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TCW's $50-Billion Sheen Tarnished by Losses

January 09, 1995|TOM PETRUNO

Trust Co. of the West, one of Los Angeles' largest money management firms and one of the leading U.S. investors in Latin America, has suffered sharp losses as Latin stock and bond markets have plummeted in recent months.

But the $50-billion-asset TCW, long known for taking bigger risks and reaping similarly outsize rewards, appears to be in a much better position with most of its Latin debt than some of its peers, Wall Street sources say. That's because TCW has avoided some of the worst-hit bonds.

Even so, the plunge in value of TCW's estimated $4.5 billion investment in Latin stocks and bonds--particularly Mexican issues--has compounded losses that the firm endured in 1994 in its substantial portfolio of mortgage securities.

Rumors have dogged the bond market periodically over the past year that TCW's mortgage investments had dropped severely, in part because the firm was known to be a large investor in so-called inverse floater securities.

Those issues--some of the same kinds of bonds owned by Orange County's doomed investment fund--are structured to pay higher yields if market interest rates fall, but lower yields if market rates rise. Because rates surged in 1994, inverse floater bonds tumbled in value.

"TCW has been one of the biggest players in mortgage derivatives in recent years," said one rival fund manager.

TCW officials, who are notoriously publicity-shy, declined to comment about their portfolios or about current strategy. But Wall Streeters familiar with the firm's operations say only a relatively few unhappy institutional clients have defected from TCW to other money managers over the last several months.

Because TCW apparently has not used leverage, or borrowed money, to intensify its bond bets, it doesn't face the kind of liquidity issues that fueled Orange County's crisis. Moreover, the Mexican bonds in TCW's portfolios are mostly dollar-denominated corporate securities, not the peso-denominated bonds that have experienced the worst losses as Mexico's currency has been devalued.

"They have very little peso exposure and virtually no tesobono (short-term Mexican government bonds) exposure," said John Liegey, whose New York-based Weston Group has advised TCW on emerging-markets securities.

So far, TCW's problem is more one of a tarnished image with some of the firm's high-powered clients, who now are swallowing deep losses in their bond accounts after enjoying three years of well-above-average returns.

TCW's more pressing client problem may be with individual investors: Five of six mutual funds that the firm manages for brokerage Dean Witter Reynolds suffered 1994 declines far exceeding industry averages, a result of TCW's bond strategy and its Latin investments.

One of those funds, the TCW/Dean Witter North American Government Income fund, slumped 15.6% in value, sparking a flurry of shareholder redemptions that drained $1 billion from the fund in just nine months.

The Dean Witter funds, only two to three years old, represented TCW's first major foray into money management for small investors. The company historically has avoided that "retail" market, preferring instead to deal exclusively with institutional investors and high-net-worth individuals.

The institutional market suits TCW's cigar-chomping, 47-year-old chairman, Robert Day, who founded the company in 1971 with $2 million.

Day, the blue-blooded Angeleno grandson of Superior Oil Co. founder William Keck, is an aggressive, no-nonsense money manager who divides his time among Los Angeles, New York and Martha's Vineyard, and who shuns publicity like the plague.

In fact, the company's public profile has traditionally been so low that some of Day's peers were shocked a few years ago when he allowed the giant initials "TCW" to be emblazoned atop the company's Downtown Los Angeles tower.

For most of TCW's history, Day had no interest in small investors--and no real need for them. Between 1980 and 1990 TCW's assets under management grew from $2 billion to $17 billion, as the company's prowess as a global stock-picker, bond manager and real estate investor attracted dozens of huge institutional investors, including Boston College, Lockheed Corp. and Levi Strauss.

As the 1990s began, TCW was perfectly positioned for meteoric growth. Loaded with high-priced talent that Day recruited from other major investment firms, TCW offered expertise in such exotic markets as Latin American securities, convertible bonds and "distressed" bonds--all areas that promised higher returns to institutional investors scrambling to cope with plummeting interest rates.

And indeed, in the five years ended in 1992, TCW's performance in many of its investment accounts was exceptional. The firm's "concentrated core" stock portfolio gained 18.5% annualized in that period, versus a 15.9% return for the Standard & Poor's 500-stock index; TCW's mortgage-backed bond portfolio returned 15.3% annualized versus 11.4% for a popular mortgage bond index.

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