MW Banner year for fixed-income funds leaves TCW and Western Asset behind

By Vivien Lou Chen

It's been a great year so far for actively and passively managed bond mutual funds and exchange-traded funds, which enjoyed total estimated net inflows of almost half a trillion dollars through November as investors flocked to the safety of yield-earning assets.

Yet a few flagship bond funds from some big-name Southern California-based firms lagged behind, with client outflows of at least $10 billion each.

The largest outflows were from Los Angeles-based TCW Group's MetWest Total Return Bond Fund, at almost $17.7 billion year to date through last month, according to data from Morningstar Direct. Western Asset Management Co., the Pasadena, Calif.-based firm known as "Wamco" and owned by Franklin Resources Inc. $(BEN)$, experienced outflows of $13.9 billion and almost $11 billion from its Core Plus and Core Bond funds, respectively.

The reasons behind the outflows varied between the two firms, but the common thread among all three funds is that they've failed in the past three years to keep up with the Bloomberg U.S. Aggregate Bond Index, a benchmark index used by many funds to gauge their own performance.

"In any given year, there are going to be sectors or industries that are going to have outflows or struggle no matter how good a year it has been," said analyst Winston Chua at data provider EPFR, which is part of ISI Markets. "Bond funds are no different; there can be some particular bond funds that underperform, that's fair to say."

   Fund                                Estimated Net Outflow YTD as of November 
   TCW MetWest Total Return Bond Fund  $17,698,501,218 
   Western Asset Core Plus Bond Fund   $13,889,698,916 
   Western Asset Core Bond Fund        $10,983,233,991 

The TCW MetWest Total Return Bond Fund MWTIX, which held 49.3% of its portfolio in mortgage-backed securities and almost 29.3% in Treasurys as of last month, has generally beaten the Bloomberg U.S. Aggregate Bond Index since its inception in 2000. However, it has underperformed the index on a three-year basis, as of November.

Bryan Whalen, chief investment officer for TCW's fixed-income group, told Bloomberg News that "we're often too early on fundamentally convicted trades" and that, over time, history indicates that approach "pays off even if it comes with the cost of a little bit of short-term underperformance."

The MetWest Total Return Bond Fund that Whalen helps to oversee is what's known as a deep-value fund, meaning that it can often reflect contrarian views that others might be missing in the broader market. Whalen told Bloomberg he was sticking by the decision to pile into short-term Treasurys on the view that elevated interest rates should eventually dent U.S. economic growth - a scenario which hasn't played out yet.

TCW spokesman Doug Morris declined to comment on the MetWest Total Return Bond Fund. The fund is just one of many at TCW, which offers a range of strategies across fixed income, equities, emerging markets and alternative investments. Some of the firm's largest investors have continued to put money to work in TCW's deep-value strategy, albeit through separately managed accounts.

Jeaneen Terrio, a spokeswoman at Franklin - which acquired Western Asset's parent Legg Mason in 2020 - also declined to comment for this article.

The reputations of Western Asset and its current parent, Franklin, have taken big hits as the result of federal charges that Wamco's former co-chief investment officer, Ken Leech, engaged in a cherry-picking scheme of steering $600 million of gains toward favored clients and $600 million of losses to less-preferred customers, like those who were in the firm's Core and Core Plus strategies.

Wamco is reportedly cooperating with investigators, while a lawyer for Leech - who pleaded not guilty earlier this week - has been quoted as saying his client has had an "unblemished" record for almost 50 years and received no financial gain from the activities alleged by the government. Shares of Franklin Resources have fallen almost 30% this year, as of Friday.

Read: How investigators say a star fund manager illegally took $600 million from some clients and steered it to others

As of November, Western Asset's Core Plus Bond Fund WACPX and Core Bond Fund WATFX were each putting the biggest allocations of their portfolios into agency mortgage-backed securities and investment-grade credit. Like the TCW fund, they've outperformed the Bloomberg index since their relative inceptions in 1998 and 1990, but have lagged the benchmark in the past three years.

Ranked fourth on Morningstar Direct's list of bond funds with the biggest estimated outflows in 2024 so far was the Total Return Fund at Pacific Investment Management Co., the Newport Beach, Calif.-based firm that goes by the name Pimco. It had nearly $10.3 billion of outflows through November, though much of this appeared to be due to clients who moved out of the fund and into separately managed accounts at Pimco. Agnes Crane, a spokeswoman for Pimco, said the firm was unable to comment.

Pimco's Total Return Fund PTTRX has posted an average annual return of about 6.2% since its inception in 1987, and a minus 2.3% average return on a three-year basis, based on December data. Its strategy is to favor high-quality intermediate-term bonds, with its largest allocation by percentage being in securitized and U.S.-government-related products, as well as investment-grade credit.

According to EPFR's Chua, U.S. bond funds in general have enjoyed inflows over 51 consecutive weeks, starting in mid-December 2023. Citing his firm's own data, which includes the final few weeks of last year, he said their last weekly outflows were "just prior to that."

"People are still looking for a safe way to get a return on their investments, with money-market funds yielding over 5% for a long time and a 10-year [Treasury] yield BX:TMUBMUSD10Y that is above 4% and around its highest level in years," Chua said via phone. "Uncertainty over the path of inflation, future Fed rate cuts, and the impact of tax-cutting policies by incoming President Donald Trump are also playing a role."

When measured as a percentage of total net assets at firms tracked by EPFR, the analyst said, inflows into bond funds have been more than four times greater than the amount that has gone into U.S. equity funds over the past year. U.S. bond funds have taken in 9%, while U.S. equity funds have taken in 2%, according to Chua.

As of Friday, U.S. government debt was rallying, sending yields broadly lower, as traders assessed monthly readings from the Fed's preferred PCE inflation gauge, which came in below expectations for November.

Meanwhile, all three major U.S. stock indexes DJIA SPX COMP turned higher as Chicago Fed President Austan Goolsbee told CNBC that he still expects borrowing costs to drop "a fair bit more" over the next 12 to 18 months.

New York Fed President John Williams told the network that Friday's PCE inflation data was "encouraging." Separately, the University of Michigan's consumer-sentiment index, released on Friday, rose for a fifth straight month.

-Vivien Lou Chen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 20, 2024 13:33 ET (18:33 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.