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TCW bond fund shares tumble after manager's ouster

December 7, 2009 |  7:25 pm

The bitter divorce between L.A. money manager TCW Group and its former chief investment officer, Jeffrey Gundlach, dealt a quick blow on Monday to one group of investors: shareholders of the TCW Strategic Income bond fund.

Thanks to a sharp rebound in the prices of the mortgage-backed bonds that make up most of the fund’s assets, the share price of TCW Strategic Income had been up 55% year to date through Friday.

But on Monday, the first trading day since Gundlach was fired Friday afternoon, the fund’s share price plunged as much as 7.6% on the New York Stock Exchange. It recovered a bit to end the day at $4.47, down 28 cents, or 5.9% from Friday’s close of $4.75.

Amid a power struggle, TCW sacked Gundlach and simultaneously announced a merger with another L.A. money manager, Metropolitan West Asset Management. TCW put Met West's bond team in charge of the funds that Gundlach had overseen.

TCW Strategic Income, one of many bond portfolios that Gundlach had managed, is a so-called closed-end mutual fund. That means it has a set number of shares outstanding that trade on a public exchange.

Unlike in the case of traditional open-end mutual funds, the market price of a closed-end fund can trade above or below the per-share net asset value of the underlying portfolio, depending on investor demand for the stock (or lack thereof).

At Monday’s closing price, the share price of TCW Strategic Income was 10.8% below the portfolio’s net asset value per share Friday. Normally, a discount of that magnitude is attractive to bargain-hunting investors who like to buy assets on the cheap.

But in this case, the fund’s share price could remain under pressure if more investors exit because Gundlach, considered one of Wall Street’s savviest mortgage-bond investors, no longer is managing the portfolio.

There’s another hitch: Gundlach personally owns 893,125 shares of the fund, or about 1.9% of the outstanding stock. If he dumps those shares he could drive the stock price lower, at least temporarily.

Of course, Gundlach would only hurt himself if he bailed out in a hurry and the share price slumped, a point he acknowledged in an interview.

He said he wasn’t selling on Monday, but he also said it made little sense for him to stay in a bond portfolio managed by someone else.

Gundlach’s proposed solution: Given that he expects to get back into the money management business, most likely by starting his own firm, he called on TCW to contract with him to oversee TCW Strategic Income and other bond portfolios that he had managed at the firm.

After such a nasty divorce, that would seem highly unlikely. But Gundlach said his proposal was serious, and he asserted that it was the right thing to do for the funds’ investors.

A TCW spokeswoman said the firm declined to comment. 

-- Tom Petruno