U.S.'s Biggest Bond Fund Fears U.S. Economy Is Peaking
Metropolitan West Total Return Bond, flush with new investors, opts for super-safe assets.
The bond-fund world has a new monarch. With $78.6 billion in assets, Metropolitan West Total Return Bond (MWTRX) has vaulted past Pimco Total Return to become the nation’s biggest actively run bond fund. The development is in large part due to the hordes of investors who left Pimco after the departure of cofounder Bill Gross in 2014. Many of those investors moved to the MetWest fund, whose assets have tripled since early 2014.
The funds share more than identical names. Both invest mainly in medium-maturity investment-grade bonds. Moreover, three of the MetWest fund’s managers—Stephen Kane, Laird Landmann and Tad Rivelle—worked at Pimco before starting MetWest in 1996. The founding trio make the big-picture calls on all nine of the firm’s funds; other managers and analysts pick the bonds.
MetWest’s leaders worry that the economy might be peaking, which could spell problems for heavily indebted companies. “In the early and middle stages of an economic cycle, we seek out risk abundantly and exuberantly,” says Rivelle. But as an economic expansion matures, he and his colleagues tend to get defensive. One particular worry today is that investment-grade bonds (debt rated triple-B or better) are riskier than they appear to be.
Consequently, Total Return, Metropolitan West Total Return Bond, a member of the Kiplinger 25, has slightly more than half of its assets in fortress-like bonds—specifically, Treasuries, as well as mortgage bonds and bundles of student loans backed by Uncle Sam. It has 22% of its assets in high-grade corporate debt and the rest in mortgage- and asset-backed securities that are not backed by the government.
The other main worry for bond investors is interest rate risk (bonds generally lose value when rates rise). Total Return’s average duration is 5.6 years, which suggests that the fund’s price would fall by 5.6% if rates were to rise by one percentage point. The fund yields 1.6%.
On a total-return basis, the fund essentially tied the Bloomberg Barclays U.S. Aggregate Bond index last year, a result that Rivelle calls “lackluster.” Could growing girth be hurting performance? No, says Rivelle: “Though the fund is large by anybody’s standards, it’s still a quarter the size of Pimco Total Return in its heyday.”