Those surprisingly small TCW redemptions

By Felix Salmon
December 11, 2009
fired, but redemptions seem to be slowing down, and that still leaves over $60 billion remaining.

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How much has the abrupt departure of star bond fund manager Jeffrey Gundlach cost his former company? Maybe less than you might think: about $2 billion left his fund in the 48 hours after he was fired, but redemptions seem to be slowing down, and that still leaves over $60 billion remaining.

Most of Gundlach’s investors are large institutions, of course, and they can sometimes move relatively slowly, and might be biding their time to see if they can renegotiate their deals with TCW or to see where Gundlach pops up next. But the good news is that an event which might have caused serious chaos in the volatile and illiquid mortgage market seems in reality to have passed with barely a ripple.

The guy who’s replacing Gundlach, Tad Rivelle, is having a torrid week, for sure. But institutional investors often respect relatively modest fund managers who have yet to reach the point at which they start believing their own press clippings:

Mr. Rivelle rejects the notion any bond manager has a secret formula that can’t be replicated. Bond selection “doesn’t rely upon some supercomputer or massive brain,” he says.

In the early days of this week, when TCW was releasing letters saying that Gundlach had “threatened to take certain actions that could have jeopardized the firm’s ability to manage clients’ fixed income assets,” the probability that it could all end in anything but tears seemed slim indeed. But it’s a testament to the newfound strength of the bond market that so far this is more of a financial-gossip story than anything with systemic implications. Well done, bond market, for keeping your head and not going crazy on the immediate-redemptions front.

One comment

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Given that only $12 billion of the money Gundlach was running was in the mutual fund (TGMNX/TGLMX), $2 billion in withdrawals is pretty significant to the company. They also got smacked by the Treasury and may lose that business. No standard institutional investor is going to reallocate money in less than a week, and those that do want to move money might well cut deals with TCW not to express their concerns publicly. Of course it’s also in their interest to keep quiet to make sure they get their cash promptly.

Given that the mutual funds were ~65% in government-backed securities, it’s unsurprising that $2 billion in redemptions failed to move a multi-trillion dollar market. As to the supposed illiquidity of the riskier end of the portfolio, banks have been using illiquidity as an excuse for their insolvency since the beginning of the crisis and it remains just as false. There’s a price for any security you can name, because there are simply too many arbs and nerds out there for there to be any market in which the world collectively throws up its hands and says “Dunno what it’s worth”. That price may not be as high as the long-term holders of bad paper would like, but Gundlach bought all these securities at a low price and TCW could sell them at a higher price today. Banks just pretend they’re illiquid because they’d rather mark the paper at 80 cents on the dollar than take the market quote of 70 or less. Maybe we’ll successfully inflate/earn our way out of this and they’ll be right, but paper that you might have to sell any day to remain solvent/meet cash demands is worth what the market will pay you for it. I really hope for their sake that TCW has been marking their paper honestly when the institutional redemptions start coming in.

But I agree with you that this won’t have any bond market impact since TCW isn’t big enough. It will hurt their company because they have lost not just Gundlach but an excellent team around him that were highly successful at gathering and managing assets. It’s also pretty damaging to the company’s reputation as a fiduciary that they will make a huge adjustment on a Friday afternoon without consulting or warning shareholders. I’ll never invest with them again, and I had been adding to the fund since I found out about it earlier this year.

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