David fought Goliath with stones and a slingshot.
A top-performing but tiny bond mutual fund managed by Los Angeles-based Trust Co. of the West is taking on Newport Beach-based bond behemoth Pimco with a knife: The TCW fund said Monday it would cut management fees in a bid to attract investors' cash.
The TCW Galileo Total Return fund said it would reduce its annual fees as a percentage of fund assets by more than one-third, to 0.44% from 0.69%, and lower the minimum investment amount to $2,000 from $25,000.
In the mutual fund industry, management fee reductions have been about as common as snow in L.A. in July. That's why Jeffrey Gundlach, manager of the TCW fund, figured the move was his best chance of getting more attention for his portfolio, he said: "It's a way of showing we intend to compete for fund dollars."
Gundlach said he has grown frustrated by the fund's small asset base even though it has beaten 98% of its peer funds over the last five years, generating an average annualized return of about 8% in that period.
That performance also has beaten Pimco's Total Return fund, which has returned an average of about 7.6% a year in the last five years.
Yet the Pimco fund is the world's biggest bond fund, with $71 billion in assets. The TCW fund holds just $212 million.
By lowering its fees, the TCW fund essentially is adding the amount of the fee cut to shareholders' annual return.
As a marketing move, "It's a smart thing to do," said Eric Jacobson, a senior analyst at fund-tracker Morningstar Inc. in Chicago. "Their performance has been terrific."
TCW isn't a small shop: It manages $80 billion overall. But that's mostly institutional money. Its retail mutual funds under the Galileo name hold about $3.3 billion.
At 0.44%, the TCW Total Return fund's expense ratio will be below the 0.75% ratio of the Pimco Total Return fund that is available for direct purchase by small investors. (Institution-only funds generally have lower expense ratios.)
John Loftus, a Pimco managing director, notes that although the two funds have similar names, they invest differently: The Pimco fund diversifies among many types of bonds, while the TCW fund focuses on mortgage-backed bonds.
And Jacobson noted that, even with its lower fee, the TCW fund still is more costly than most of low-cost-leader Vanguard Group's bond funds.