LAIRD LANDMANN: It’s great to be here, thank you.

PRESENTER: So, Laird, first of all, TCW does tend to fly under the radar internationally, but has a strong reputation institutionally. So can you start by telling me about your approach to managing fixed income assets for clients?

LAIRD LANDMANN: Well I think we do tend to fly under the radar, because we don’t take a promotional approach to the asset class. So we kind of like to tell it how it is, because we’re a value manager at the end of the day. So when our asset class is expensive, we tend to be straightforward with our clients and say it’s very difficult to make money in fixed income. And that’s the case today. And when you’re a value manager, you have to cut your risk in those periods. And when value comes back to the market, that’s the time to reach out and take some risk in the portfolio. So that’s always been our approach, and we’ve augmented that by basically we use a team approach to basically find the best valuation in different markets. The markets in fixed income, the expression I would use is it’s not a Jim Cramer market where we you can know everything about everything.

There’s millions of different bonds out there. So we’ve curated a team over 25 years of specialists, and we give them the authority and the ability to go out and select from a bottom-up basis the best securities in their individual sectors. Whether that’s mortgages, non-agency mortgages, corporate bonds, high yield, and they can build the best possible portfolio for us from the bottom-up. And that’s allowed us to add alpha over many market cycles. And we try to de-emphasise the systemic top-down risk taking that everyone likes to talk about in fixed income: where are interest rates going, what’s the yield curve going to do, what’s the Fed doing? That tends to be less important for alpha than simply picking the right bonds at the end of the day.

PRESENTER: So how has the new TCW income fund evolved?

LAIRD LANDMANN: Well I think we’ve had a history of bringing new products, but we do it gradually. Again, we don’t like to take a promotional approach. So when everyone else was launching income funds, and we thought bonds were pretty expensive, we held off. We still think bonds are pretty expensive, but we think that the cycle is beginning to change now. You’re beginning to see cracks in the system. I think as Humphrey Bogart always said, Humphrey Bogart in Casablanca, round up the usual suspects. Well the usual suspects, Turkey, Argentina, Brazil, all suffering right now. Weak creditors are beginning to suffer. To us that indicates value is going to come back to this market.

So it’s an opportune time to launch an income type of fund that will target having a riskier portfolio, but a much high income oriented portfolio. So we can launch it I think, be a little conservative at first, wait for the buying opportunities, and then really have the opportunity to differentiate ourselves versus the market in general.

PRESENTER: OK. So talk me through then the team that’s managing the fund, and is it true that the team’s now expanding globally?

LAIRD LANDMANN: The team is expanding globally to answer your second question first. We’re happy to be adding presence of investment professionals in London and in Singapore. And that will largely focus on bringing core members of our team in Los Angeles over to these places, and allowing them to grow teams organically. Having a team approach in asset management is just a very difficult thing to manage. It usually is about personalities and how great somebody is, and to us it’s really all about philosophy and process. So we want to grow it from that perspective, and make sure we hire the right people.

In terms of the team itself, the team itself is largely equity owners of the firm. And that has created an incredibly stability amongst the team. Tad and I have worked together for 28 years, I think, and the team’s average tenure is something like 15 years. So the process of being team oriented, and having equity ownership by the portfolio managers has worked to create a stable platform.

PRESENTER: So what will the new income fund look like?

LAIRD LANDMANN: At first, it’ll probably look a lot like our unconstrained funds right now, but that’s not the long-term objective. As rates go up here, we use that as an opportunity I think to add duration to the fund. And over time as we see weakening in the credit sectors, particularly high yield, loans, emerging markets, we’ll use that to target higher income for the fund, and eventually a longer duration. So I know risk parity is a bit of a four letter word, but the fund would have more of a risk parity approach that it is a longer duration and more exposure to credit than our unconstrained fund, which generally has no correlation to treasuries, but has a much lower credit risk associated with it.

PRESENTER: So what’s your view on the fixed income market, currently, and also where are the opportunities, where are you seeing value?

LAIRD LANDMANN: The fixed income markets are challenging right now, and we’re going through I think a secular change in the markets. That is we’ve gone through a very long period where the markets have been flooded with central bank liquidity, and at the same time there hasn’t been enough supply of bonds to meet that. And so we’ve seen rates be lower than they should been, we’ve seen credit spreads be tighter than they should been. It’s very hard to find opportunities in that type of environment.

Now the central banks are beginning to withdraw some of the liquidity, obviously the Fed leading the way, we’re definitely seeing an environment where there are for the first time more bonds and less buyers. The big buyer stepping away of course is the central banks. That’s going to begin to create value, and it already is. It’s the marginal players on the edges are experiencing liquidity crisis. That will most likely spread, and that will bring about opportunities. So right now we would say avoid high yield, avoid loans, avoid most areas of the emerging markets. They’re going to be vulnerable in this period of rising rates, declining liquidity. But be ready to move in when the value comes back to those sectors.

The structured sector is a little bit better positioned. That’s where we’re emphasising our investments right now, particularly legacy non-agency mortgages in the United States. Mortgages that were issued 10/12 years have now paid down to the point that they’re deleveraged. So everything else in the world, corporates, high yield, is reaching new highs in terms of leverage ratios. But these securities are deleveraging, the market is shrinking, so unlike every other market that’s growing and the technicals are getting worse, more bond, less buyers. Here there are less bonds, more buyers, so it’s working quite well. And we think that market will continue to have price appreciation, and continue to decouple from other risk markets like high yield and loans.

So we do like that sector of the marketplace. You can park cash safely in say agency commercial mortgages right now, and we’ve done that in the triple-A sector of that market. Very short older commercial mortgage backed securities basically offer a very safe haven, they’re self-liquidating. And if you’re buying things that are four or five years old, you’re buying before the commercial real estate run up really happened. So you’re getting a lot of protection. That is you’re getting collateral that today is worth maybe 150% of what it was worth when these bonds were issued. So those are the sectors that we feel comfortable with at this moment.

There’s a few sectors and asset backed, like the government guaranteed student loan sector, which we confusingly call the FELPS market, and a little bit of triple-A CLOs but not too many, because that sector is notoriously volatile during deleveraging. So hopefully that gives you a little bit of a parameter. We had traditional credit, high yield and investment grade corporates for the most part. We like some of the older structured credits that are out there.

PRESENTER: Super, Laird, thank you.

LAIRD LANDMANN: Thank you very much.