In the all-out war between L.A. money manager TCW Group Inc. and its former chief investment officer, Jeffrey Gundlach, one battle will be decided Friday.
That's when more than 200 big investors in two TCW bond funds will choose between keeping their money with the firm or exiting.
TCW naturally wants to hold on to the $3 billion in the funds. Gundlach, meanwhile, has made a full-court press to persuade the investors, including a number of large pension funds, to dump TCW and bring their money to his new firm, DoubleLine Capital.
Yet many of the investors could choose a third option: boycotting both TCW and Gundlach, rather than risk suffering collateral damage from the bitter legal fight that has followed their split.
TCW fired Gundlach, the firm's star bond manager, on Dec. 4, saying he had threatened to quit and take his staff with him. Within days, Gundlach launched DoubleLine, and more than 40 of his former TCW staffers soon jumped ship to join him.
Last month, TCW sued Gundlach and several other ex-TCW employees, alleging that they set up DoubleLine using "vast quantities" of proprietary information they stole from TCW. Gundlach has since countersued, accusing TCW of firing him to avoid honoring an agreement to share up to $1.25 billion in potential fee income.
The TCW bond funds now at issue were created in 2007 and 2008 for institutional investors. The portfolios own home-mortgage-backed securities that Gundlach picked out as undervalued amid the mortgage-market meltdown.
When TCW fired Gundlach, it triggered a "key man" provision that compelled TCW to give investors the right to reconsider their participation in the funds.
For TCW, the $3 billion in the mortgage funds is just a fraction of the company's total $100 billion in assets. But the investors' decision inevitably will be viewed as a vote of confidence -- or lack thereof -- in the bond-fund managers of Metropolitan West Asset Management, which TCW brought in to replace Gundlach.
To try to keep the investors on board, TCW has offered to cut its management fee on the funds to 1% from 2% and to slash its take of the funds' future performance to 5% from 20%.
Referring to Metropolitan West, a TCW spokeswoman said the firm had "great confidence in the new investment team."
Gundlach, who still has some of his own money invested in the funds, has sent letters to the other investors urging them to sell, give their cash to him and let him build new portfolios of mortgage bonds for them. He has held two conference calls for investors to make his pitch.
Bringing in $3 billion would be a huge lift for DoubleLine, doubling the amount Gundlach says he's currently managing.
Gundlach had urged TCW to allow investors in the funds to be paid "in kind" -- meaning that they would get the actual bonds in the funds rather than cash. That would have allowed the investors to bring the bonds to Gundlach, who picked them in the first place. But TCW declined to provide that option, citing legal restrictions.
Faced with staying put or liquidating their holdings, some investors say they've decided to cash out.
One pension fund manager who requested anonymity said that although he thought TCW's new Metropolitan West managers had "great skills," he didn't believe they were experienced enough with the kinds of bonds in the funds. Noting that many of the bonds have risen in value from the depressed levels of 2008, the investor said it would be crucial now to know which to hold and which to sell.
"To make money from this way forward is not to lose it," he said.
But the manager also said he wouldn't be taking his money to Gundlach.
"Jeffrey Gundlach is brilliant, but I have the sense that TCW is going to have him tied up for three to five years" in legal wranglings, the manager said. "My concern is how he will be distracted" by the court fight.
The Fairfax County (Va.) Retirement Systems, which has about $62 million in the funds, also has decided to cash out, said Larry Swartz, chief investment officer.
He said the pension funds hadn't decided where to take the money, but that, "Generally, we don't like organizational uncertainty."