Giving Pimco a Run for Its Money
Met West's funds are patterned after those of a huge rival. It's no coincidence.
No bond house is bigger or better known than Pimco, the Newport Beach, Cal., firm led by Bill Gross, the closest thing there is to a fixed-income superstar. But just an hour's drive up the Pacific Coast in Los Angeles, a much smaller and younger firm is giving Pimco a run for its money. Launched in 1996, Metropolitan West Asset Management offers six bond funds, five of which compete directly with similar Pimco products. Long-term results of the firms' flagship funds are almost indistinguishable. From its inception on March 31, 1997, to October 2, Metropolitan West Total Return Bond M gained 7.1% annualized, and the administrative class of Pimco Total Return gained 6.9% annualized. Both Total Return funds are in the top 20% of their peer groups over the past five years.
Pimco ties
That there should be similarities in fund names, performance and, as it turns out, management styles isn't surprising. That's because three of Met West's founders -- Tad Rivelle, Laird Landmann and Stephen Kane -- once ran money at Pimco.
Despite the similar results, Met West insists that it has an edge over Pimco: It's much smaller. Pimco runs $642 billion, and Met West controls $18 billion. Met West Total Return is a gnat ($2 billion in assets) to Pimco Total Return's elephant ($97 billion). "We could double in size and still be a gnat," says Rivelle, Met West's chief investment officer.
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Size matters little for a bond fund that mostly owns Treasuries and other easy-to-trade issues in large supply. But for those that dabble in small corporate issues and other obscure bonds, it's easier to maneuver with fewer assets.
Met West Total Return Bond certainly gives its managers enough flexibility to test the thesis. Kane, Landmann, Rivelle and David Lippman, who joined the firm in 2001, invest in a mixed bag of IOUs, with the holdings and maturity strategy guided by the firm's economic outlook. The fund's average duration, a measure of its sensitivity to interest-rate swings, can range from two to eight years but is generally expected to be within a year of the duration of the Lehman Brothers Aggregate Bond index. (A fund with an average duration of four years, for example, would likely gain 4% with each percentage-point drop in rates and sink by 4% for each point that rates rise.)
No big bets
Lately, the managers have not been making any big interest-rate bets. Met West Total Return's average duration was about the same as the Lehman index's duration of 4.7 years. And, concerned about a slowing economy, the Met West team had only 10% of assets in bonds rated below investment grade (the maximum is 20%).
Metropolitan West (www.mwamllc.com) is a reasonable choice for investors seeking conservatively managed bond funds. Total Return's annual expenses of 0.65% are below average. The fund recently yielded 5.3%.
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