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Fund manager makes personal bet on risky debt

July 26, 2007|Tom Petruno | Times Staff Writer

Among the biggest victims of the recent plunge in prices of high-risk corporate and mortgage-backed bonds are so-called closed-end bond mutual funds, some of which have long been owners of those securities.

This week, the steep dive in shares of the Los Angeles-based TCW Strategic Income fund attracted one buyer of note: Jeffrey Gundlach, who invests the fund's portfolio and also is chief investment officer of its management company, TCW Group Inc.

Gundlach bought 127,200 shares of the fund Tuesday at $4.40 each and 55,200 shares Wednesday at $4.41, according to filings he made with the Securities and Exchange Commission.

The purchases brought his total holdings in the fund to 521,250 shares, worth about $2.3 million.

The fund's price hit a four-year low of $4.20 on Friday, a drop of 16.3% since late May.

Investors often watch corporate insiders' stock trades for clues to the value in a security. In theory, at least, the managers running a company -- or in this case, a fund -- have the best information about its appeal as an investment.

For Gundlach, 47, managing the $230-million TCW Strategic Income fund is a relatively small part of the role he plays at TCW Group. His main job is directing investment strategy for the company, which manages about $150 billion in bonds, stocks and other securities.

TCW is a major player in the market for mortgage-backed securities, including those backed by sub-prime loans made to people with poor credit histories.

The TCW Strategic Income fund has about 15% of its assets in mortgage-related securities that have some exposure to sub-prime loans, according to Gundlach. About one-fifth of assets are in a security that is a bet on an index of junk bonds.

Both of those high-risk markets have sunk in recent weeks, amid fears over rising defaults on sub-prime mortgages and investors' concern that credit problems will spread to corporate bonds next.

In an interview, Gundlach cautioned that he wasn't trying to call the bottom in those troubled markets with his purchases this week. But the price of the fund had fallen to a level at which he believed he could make money in the long run, he said.

Closed-end bond funds are popular with individual investors for the income the portfolios generate.

Closed-end funds differ from conventional open-end mutual funds in that closed-end portfolios have a limited number of outstanding shares, which trade on stock exchanges. So the funds have two share prices: One is the price of the stock as determined in the market. The other is the per-share value of the underlying portfolio, or net asset value.

When investors sour on a closed-end fund, their selling can drive the stock price below the portfolio value. That's what has happened with many closed-end bond funds recently.

TCW Strategic Income said its portfolio was worth $4.91 a share Friday. The stock, at $4.20 that day, was 14.5% below the fund's net asset value.

"I like to buy a dollar bill for 85 cents," Gundlach said.

Still, he said, it was likely that the worst wasn't over for prices of high-risk bonds.

On Wednesday, Wall Street indexes that reflect prices of baskets of mortgage-bond securities fell to fresh record lows after July payment-default data on the underlying loans showed "more of the same and worse of the same," Gundlach said.

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