Upload
brad-samples
View
221
Download
0
Embed Size (px)
Citation preview
8/3/2019 TCW 2011-2012 HY
1/55
2011-2012 Review and Outlook: MetWest Total Return Bond Fund
Is There Life After Debt?
January 10, 2012
MetWest is a wholly-owned subsidiary of The TCW Group, Inc.Presenters are registered representatives of TCW Funds Distributors, Inc. (member FINRA/SIPC)
Presented by:
Tad RivelleChief Investment OfficerFixed IncomeGroup Managing Director
Laird R. LandmannGroup Managing DirectorU.S. Fixed Income
8/3/2019 TCW 2011-2012 HY
2/55
1 MKTcc1764 1/10/12
You should consider the investment objectives, risks, charges and expenses of the MetWest Total Return Bond Fund carefully before investing. The Funds Prospectusand Summary Prospectus contains this and other information about the Fund. To receive a free Prospectus, please call 1-800-241-4671 or you may download theProspectus from the Fund's website at http://www.mwamllc.com/literature.php. Read it carefully before you invest or send money.This presentation is for information purposes only. There is no assurance that historical occurrences or trends will be repeated or continue in the future. Pastperformance is no guarantee of future results. The third party statistical data contained herein is based on sources believed to be reliable.Any opinions expressed are current only as of the time made; are subject to change without notice; are solely those of the author and do not represent the views of TCW/MetWest as a firm or of any other portfolio manager or employee of TCW. Funds investing in U.S. government-guaranteed securities, including the MetWest TotalReturn Bond Fund, are neither insured nor guaranteed by the U.S. Government and neither the Fund nor its yield is guaranteed by the U.S. Government. Fixed incomeinvestments entail interest rate risk, the risk of issuer default, issuer credit risk, and price volatility risk. Funds investing in bonds can lose their value as interest rates riseand an investor can lose principal.The information contained herein may include estimates, projections and other "forward-looking" statements. Actual events may differ substantially from those
presented herein. TCW assumes no duty to update any such statements.The MetWest Funds are distributed by BNY Mellon Distributors Inc. which is not affiliated with TCW. The MetWest Funds are advised by Metropolitan West AssetManagement, LLC, which is a wholly-owned subsidiary of The TCW Group.
AgendaI. Market Review/Economic Backdrop
II. Value Based Bond Management in a Risk On/Risk Off Market
III. Economic Outlook
IV. Portfolio Strategy
V. Appendix
Securities offered through TCW Funds Distributors, Inc. (member FINRA/SIPC)
8/3/2019 TCW 2011-2012 HY
3/55
8/3/2019 TCW 2011-2012 HY
4/55
2011 Market Review Asset Class Returns
3 MKTcc1764 1/10/12
Asset Class Returns 1
3 Yrs Ended2011 Ranking 2011 12/31/2011
Gold 10.1% 21.0%
U.S. Treasuries 9.8% 3.9%
Agency MBS 6.2% 5.8%
Developed Countries Gov. Bonds 5.6% 3.6%HY Bonds 4.4% 23.7%
U.S. Equities 2.1% 14.1%
ABX 06-1 AAA -2.0% 2.5%
Residential Housing 2 -3.0% -8.3%
Emerging Markets Debt -3.2% 8.5%Commodities -8.8% 18.9%
Emerging Markets Equities -12.5% 17.7%
European Equities -13.2% 2.6%
U.S. Financials Equities -17.1% 2.9%
3 Yrs Ended3 Yr Ranking 12/31/2011 2011
HY Bonds 23.7% 4.4%
Gold 21.0% 10.1%
Commodities 18.9% -8.8%
Emerging Markets Equities 17.7% -12.5%U.S. Equities 14.1% 2.1%
Emerging Markets Debt 8.5% -3.2%
Agency MBS 5.8% 6.2%
U.S. Treasuries 3.9% 9.8%
Developed Countries Gov. Bonds 3.6% 5.6%U.S. Financials Equities 2.9% -17.1%
European Equities 2.6% -13.2%
ABX 06-1 AAA 2.5% -2.0%
Residential Housing 2 -8.3% -3.0%
1. Annualized returns.2. Estimated value.Source: Bloomberg, Barclays, ML
Policy driven, post 2008 financial remediation process takes a pause
Wanting for Europe to catch on and catch up
= risk off assets = risk on assets
8/3/2019 TCW 2011-2012 HY
5/55
Economic Recap: Balance Sheet Recessions Not Great For Employment
4 MKTcc1764 1/10/12
Some Improvement BUT Some Discouragement
Mar-1948 Mar-1964 Mar-1980 Mar-199654
56
58
60
62
64
66
68
Dec-2011
Civilian Labor Force Participation Rate
Jan-1971 Apr-1981 Jul-1991 Oct-200105
10152025303540
45Median Weeks Unemployed
Average Weeks Unemployed
Dec-2011
Duration of Unemployment
Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
Dec-1979 Dec-1987 Dec-1995 Dec-2003 Dec-20110
100
200
300
400
500
600
700
800
0%
2%
4%
6%
8%
10%
12%
I n i t i a l
J o b l e s s
C l a i m s
( t h o u s a n
d s )
U n e m p
l o y m e n
t R a t e
( % )
Initial Jobless Claims Unemployment Rate
Unemployment Rate vs. Initial Claims
Source: Bureau of Labor Statistics, U.S. Department of Labor and Bloomberg
8/3/2019 TCW 2011-2012 HY
6/55
Economic Recap:Policy Makers Fighting Leverage Through Rates
5 MKTcc1764 1/10/12
2008 housing crisis caused massive wealth decline
Consumer and lender behavioral changes result invelocity collapse
Federal Government spending/deficits filled the hole
Federal Reserve responds with
ZIRP
Twist
1959 1965 1972 1978 1985 1991 1998 2004 20111.500
1.600
1.700
1.800
1.900
2.0002.100
2.200
M2 Velocity
Jun-2004 Sep-2005 Dec-2006 Mar-2008 Jun-2009 Sep-2010 Dec-2011-1
0
1
2
3
45 Yr Real Yields 10 Yr Real Yields 30 Yr Real Yields
Real Yields
Source: Federal Reserve
Source: Bloomberg
8/3/2019 TCW 2011-2012 HY
7/556 MKTcc1764 1/10/12
Direct Impact of ZIRP Still Muted
Nominal variables look good for housing market
Continued price erosion makes financing homesexpensive
Delaying impact of policy
However
Residential real estate is cheap
In many demographics
rents are 2x to 3x a mortgage payment
rents are firm to rising
many zip codes below wholesale constructioncosts
Dec-1975 Dec-1981 Dec-1987 Dec-1993 Dec-1999 Dec-2005 Dec-20110%
2%4%6%8%
10%12%14%16%
18%20%
30 Yr FNMA Mortgage Commitment Rate
Dec-1975 Dec-1984 Dec-1993 Dec-2002 Dec-2011-10%
-5%
0%
5%
10%
15%
20%
"Real" Mortgage Rates
Source: Bloomberg
Source: Federal Reserve, Bloomberg, Fed. Reserve Bank of St. Louis
8/3/2019 TCW 2011-2012 HY
8/557 MKTcc1764 1/10/12
Developed Country Debt Burdens Have Dramatically Increased
Euro Block faces unique challenges in a balance sheet recession
Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-20110
20
40
60
80
100
120
140
UK Italy Japan
Debt Burdens
Dec-2004 Feb-2006 Apr-2007 Jun-2008 Aug-2009 Oct-2010 Dec-20111.5
2.5
3.5
4.5
5.5
6.5
7.5Italy Spain U.S.
Italy & Spain 10 Year Yields
Source: IMF, Bloomberg, Fed.
Source: Bloomberg
Jun-2006 May-2007 Apr-2008 Mar-2009 Feb-2010 Jan-2011 Dec-20110.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
C B A s s e t s
I n d e x
( M a y
2 0 0 6 =
1 . 0 ) U.S.
ECB
BOE
SNB
Central Bank Balance Sheet Expansion
Jun-2006 May-2007 Apr-2008 Mar-2009 Feb-2010 Jan-2011 Dec-20110%
10%
20%
30%
40%
50%
60%
70%
0%
10%
20%
30%
40%
50%
60%
70%
C B A s s e t s a s
% o
f G D P
Fed ECB BOE SNB
Central Bank Assets as % of GDP
Source: Bloomberg, Fed. Reserve, Bank of England, Swiss National Bank, European Central Bank
Source: Bloomberg, Fed. Reserve, Bank of England, Swiss National Bank, European Central Bank, IMF
US Germany Spain
8/3/2019 TCW 2011-2012 HY
9/55
II. Value Based Bond Management in a Risk On/Risk Off Market
8/3/2019 TCW 2011-2012 HY
10/55
2011 MWTIX Positioning
9 MKTcc1764 1/10/12
Dec-2010 Feb-2011 Apr-2011 Jun-2011 Aug-2011 Oct-2011 Dec-2011100
150
200
250
300
350
400
450
500
Single-A Rated Financial Spreads
Source: Barclays
Dec-2010 Feb-2011 Apr-2011 Jun-2011 Aug-2011 Oct-2011 Dec-2011-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
10 Year Real Interest Rates
Dec-2010 Feb-2011 Mar-2011 May-2011 Jun-2011 Aug-2011 Sep-2011 Oct-2011 Dec-201130
32
34
36
38
40
42
4446
48
Non-Agency MBS PricesABX.HE.AAA.07-2
Source: Bloomberg
Source: Markit
Value disciplines directs strategy shift
Reduced
Dec-2010 Feb-2011 Apr-2011 Jun-2011 Aug-2011 Oct-2011 Dec-20112.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Yield Curve Slope2Y/30Y Treasury Spreads
Source: Bloomberg
Neutral
Added
Reduced
Neutral
Added
Bullet
AddedLongUST Modest
Bullet
8/3/2019 TCW 2011-2012 HY
11/55
2011 MWTIX Positioning (contd)
10 MKTcc1764 1/10/12
Value based disciplines: Sell during remediation, add during reversal
Valuations in some sectors (Financials and Non Agency MBS) touch 2008 levels
1st half 2011 2nd half 2011 2nd half ChangePositioning Result Positioning Result
Interest Rates 0.5 years short Modest negative 0.9 years short Negateive Cost Average Lower
Yield Curve Bullet Positive Modified bullet Neutral Add 30 Year UST
Sector Allocation Overweight OverweightNon-Agency MBS Modest positive Non-Agency MBS Negative Add/Swap
CMBS Modest positive CMBS NeutralHigh Yield Modest negative Add
Market Weight Market WeightI.G. Corporates Modest positive I.G. Corporates Modest Positive Unchanged
High Yield Modest positive
Issue Selection Emphasis on: Emphasis on:Senior, Non-Agency MBS Neutral Senior, Non-Agency MBS Modest Positive AddBank and Utility paper Senior Bank paper Negative Add/Swaps
30% Senior CMBS Bank TRUPs Modest Positive Swaps
Euro crisis/Dodd-Frank fears infected all risk/liquidity premiums
Substantial value and total return opportunities now exist
8/3/2019 TCW 2011-2012 HY
12/55
8/3/2019 TCW 2011-2012 HY
13/55
12 MKTcc1764 1/10/12
MetWest Total Return Bond Fund Performance AttributionAs of December 31, 2011*
YTDas of December 2011
MetWest Total Return Bond Fund 5.72%
Barclays Aggregate Index1 7.84%
Out/Underperformance -2.12%
Attribution of Out/Underperformance
YTDas of December 2011
Duration (95)
Yield Curve 20
Sector Allocation (18)
Security Selection (119)
Corporates (33)
Govenrment Related (1)
ABS (85)
MBS (16)
CMBS 10
Other 5
Total Alpha (212)
The performance data presented represents past performance and is no guarantee of future results. Total returns include reinvestment of dividendsand distributions. Current performance may be lower or higher than the performance data presented. Performance data current to the most recent monthend is available on the Funds website at www.mwamllc.com/funds_monthly.php. Investment returns and principal value will fluctuate with marketconditions. The value of an investment in the Fund, when redeemed, may be worth more or less than its original purchase cost.Portfolio holdings and characteristics are subject to change at any time. It should not be assumed that an investment in the securities listed was or will be profitable.*The performance attribution analysis presented above decomposes the outperformance (alpha) of MetWest Total Return Bond Fund ("Fund") versus Barclays Capital Aggregate Index. The perfomance attribution wascalculated based on the market value weighted gross of fees performance of the four Classes of the Fund and all holdings in the fund. The analysis was performed by utilizing an industry-wide accepted methodology; additional information regarding the calculation of these performance returns is available upon request.
The Barclays Capital US Securitized Index is an unmanaged group of securities and assumes no reduction for fees and expenses in measuring returns. It is not possible to invest directly in an index.The performance returns reflect a period of unusual market conditions, and thus, the performance returns are not be indicative of future results.The performance returns are based on a registered investment company which has a different regulatory scheme and may be subject to different investment restrictions than a separate account. The inception date of theMetropolitan West Total Return Bond Fund is March 31, 1997.
8/3/2019 TCW 2011-2012 HY
14/55
III. Economic Outlook
8/3/2019 TCW 2011-2012 HY
15/55
A Black Swan Market
14 DFIsecEO1045 10/20/11
8/3/2019 TCW 2011-2012 HY
16/55
8/3/2019 TCW 2011-2012 HY
17/55
Diametrically Opposing World Views Among Investors
16 DFIsecEO1045 10/20/11
Investment Thesis #1: The U.S. is going the way of Japan in the 1990s
Economic malaise, deflation Fiscal stimulus starting/stopping
Zero rates for as far as the eye can see
Investment Thesis #2: Feds pro-inflation policies will de-leverage the U.S.
Bernanke put the monetary pedal to the metal back in 2008
Zero rates implemented in December 2008 Quantitative easing begun at once vs. Japan which waited until c. 2001
8/3/2019 TCW 2011-2012 HY
18/55
Even Mad Crowds Self-Fulfill Their Beliefs
17 DFIsecEO1045 10/20/11
8/3/2019 TCW 2011-2012 HY
19/55
18 DFIsecEO1045 10/20/11
Illusion of Wealth Effect
2002 20060
10
20
30
40
50
60
70
80
90
A s s e t s
( U . S . $
T r i
l l i o n
)
Real Estate
Equipment & Software
Consumer Durable Goods
Currency, Deposits & Money Market Fund Shares
Commercial Paper
U.S. Treasury Securities
US Agencies and Agency MBS
Municipals
Corporate & Foreign Bonds
Non-Agency Mortgages
Equities
Mutual Fund Shares
Life Insurance Reserves
Pension Fund Reserves
Equity in Non-Corporate Business
Other
$77.6 Trillion
$50.1 Trillion
Source: Federal Reserve Board
Assets of Households & Nonprofit Organizations
U.S. Asset values ran up over 50% in 4 years!
8/3/2019 TCW 2011-2012 HY
20/55
19 DFIsecEO1045 10/20/11
Fed Ignored Asset Prices
Asset prices were not an input to Fed policyBut wrong asset prices distort the allocation of labor and capital
Asset Price Markets
Goods and Service Economy
Federal Reserve
Fed
FundsRate
Inflation
Unemployment
Home Prices
Stock Valuation
8/3/2019 TCW 2011-2012 HY
21/55
20 DFIsecEO1045 10/20/11
Home Price Bubble Resulted in Excess Leverage
Source: Deutsche Bank, LoanPerformance, DB Global Markets Research1 Approximately 50% of Nevada homes.
100%
60%
80%
40%
60%
20%
0% N V M
I A Z
F L I D C
A U T
G A R
I I L O R
A L
M D
W A
V A
N M
W V
O H
M N
M O
D CI N N
J D E
W Y
100%
60%
80%
40%
60%
20%
T N
C T
K S
M S
M A
M T
N H
S C
N C
K Y
C O N
Y P AH
I T X
A R
M E
A KI A
O K
L A V T
S D N
E N D
0%
50% to 99% equity
5% to 25% equity
Negative equity
25% to 50% equity
0% to 5% equity
75% of the home mortgages 1 in Nevada are underwater
8/3/2019 TCW 2011-2012 HY
22/55
21 DFIsecEO1045 10/20/11
Downsizing the American Dream
Source: US Census Bureau, MBA*The Adjusted Homeownership Rate is derived by reducing the numerator of the Homeownership Rate by the number of foreclosed properties and properties with seriously delinquent loans which subsequently went intodefault or are expected to go into default, based on the historical trends.
Mar-1990 Jun-1994 Sep-1998 Dec-2002 Mar-2007 Jun-201162.0%
63.0%
64.0%
65.0%
66.0%
67.0%
68.0%
69.0%
70.0%Homeownership Rate
Percent of Households That Own Their Homes
Homes that arein foreclosure or60+ delinquent}
8/3/2019 TCW 2011-2012 HY
23/55
22 DFIsecEO1045 10/20/11
Job Creation Not Responsive to Fiscal/Monetary Stimulus
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
N o n - F a r m
P a y r o
l l s a s a
% o
f P r i o r
N o n -
F a r m
P a y r o
l l s P e a
k
Months Since Prior Employment Peak
1953
1957-1958
1960-1961
1969-1970
1973-1975
1980
1981-1982
1990-1991
2001
2007-2009
Source: BLS, TCW
Labor Market Recovery in Perspective
The Great Recession
Distorted Economy
Less mobile Labor Force
8/3/2019 TCW 2011-2012 HY
24/55
So, How Do You Solve a Problem Like a Debt Burden?
23 DFIsecEO1045 10/20/11
Laissez-Faire Response: Allocate the Losses
Statist/Keynesian Response: Artificially Stimulate
Monetary Response: Print Money
Problem: Economic growth remains unnatural until the private sector has de-levered
Were Fromthe Governmentand Here toHelp You
8/3/2019 TCW 2011-2012 HY
25/55
Laissez-Faire Solution to Excess Leverage
24 DFIsecEO1045 10/20/11
Involuntary de-leveraging of private sector
Bankruptcies
Foreclosures Debt forgiveness, debt rescheduling
Capitulates to the reality that loans which cant be repaid, wont be repaid
Pluses Labor, capital, homes, etc., are rapidly repriced to market-clearing levels
Economy now has good information
Efficiency enhanced
Minuses Risks destruction of banking system
May tear apart social fabric
Severe deflation, depression are likely outcomes
8/3/2019 TCW 2011-2012 HY
26/55
25 DFIsecEO1045 10/20/11
Keynesian (Statist) Solution
Private sector leverage is transferred to the public sector
Stimulus programs
Bailouts for borrowers/lenders Federal spending raises private sector incomes
Pluses Slack resources put to work
Private sector de-leveraging accelerated
Minuses Inefficient resource allocation perpetuated
Adjusted process impeded Ricardian Equivalence may render stimulus impotent
Were Fromthe Governmentand Here toHelp You
8/3/2019 TCW 2011-2012 HY
27/55
26 DFIsecEO1045 10/20/11
Monetarist Answer to De-Leveraging
Lift nominal GDP by embracing pro-inflation policies
Contracts are denominated in notional amounts, not real amounts
Debts that are not economically serviceable in terms of 2007 dollars mightbe serviceable in depreciated 2012 dollars
Pluses Bankruptcies, foreclosures mitigated
Nominal GDP growth accomplishes the de-leveraging seamlessly
Minuses Wealth transfer from creditors to debtors
Decreased economic efficiency
Needs a pool of fools
Higher rates of inflation tend to self-reinforce by lifting inflation expectations
Central bank may lose its credibility
8/3/2019 TCW 2011-2012 HY
28/55
Will the U.S. Repeat the Japanese Deflation Experience?
Liquidate labor, liquidate stocks, liquidate real-estate...it will purge the rottenness out of the system.
Andrew MellonSecretary of the Treasury
(1921-1932)
27 DFIsecEO1045 10/20/11
8/3/2019 TCW 2011-2012 HY
29/55
28 MKTcc1764 1/10/12
U.S. vs. Japan: Fundamental Economic Variables Support Risk OffU.S. vs. Japan: Real Estate Market Boom & Bust U.S. vs. Japan: Cumulative Real GDP Growth
U.S. Demographics vs. Japanese Demographics:Cumulative Labor Force Growth
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 210
10
20
30
40
50
60
70
80
90
100
R e a
l E s t a t e
P r i c e
I n d e x
Years Since Real Estate Price Peak
Japan Urban Land Price Index 6 Major Cities (Sep '90 = 100)
S&P Case Shiller 20 City Composite (Jul' 06 = 100)
Real Estate Price Peak
Source: Bloomberg, Statistics Bureau of Japan Source: Bloomberg, BEA
Source: BLS, CBO, Bloomberg
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21-5%
0%
5%
10%
15%
20%
25%
C u m u
l a t i v e
R e a
l G D P G r o w
t h
Years Since Real Estate Price Peak
U.S.
Japan
1 2 3 4 5 6 7 8 9 10 110%
1%
2%
3%
4%
5%
6%
C u m u
l a t i v e
L a b o r
F o r c e
G r o w
t h
Years After Real Estate Price Peak
U.S.
Japan
8/3/2019 TCW 2011-2012 HY
30/55
Inflation Will Solve the Leverage Problem
Inflation is always and everywhere a monetary phenomenon. Milton Friedman
By increasing the number of dollars in circulation
Under a paper-money system, a determined government canalways generate higher spending and hence positive inflation. Ben Bernanke
29 DFIsecEO1045 10/20/11
8/3/2019 TCW 2011-2012 HY
31/55
30 MKTcc1764 1/10/12
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 210%
2%
4%
6%
8%
10%
12%
14%
16%
C u m u
l a t i v e
N o m
i n a l
G D P G r o w
t h
Years Since Real Estate Price Peak
U.S.
Japan
Governments tax nominal incomes Debt is serviced with nominal incomes not with real income
U.S. vs. Japan: The Nominal Variables Say Risk OnU.S. vs. Japan: Central Bank Target Rates U.S. vs. Japan: Cumulative Monetary Expansion
U.S. vs. Japan: Cumulative Nominal GDP Growth U.S. vs. Japan: Cumulative Inflation Since Real Estate Price PeakCumulative Inflation Since the Real Estate Price Peak
Source: Bloomberg
Source: Bloomberg, Federal Reserve1 Currency in circulation plus deposits held by depository institutions at the Federal Reserve Banks.2 Currency in circulation plus current account deposits held by financial institutions at the bank of Japan.
Source: Bloomberg Source: BLS, Statistics Bureau of Japan
0 1 2 3 4 5 6 7 8 9 100
1
2
3
4
5
6
T a r g e
t R a t e
( % )
Years Since Real Estate Price Peak
Fed Funds Target Rate
BOJ Overnight Target Rate
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 210%
50%
100%
150%
200%
250%
Cumulative MonetaryBase Growth
Years Since Real Es tate Pric e Peak
U.S. Monetary Base
Japan Monetary B ase
1
2
QuantitativeEasing 1
QuantitativeEasing 2
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20-2%
0%
2%
4%
6%
8%
10%
12%
C u m u
l a t i v e
I n f l a t i o n
G r o w
t h
Years Since Real Estate Price Peak
U.S.
Japan
Quantitative Easing 1
Quantitative Easing 2
8/3/2019 TCW 2011-2012 HY
32/55
8/3/2019 TCW 2011-2012 HY
33/55
Financial Repression: The Care and Feeding of Pro-Inflation Policies
32 DFIsecEO1045 10/20/11Source: U.S. Treasury, Federal Reserve, TCW
Zero rates pledged through 2013
Short rates anchored
2-year, 5-year Treasury rates reprice according to the 0% rate arbitrage
Asset Liability
0.30% 2-year UST 0% Fed Loan
Operation Twist
Drives down longer-term Treasury rates
Expected 30 Year Bond Issuance(Oct'11 - Jun'12)
Fed Purchase of Long Bonds(Oct'11 - Jun'12)
$0
$50
$100
$150
B i l l i o n s
U S D
$127 B$116 B
Expected Issuance of Long U.S. Treasuries
Intended Fed Purchases of Long U.S. Treasuries(91% of total issuance)
8/3/2019 TCW 2011-2012 HY
34/55
Reinventing the Greenspan/Bernanke Equity Put
33 DFIsecEO1045 10/20/11
Source: Bloomberg
-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 210
10
20
30
40
50
60
70
80
90
100
S t o c k
M a r
k e t I n d e x
Years Since Stock Market Peak
S&P 500 Index (Oct '07 = 100)
NIKKEI 225 Index (Dec '89 = 100)
Stock Market Peak
Quantitative Easing 1
Quantitative Easing 2
8/3/2019 TCW 2011-2012 HY
35/55
European Policy Options
Were not just here to make a single market but a political union. Jacques Delors, EU Commission President, 1993
The European Union Treaty will lead to the
creation of the United States of Europe. Helmut Kohl, German Chancellor, 1992
34 DFIsecEO1045 10/20/11
8/3/2019 TCW 2011-2012 HY
36/55
35 DFIsecEO1045 10/20/11
American Experience: Nearly 100 Years to Form a Modern Federal Union
1776: American Declaration of Independence
States were thought of as sovereigns
1788: U.S. Constitution ratified by the states
1832: South Carolina declares a Federal tariff nulland void within the state of South Carolina
South Carolina prepares to resist invasion
Tariff was reduced
1850s: Southerners argue that the Constitutionis a voluntary compact
The union is an agreement among states
Any state can secede
1861-1865: United States of America wages war on the eleven Confederate States of America
1865-1876: United States occupies Southern states
8/3/2019 TCW 2011-2012 HY
37/55
Unit Labor Costs Diverged Across Europe
36 DFIsecEO1045 10/20/11
Rising productivity in Northern Europe reduced unit labor costs in the North
Competitiveness of Germany enhanced vs. Italy, Spain
Equilibrium could have been restored via:
Migration of labor
Appreciation of the (non-existent) German currency (Deutsche Mark)
Depreciation of the (non-existent) Peseta, Lira
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201090
100
110
120
130
140
150
U n
i t L a b o r
C o s t
I n d e x
( 1 9 9 9 =
1 0 0 )
France
Germany
Italy
Spain
Portugal
Unit Labor Costs in the Euro Area
Source: Bloomberg, OECD, TCW
Germany
Spain
8/3/2019 TCW 2011-2012 HY
38/55
European Trade Imbalances Created National Creditors/Debtors
37 DFIsecEO1045 10/20/11
Eurozone current account was near balanced
However, some countries ran surpluses (e.g. Germany) and others (Spain, Greece) deficits
Wide imbalances within Eurozone meant vast increase in borrowing by importing countries
German surpluses were recycled into a Spanish real estate bubble
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201-300
-200
-100
0
100
200
300
U S D B i l l i o n s
Intra-Eurozone Current Account (Imbalances)
Source: IMF, TCW
Germany
Spain
Eurozone
8/3/2019 TCW 2011-2012 HY
39/55
Can Europe Go Back to National Currencies?
38 DFIsecEO1045 10/20/11
Toothpaste cant be put back into the tube
Creation of a northern Euro/southern Euro or restoring national currencieswould catalyze:
Immediate, massive appreciation of Deutsche Mark
Depreciation of Lira, Peseta
German labor would be repriced causing deflation, depression across northern Europe
Southern Europe would hyperinflate
How would anyone know which Euro assets and which Euro liabilities would convert into Deutsche Mark,Franc, Lira, etc.?
Massive uncertainty would cause a run on the banks
Sovereign governments would have to guarantee the banks
8/3/2019 TCW 2011-2012 HY
40/55
Options for Resolution
39 DFIsecEO1045 10/20/11
Abandon the Euro: Financial Anarchy
Series of one time fixes: Recapitalizebanks, enlarge EFSF, ECB Italian,Spanish bond purchases
Establish a Fiscal Union: Tax and Transferthroughout the EU, ECB powers enlarged
8/3/2019 TCW 2011-2012 HY
41/55
Conclusions
40 DFIsecEO1045 10/20/11
8/3/2019 TCW 2011-2012 HY
42/55
Conclusions: Out of the Valley of Debt
41 DFIsecEO1045 10/20/11
The Federal Reserve is choosing the least bad policy choice
Necessary consequence is that U.S. inflation will rise
Which will support nominal GDP growth
Thereby facilitating de-leveraging via currency debasement
Failure to reprice asset markets, labor markets, etc., have consequences too
Inefficient resource allocation
Painfully slow real GDP growth
High unemployment to continue
Europe has no feasible choice but to move towards a stronger union
ECB will operate more like the Fed
Can draw upon Feds dollar swap lines
Political leadership likely will avoid hard choices and grand solutions, favor short-term fixes
8/3/2019 TCW 2011-2012 HY
43/55
IV. Portfolio Strategy
(Developed)
8/3/2019 TCW 2011-2012 HY
44/55
43 MKTcc1764 1/10/12
Strategy For a Financially Repressive World
Beware interest rate duration
Fed reflation efforts
Long-term Federal budget imbalance Potential end of mercantilism (Pool of Fools)
Fed balance sheet unwind
Fed policy and eventually all policy pushes for reflation and disintermediationof low risk assets
Eventual reduction in risk premia (credit, MBS, EMD)
Focus on undervalued assets that can survive the trade
Securities which benefit from reflation:(non-agency MBSSenior only; CMBS30% and 40% Seniors)
Secured high yield Systemically critical banks (Senior debt, TRUPs)
Investment Grade Corporates
(Developed)
How does 0% sound,does zero work for you?
>
8/3/2019 TCW 2011-2012 HY
45/55
44 MKTcc1764 1/10/12
MetWest Total Return Bond Fund Summary CharacteristicsAs of December 31, 2011
Sector CompositionMetWest Barclays
TR Bond Fund Aggregate
U.S. Government 10.4% 42.0%U.S. IG Credit1 17.3% 23.9%U.S. High Yield 6.2% 0.0%Agency MBS 29.9% 31.8%Non-Agency MBS 16.6% 0.0%CMBS 8.1% 2.0%ABS 5.0% 0.2%International Fixed Income 0.0% 0.0%Emerging Markets Fixed Income 0.0% 0.0%Cash & Equivalents 6.5% 0.0%
Quality Composition 2,3MetWest Barclays
TR Bond Fund Aggregate
AAA 57.3% 75.1%AA 6.9% 5.1%A 9.0% 10.7%BBB 7.6% 9.1%BB 4.6% 0.0%B & Below 14.6% 0.0%
MetWest BarclaysTR Bond Fund Aggregate
Portfolio Duration 4.1 Years 5.0 Years
Average Maturity 7.1 Years 7.1 Years
1 Includes Corporates, Municipals, Supranationals, and USD-denominated Sovereigns and Foreign Agencies of developed countries.2 Quality ratings by Moody's, Standard & Poor's and Fitch, such as "AAA" refer to portfolio securities and not to the fund itself. When ratings vary, the highest rating is used. Securities rated below BBB are considered
more speculative and are subject to greater risks than higher rated bonds. Portfolio composition may change at any time. Holdings rated below B were purchased at B or better.3 MetWest receives credit quality ratings on the underlying securities held by the Fund from Moodys, Standard & Poors and Fitch. MetWest created the Quality Composition breakdown by taking the highest rating o
the three rating agencies when two or three of the agencies rate a security. If only one agency rated a security, MetWest will use that rating. Securities that are not rated by any of the three agencies are shown in theunrated category.
S A S
8/3/2019 TCW 2011-2012 HY
46/55
45 MKTcc1764 1/10/12
Focus Sector: Non-Agency MBSCredit Snapshot Keep Your Eyes On the Horizon
Source: First American CoreLogic Loan Performance, TCW
J u n - 2 0 0 7
D e c - 2
0 0 7 J u n
- 2 0 0 8 D e
c - 2 0 0 8
J u n - 2 0 0 9
D e c - 2
0 0 9 J u n
- 2 0 1 0 D e
c - 2 0 1 0
J u n - 2 0 1 1
D e c - 2
0 1 1-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
J u n - 2 0
0 7
D e c - 2
0 0 7
J u n - 2 0
0 8
D e c - 2
0 0 8
J u n - 2 0
0 9
D e c - 2
0 0 9
J u n - 2 0
1 0
D e c - 2
0 1 0
J u n - 2 0
1 1
D e c - 2
0 1 10.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Prime
Alt-A
Option ARM
Subprime
J u n - 2 0 0 7
D e c - 2 0 0 7 J u n
- 2 0 0 8 D e
c - 2 0 0 8 J u n - 2 0 0 9
D e c - 2 0 0 9 J u n
- 2 0 1 0 D e
c - 2 0 1 0 J u n - 2 0 1 1
D e c - 2 0 1 1
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%12 Months Clean to 60 DQ Roll Rates Severity
Voluntary Prepayments
F S N A MBS
8/3/2019 TCW 2011-2012 HY
47/55
46 MKTcc1764 1/10/12
Focus Sector: Non-Agency MBSModified ModificationsAn Unappreciated Change for the Better...
Source: First American CoreLogic Loan Performance, TCW
M a r - 2 0
0 8 J u n
- 2 0 0 8 S e p
- 2 0 0 8 D e
c - 2 0 0 8 M a
r - 2 0 0 9 J u n
- 2 0 0 9 S e p
- 2 0 0 9 D e
c - 2 0 0 9 M a
r - 2 0 1 0 J u n
- 2 0 1 0 S e p
- 2 0 1 0 D e
c - 2 0 1 0 M a
r - 2 0 1 1 J u n
- 2 0 1 1 S e p
- 2 0 1 1 D e
c - 2 0 1 1
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Prime
Alt-A
Option Arm
Subprime
0 10 20 30 40 500.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Months
2011
2010
2009
2008
2007
Modifications by Sector Recidivism by Vintage
The Benefit of AffordabilityFocused Modifications
Capitalization-BasedModifications
Modifications Are Up Substantially... ...And So Are Their Effectiveness
F S t N A MBS
8/3/2019 TCW 2011-2012 HY
48/55
47 MKTcc1764 1/10/12
Focus Sector: Non-Agency MBSWhat HPA & Employment Forecast Is EmbeddedIn Non-Agency RMBS Prices?
0% Year 1 -10% Year 1 -20% Year 1 -30% Year 1
+3% Years 2+ 0% Years 2+ 0% Years 2+ 0% Years 2+
5% 6% 10% 15%
11.45% 10.72% 9.54% 7.77%
Annual HPA
Long Term Unemployment*
Loss-Adjusted Yields
The loss-adjusted yields shown above are derived from cashflows generated using a proprietary TCW logistical regression model on a representative sample of non-agency MBS, with certain assumptions embedded inthe model. This analysis is presented here for illustrative purposes only. Actual realized yields will differ, perhaps significantly, from the results shown above.*Unemployment rate labeled in these scenarios is the eventual and terminal rate achieved after ramping up or down over the course of 3-7 years.
Scenarios
1 2 3 4
8/3/2019 TCW 2011-2012 HY
49/55
8/3/2019 TCW 2011-2012 HY
50/55
Focus Sector: Investment Grade Corporate BondsBarclays Credit Spreads Index OASAs of December 31, 2011
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
100
200
300
400
500
600
700
800
900
O A S ( b p s )
Credit Index Non-Corporates Industrials Utilities Financials
49 MKTcc1764 1/10/12
Source: Barclays Capital
8/3/2019 TCW 2011-2012 HY
51/55
50 MKTcc1764 1/10/12
Focus Secto r: High YieldCredit Cycle Analysis: High Yield Corporate Fun damentals
Source: Morgan Stanley
1 9 9 8
1 9 9 9
2 0 0 1
2 0 0 2
2 0 0 4
2 0 0 5
2 0 0 7
2 0 0 8
2 0 1 0
0%
2%
4%
6%
8%10%
12%
14%
16%
Median: 8%
2 0 1 1 1 9 9
8 1 9 9
9 2 0 0
1 2 0 0
2 2 0 0
4 2 0 0
5 2 0 0
7 2 0 0
8 2 0 1
0-20%-15%-10%-5%0%5%
10%15%20%25%30%
2 0 1 1
Cash/Debt Ratio Last 12 Months Sales Growth
... as well as declining cash balances and declining sales growth
Focus Sector: High Yield
8/3/2019 TCW 2011-2012 HY
52/55
51 MKTcc1764 1/10/12
Focus Sector: High YieldHigh Yield Excess Return Prospects Dependent on Credit Cycle StagePre-Recession 1High Yield OAS +420
Recession 2High Yield OAS +1,000 bps
Current3High Yield OAS +699
Analysis assumes no interest rate or curve shape shift nor spread changes. Analysis for illustrative purposes only1. Example from September 2007. Assume bell-shaped default distribution. Uses maturity schedule as of September 2007.2. Example: typical recession risk premium. Front end weighted default distribution. Uses maturity schedule as of September 2008.3. Default distribution centered around year 2. Uses maturity schedule as of December 2011.
8/3/2019 TCW 2011-2012 HY
53/55
V. Appendix
8/3/2019 TCW 2011-2012 HY
54/55
53 MKTcc1764 1/10/12
The primary risks affecting this Fund are interest rate risk (including extension risk and prepayment risk), liquidity risk,market risk, and credit risk.
Interest rate risk refers to the possibility that the value of the Funds portfolio investments may fall since fixed income securities
generally fall in value when interest rates rise. Extension risk is the possibility that rising interest rates may cause owners of the underlying mortgages to pay off their mortgages at a
slower than expected rate. This particular risk may effectively change a security which was considered short or intermediate term into along-term security. Long-term securities generally drop in value more dramatically in response to rising interest rates than short orintermediate-term securities.
Prepayment risk refers to the possibility that falling interest rates may cause owners of the underlying mortgages to pay off theirmortgages at a faster than expected rate. This tends to reduce returns since the funds prepaid will have to be reinvested at the thenlower prevailing rates.
Liquidity risk refers to the possibility that the Fund may lose money or be prevented from earning capital gains if it cannot sell a securityat the time and price that is most beneficial to the Fund.
Market risk is the possibility that the returns from the types of securities that the Fund invests in will underperform returns from thevarious general securities markets or different asset classes.
Credit risk refers to the loss in the value of a security based on a default in the payment of principle and/or interest of the security, orthe perception of the market of such default. The value of the Funds share price will fluctuate up or down based on the value of theportfolio holdings, which can be affected by these risks.
The information contained herein may include estimates, projections, and other forward-looking statements. Actual events may differ substantially from those presented herein. TCW assumes no duty to update anysuch statements.Any opinions expressed are current only as of the time made and are subject to change without notice. The views expressed herein are solely those of the author and do not represent the views of TCW as a firm or of anyother portfolio manager or employee of TCW.
A Word About Risk
8/3/2019 TCW 2011-2012 HY
55/55
BiographiesInvestment Management Team
54 MKTcc1764 1/10/12
Tad RivelleChief Investment OfficerFixed IncomeGroup Managing Director
Tad Rivelle is Chief Investment Officer, Fixed Income,
overseeing investment management of all U.S. fixedincome products at TCW, including fixed income mutualfunds offered by both TCW and MetWest. He also overseesall of TCWs fixed income research and commentary,which includes daily updates on the economy and thecredit markets published on www.tcw.com. He is also aportfolio manager of numerous TCW and MetWestproducts, including the MetWest Total Return Bond Fund,
TCW Total Return Bond Fund, TCW Core Fixed Bond Fund,and the TCW Strategic Income Fund. Prior to joining TCW,Tad served as Chief Investment Officer for MetWest.Under Tads leadership, the MetWest investment teamwas recognized as Morningstar's Fixed Income Managerof the Year for 2005. Prior to founding MetWest, Tad wasco-director of fixed income at Hotchkis and Wiley. He wasalso a portfolio manager and vice president at PIMCO.Tad holds a bachelor's degree in physics from YaleUniversity, a master's degree in applied mathematicsfrom University of Southern California, and an MBAfrom UCLA Anderson School of Management.
Laird R. LandmannGroup Managing DirectorU.S. Fixed Income
Mr. Landmann is a Generalist Portfolio Manager in the
U.S. Fixed Income Group. He joined TCW in 2009 duringthe acquisition of Metropolitan West Asset ManagementLLC (MetWest). Mr. Landmann currently co-manages manyof TCW and MetWests mutual funds, including the MetWestTotal Return Bond Fund, the MetWest High Yield Bond Fundand the TCW Core Fixed Income Fund, and leads the fixedincome groups risk management efforts He is a memberof the MetWest investment team that was recognized as
Morningstar's Fixed Income Manager of the Year for 2005and has been nominated for the award six times. Prior tofounding MetWest in 1996, Mr. Landmann was a principaland the co-director of fixed income at Hotchkis and Wiley.He also served as a portfolio manager and vice presidentat PIMCO. Mr. Landmann holds a BS in Economics fromDartmouth College and an MBA from the University of Chicago Booth School of Business.