This month, BFI interviews Steve Kane, co-CIO and generalist portfolio manager at TCW Investment Management. We discuss the new ESG Securitized Bond Fund, TCW and MetWest's broader bond fund lineup, and the manager's latest observations. Our Q&A follows. (Note: The following is reprinted from the November issue of our Bond Fund Intelligence, which was published on Nov. 15. Contact us at info@cranedata.com to request the full issue or to subscribe. Also, mark your calendars for our next Bond Fund Symposium, which will take place March 28-29, 2022, in Newport Beach, Calif.)
BFI: Give us a little history. Kane: The fixed income team here at TCW, the core of it at least, originally came from Metropolitan West Asset Management. MetWest was founded by me and a few other PMs, including Tad Rivelle and Laird Landmann.... The three of us began our careers together at PIMCO back in the early 1990s…. MetWest focused initially on core, core plus and traditional multi-sector fixed-income strategies. We then built our team and came over to TCW through an acquisition in 2009. Since that point, we've been heading up the TCW fixed income team.
TCW maintains mutual funds under the TCW and MetWest names, but for fixed income it's been the same team from 2009 forward. We've grown the assets to about $240 billion, and we have a team of 75 investment professionals. We have 4 generalist portfolio managers overseeing the investing activity and focusing on macro elements of strategy across portfolios -- duration and yield curve and broad sector exposure. Then the balance of the team, 71 people, are divided into sector teams.... There are the traditional fixed-income sectors: corporate credit, securitized credit, government and the rates team, and emerging markets.
Like many of our peers, we use a combination of top-down and bottom-up strategies to attempt to add value and beat our objectives and indices. But where we are a little bit different is the emphasis on bottoms-up relative to the top-down. So, we're more disciplined and relatively risk controlled on the macro part of what we do, and we are much more opportunistic, bottom-up, research-driven on the security selection and sector rotation parts of what we do. That has historically resulted in the predominance of our outperformance.
BFI: Talk about the ESG Securitized Fund. Kane: In terms of fixed income, this is our first ESG-labeled and ESG-focused fund.... It's not only novel for us, [but] we think it is somewhat novel in the marketplace today, being an ESG securitized fund.... ESG investing evolved initially in the equity markets, [and it's] also begun to influence corporate bond investing. There's been green bonds.... But in the securitized area, it's less developed. There's not funds out there, and it's a new area of the fixed income market.
We think this fund provides a unique opportunity for investors to access this part of the market. The way we're doing it is by, in effect, investing in three segments of the securitized ESG market. One is ... the labeled ESG market, or bonds that are labeled and officially recognized by official organizations as green.... That's a very small segment of the market and our fund.
The other area we're investing in, which is a significant part of what we're doing, is the non-labeled ESG themed debt. These are areas of the securitized market TCW identifies as ESG in some way, [like] commercial mortgage-backed securities backed by properties that are LEED certified, asset-backed securities backed by solar [and] agency mortgage-backed securities.
BFI: Tell us about your other funds. Kane: We have the $87 billion MetWest Total Return Bond Fund. This has a long history going back to 1997, and it fits within the core-plus bond fund universe, seeking to outperform the Barclays Aggregate Bond Index.... That is our bread and butter, so to speak, meaning that it uses all of our expertise and all of the sectors, as well as the macro positioning in terms of interest rates/duration, yield curve sector exposure, issue selection. That is a strategy that is long-tenured ... and the core of many investors' portfolios. It includes mostly investment grade, but some high yield and some emerging market securities.
The MetWest Low Duration Fund is, just as the name describes, a short-term bond fund managed to a one-to-three-year Treasury index. So that has a duration of just about two [years]. And it again is primarily about 90%, 90+% investment grade. Today, it's even higher than that. But it's usually 90+% investment grade, focused in on shorter-term securities ... finding the best opportunities across the Treasury, corporate asset backed, mortgage-backed securities markets, running a little bit more conservative ... than the MetWest Total Return Bond Fund.
Our interest rate positioning is more longer-term oriented. What the Fed is likely to do factors into it, but not for a specific meeting ... rather over the course of quarters and years. So just to give you a flavor of what our thinking is, we're currently lined up with the market in terms of what the Fed is likely to do in the near term.... Where we differ from the market is ... out the curve.... We think ... inflation is likely to be running high for a period of time and that investors need to be compensated for higher interest rates from the Fed down the road.
We also have MetWest Unconstrained Bond Fund.... It's a go anywhere, do anything fund of sorts. It doesn’t have a benchmark, and therefore has the flexibility to really move the duration around. It has some flexibility to own a lot of high yield if that's attractive, or emerging market if that's attractive. Today, we have that fund look very much like a low duration fund, meaning duration is short and credit risk is limited, given that yield spreads are relatively tight in the high yield market.... Even in a fund where we can take a lot of risk, we're choosing not to do so today.
BFI: What are you buying or not buying? Kane: A sector we don't like is corporate bonds, whether investment grade or high yield. The fundamentals are good ... but what we don't like is the pricing.... We just don't think there's a lot of value to high yield bonds.... We like agency and non-agency mortgage-backed securities [and] the collateralized loan obligation, or CLO, market.... The summary would be we don't like corporate credit, but we do like securitized credit.
BFI: What's your biggest challenge? Kane: The issue is not supply, it's price. We're seeing a lot of supply, but we're seeing just as much demand, unfortunately.... The challenge is finding supply at the right price, and it's hard to do in the corporate market. We are seeing new issue opportunities in the securitized market that are still reasonably interesting. In part that's probably because it's a little bit more complex.
BFI: Talk about your customers. Kane: The majority are institutional. But our large Total Return Bond Fund also is on a lot of broker-driven wealth platforms [used by] financial advisors whose clients are retail.
BFI: What about ultra-shorts? Kane: MetWest Ultra Short Bond Fund is very conservative ... meant to be in effect, a money market alternative. It doesn't qualify as a money market fund because it's buying instruments that are not '2a-7' eligible. But it is very short-term focused, under a year in its average maturity, and ... high quality.... It owns very, very little high yield.... The fund owns mostly very short-term floating rate agency mortgage-backed securities, very short-term investment grade corporate debt and very high-quality triple-A rated asset-backed securities.
BFI: Tell us about your outlook. Kane: The positive for bond funds is there should continue to be high demand well into the future. We have an aging population, so you have a long-term technical tailwind.... But given that the Fed's going to be tightening, and given that a lot of liquidity has already come into the bond market ... we don't see a lot of value.... We wouldn't be pounding the table today.... That's a bit of a near-term headwind.... Of course, equities may be even more challenging [going forward], so your [minimal] return in your bond fund may be at the head of the class.
