A power struggle at one of L.A.'s biggest investment firms has many of the ingredients of a Shakespearean tragedy: frustrated ambition, a hero's fall from grace, betrayal and revenge.
It also has left billions of dollars of investors' hard-earned money stuck uncomfortably in the middle.
One week ago, TCW Group unexpectedly fired its veteran investment chief and star bond fund manager, Jeffrey Gundlach, asserting that he had threatened to quit the firm and leave it in the lurch.
With $110 billion in fee-generating assets, most of that in the fixed-income securities that are Gundlach's specialty, TCW says it had no choice but to make a preemptive strike: It ousted the 50-year-old manager -- a former rock 'n' roll drummer -- and simultaneously bought a smaller crosstown money manager to take over his portfolios.
The surprise move triggered what one analyst called a "virtual earthquake in L.A.'s bond world" -- a reminder that Southern California has over the last two decades become a hot spot for fixed-income investing.
Gundlach, in fact, has long chafed in the shadow of the world's best-known bond investor, Bill Gross of the Newport Beach-based Pimco funds. Gross, 65, is the acknowledged king of the bond world for his prescient investment calls and spectacular long-term performance with his Pimco Total Return bond fund.
But as Gundlach is never slow to point out, his biggest mutual fund at TCW, the TCW Total Return Bond fund, has beaten Gross' record over the last 10 years: The TCW fund has risen 7.69% a year in that period, compared with the Pimco fund's 7.56% average annual gain.
In the stock market's boom days those numbers wouldn't have impressed many investors. But after last year's Wall Street crash, this will go down as a lost decade for stocks. The average return on the Standard & Poor's 500 stock index is negative 0.6% a year over the last 10.
No wonder bonds have become so appealing to millions of American investors, who have poured record sums into bond mutual funds this year. That also raises the stakes in the feud between Gundlach and TCW.
Indeed, many of the clients Gundlach built up in his 24 years at TCW are waiting for his next step. He says he expects to quickly reemerge as an investment manager on his own, and steal his old clients from TCW.
Early this week, Gundlach set up shop on the 26th floor of the US Bank tower in downtown L.A. with five of his top TCW lieutenants and other loyal support staff who followed him out the door.
For its part, TCW's move to protect its business as it sacked Gundlach was to buy Metropolitan West Asset Management, a 13-year-old West L.A. firm that manages about $30 billion in bonds.
In a Friday call with investors, Met West Chief Investment Officer Tad Rivelle, who also has assumed that role over most of TCW's bond investments, said TCW Total Return Bond fund had suffered "substantial" redemptions in the first four days of this week as nervous investors yanked $3.5 billion, reducing the fund to $8.5 billion.
But he said redemptions had tapered off by Thursday, and he sought to make a case for investors to stay put -- stressing that Met West was "very comfortable" with the portfolio as Gundlach left it.
Investors' concerns about Gundlach's exit center on his expertise with a complex corner of the bond market: mortgage-backed securities.
His mutual fund performance of the last decade partly reflects that he avoided the worst of the mortgage dreck during the housing bubble -- and that, in the bust of the last two years, he was confident enough to buy mortgage bonds that had dived to rock-bottom levels and have since resurged.
Even as many investors refused to touch crumbled mortgage securities in 2007 and 2008, "he had the insight to say, 'This stuff had gotten really cheap,' " said Eric Jacobson, a bond-fund analyst at Morningstar Inc. in Chicago.
But some of Gundlach's rivals in the bond business say his approach to mortgages was contradictory during the boom years. While his mutual fund steered clear of the worst debt, TCW under Gundlach became the world's largest manager of so-called collateralized debt obligations, or CDOs.
CDOs were a notorious example of Wall Street alchemy, seeming to turn bonds backed by subprime mortgages into AAA-rated securities. When the housing market collapsed, CDOs were among the biggest casualties.
Gundlach is unrepentant about TCW's role in creating and managing CDO pools. They were, he said, what major institutional investors clamored for, and he believes the buyers fully understood the risks.
But that doesn't wash with his critics. Even Jacobson, a fan of Gundlach's mutual funds, says of TCW's CDO binge: "In my world, that's bad stewardship."
Unlike many money managers who took the traditional path of a Harvard or Stanford MBA to break into the profession, Gundlach fell into the business by accident.
A math major at Dartmouth College in the late 1970s, his first job out of school was as an actuary at an insurance company. He hated it, he says.
