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MetWest Flexible Income Fund - MWFEX, MWFSX

edited June 13 in Fund Discussions
This fund has had incredibly strong performance since opening in Nov of 2018, up 27.8% since inception. I can't figure out how the yield is so high, 18%.

It has about 57% in investment grade bonds, mostly mortgages and corporate credit, no EM, a duration of 2.67, an average bond price of $94.11 and 23% in cash. Non of that indicates anything risky. It only dropped about 5% in March and is up 7% YTD.

Are they doing a "return of capital"? Is it because their asset base of 12 million is so small? They have a small amount in a few derivatives but nothing close to what Pimco uses. Seems to good to be true, what am I missing?
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  • I called TCW. They said it is because the asset base is so small. They have been able to buy a smaller number of bonds trading at a discount, therefore increasing the yield. They said that as AUM increases, the yield will fall. So I guess we should all pile in now?
  • msf
    edited June 11
    It doesn't look like they're making ROC payments. These aren't forms I generally look for (because funds I invest in return little if any capital, as is the case for most OEFs), but here is what I know;
    Section 19(a) of the Investment Company Act of 1940 (the 1940 Act) generally prohibits a business development company (BDC) or a registered investment company from making a distribution from any source other than its net income (e.g., out of capital), unless that payment is accompanied by a written statement that adequately discloses the source or sources of the payment.

    ... the Section 19(a) notice [must] be sent to stockholders contemporaneously with the distribution payment.
    https://us.eversheds-sutherland.com/mobile/NewsCommentary/Legal-Alerts/214294/Legal-Alert-SEC-Staff-states-that-IRS-Form-1099-DIV-cannot-be-used-to-satisfy-the-requirements-of-Section-19a-of-the-Investment-Company-Act-of-1940

    Checking for 19A notices on the TCW (MetWest/TCW funds) site, one finds no 2020 notices, and the only notices for any MetWest fund for any year are for MetWest's Low Duration and Unconstrained Bond Funds, and then only for 2019. Even those notices show only tiny amounts of ROC for those other funds.

    https://www.tcw.com/en/Literature/Tax-Center

    Here's an example of what one expect to find from a fund that made frequent ROC payments:
    https://www.troweprice.com/personal-investing/planning-and-research/tax-planning/distribution-notices.html
  • Thanks, msf
    So they aren't making ROC payments. Just very good performance due to low AUM? Seems like a lot of funds have good initial performance due to low AUM. Makes me wonder why a closed end fund like TSI or DBL can't maintain great performance when they're only around 250 million in AUM. 250 is still a lot more than 12 million though.
  • I like Tad Rivelle. own TSI, but I looked at 3/31/20 report....I don't have any clue how they can have a 18% dividend.

    25% of portfolio is cash/treasuries so that's like 1-2% tops. Maybe some bond gurus on this site can figure out this mystery?
  • Because of the low AUM, they own very illiquid, very high yielding bonds. The volatility of these bonds is probably much higher than what the Morningstar performance chart suggests, but due to the illiquidity, you don’t see the big price swings. I’ve heard PCI and PDI have similar illiquid holdings. The vast majority of the AUM is management money, so they aren’t worried about redemptions and having to sell these illiquid positions. Tad owns about a third of the fund himself. As AUM rises, this will change and performance and yield will normalize
  • Good thread.
  • the yield still makes no sense whatsoever.
  • The yield in June was 1.26%, so 15% annualized...its come down some, practically no volatility in June. I allocated about 10% to it last week. After seeing how much Tad and other managers own of it, I trust it more. TCW is not Bernie Madoff.
  • I agree Jay. I've got a bunch of TSI. love these guys. I may follow u in here. the yield on those instruments seems closer to a TSI yield
  • This is exactly the type of fund I love to own. Great managers, new fund, small AUM, under the radar fund. In the Multi sector bond category it has the best year to date performance + great volatility + very high yield. The fund has about 50% in MBS/securitized and about 55% in IG(investment grade) bonds, duration about 2.7.
  • edited June 29
    Speaking of TSI, the discount is looking appealing today, Bobby. I'm trimming a little GOF and RCTIX to reallocate to TSI...oh, just realized its reflecting the quarterly dividend payout. Still a 3%ish discount though.
  • msf
    edited June 29
    JayRock82 said:

    I can't figure out how the yield is so high, 18%. ... It has about 57% in investment grade bonds, mostly mortgages and corporate credit ... Seems to good to be true, what am I missing?

    You and me both.
    JayRock82 said:

    I called TCW. They said it is because the asset base is so small. They have been able to buy a smaller number of bonds trading at a discount, therefore increasing the yield.

    As it is stated, this doesn't make sense to me. (Perhaps they are talking about odd lot pricing?) For a given type of bond and a given credit rating, there's a market rate of return. The price of a given bond is determined by that market rate and its coupon rate. The lower the coupon, the higher the discount, so that YTM (and thus SEC yield) comes close to market rate. IOW, the YTM of a bond is generally independent of the size of the discount.

    When looking at current yield, i.e. coupon / price rather than YTM, a discount bond will have a smaller yield. It's true that the discount will decrease the denominator. But the coupon (numerator) will also be smaller than with a bond selling at par. This latter effect dominates. So generally current yield goes down, not up, as market discount increases.

    (Left as an exercise: compare current yields on two ten year bonds, one with a 2% coupon selling at par, and one with a 1% coupon.)
    Bobby said:

    25% of portfolio is cash/treasuries so that's like 1-2% tops. Maybe some bond gurus on this site can figure out this mystery?

    Precisely the point. It's easy enough to look at the full portfolio for this fund because it is so small. Given that the average yield is 15%, 18%, somewhere around there, we need to be able to find lots of bonds with yields well over 20% to counterbalance the cash, let alone other lower yielding bonds.

    In our search for these bonds we can ignore all premium bonds paying less then, say, 15% coupon. This is because the YTW of a premium bond is even less than its coupon rate. Pretty much none of the premium bonds have coupons high enough to contribute to the high average yield.

    A quick and dirty approximation for yield of discount bonds is:
    [discount (as fraction of current price) ÷ years to maturity] + coupon rate

    For example, we can approximate the yield of $10K of bonds with a current value of $6K, a coupon of 5%, and a maturity in 10 years as: $4K/$6K ÷ 10 years + 5% ~= 11.6%

    Without going into gory detail, I'll just say that few bonds pop out as having high yields (20%+). The ones I could find (this assumes they're performing):

    Corporates:
    Intelsat Jackson Holdings: $13K @ 22% and $22K @ 21% (using approximation described above)
    Antero Resources: $5.7K @ 40% and $3K @50%

    Lots of junk yielding 10%-15%, but even those hurt, not help boost the average.
    So the help from the corporates comes from $44K in total assets.

    Non-agency MBS (assuming not paid off early):
    Bombardier: $51K @ 26%
    GSAA Trust, Series 2007-3, Class 2A1B: $13K @ 43%

    So the help from non-agency MBSs comes from $64K in total assets.

    All in all, about $100K of value in a $9M fund. Certainly nowhere near enough to pull the average yield up to where the fund says it is. I have a few more thoughts but they're in the way of pure, uninformed speculation. So I would rather hear from the bond mavens.
    FD1000 said:

    In the Multi sector bond category it has the best year to date performance + great volatility + very high yield. The fund has about 50% in MBS/securitized and about 55% in IG(investment grade) bonds, duration about 2.7.

    This is the second post giving a figure of 55% - 57% in investment grade bonds.

    Consider that the same managers run another TCW fund that has only 35% in IG bonds. M* rates the average credit quality of that fund as AA. If you'd prefer, SIRRX is another multisector bond fund with 57% of its portfolio in IG bonds, and M* likewise rates its average quality as AA.

    OTOH, PUCZX is a multisector bond with half (50%) of its portfolio in IG bonds while its average credit quality is BB. So one can tell virtually nothing about the credit quality of a fund from the figure being given, IG bonds as a percentage of AUM.

    I'm reasonably confident that M* would rate MWFEX's portfolio as BB or possibly worse. While a somewhat larger percentage of the bonds in MWFEX are IG than in PUCZX, the junk bonds are of lower quality. The effect on average credit quality, as M* explains in its methodology, is nonlinear. So a few really bad bonds can drag down the whole average.

    Moving on to convexity. This is another risk of this fund, where the convexity is almost nonexistent (0.09). While there are various techniques for pushing down duration some of them also drive down convexity. This is undesirable, as it tends to mitigate the benefit of shorter duration.

    Finally, when people make statements about volatility, it would be nice to see hard numbers (standard deviations) included.
  • MSF, I really appreciate you breaking it down in that detail. Would you hazard to say there is something nefarious going on? Or is it just a portfolio full of total junk?
  • Or maybe both?
  • I've followed MetWest for years, and heard some of their managers speak in person. I do have faith in their integrity.

    On the commercial bond side, there looked to be a good amount of junk. But even that junk didn't seem to be yielding that much (maybe 10%-15% if I was doing arithmetic correctly).

    I mentioned above that I've got some pure speculation - I'm seeing a lot of derivatives and floaters. I haven't thought through their impact on yield. That goes down a rabbit hole I'd just as soon avoid, unless I want to prep for a job on Wall Street.
  • edited June 29
    FD1000 said:

    This is exactly the type of fund I love to own. Great managers, new fund, small AUM, under the radar fund. In the Multi sector bond category it has the best year to date performance + great volatility + very high yield. The fund has about 50% in MBS/securitized and about 55% in IG(investment grade) bonds, duration about 2.7.

    My numbers are from TCW(link) then Portfolio Composition.

    You can see SD compared to PIMIX,JMUTX,PUCZX since inception, see PV(link)
  • FD1000 said:

    FD1000 said:

    This is exactly the type of fund I love to own. Great managers, new fund, small AUM, under the radar fund. In the Multi sector bond category it has the best year to date performance + great volatility + very high yield. The fund has about 50% in MBS/securitized and about 55% in IG(investment grade) bonds, duration about 2.7.

    My numbers are from TCW(link) then Portfolio Composition.

    You can see SD compared to PIMIX,JMUTX,PUCZX since inception, see PV(link)

    Why are you still 'pumping' risky funds with low SD?
    SD deviation does not necessarily equate to risk.

    Haven't you learned from the other funds you 'pumped' like SEMMX, IOFFX, JMUTX and PUCZX because they have short term 'momentum' with low SD?
    Some of these funds were down 17% in one month.

    Promoting a fund which has a small AUM, risky assets and low liquidity is irresponsible.

    If investors flee from small AUM funds, it will put pressure on the fund to sell illiquid assets. The fund will be selling these illiquid assets at huge discounts resulting in significant losses.

    An investor only has to look at what happened to Third Avenue Focus Credit fund to see the result.

    https://www.cnbc.com/2015/12/11/third-avenue-to-liquidate-junk-bond-fund-that-bet-big-on-illiquid-assets.html

  • edited June 30
    I don't promote anything.
    BigTom said:

    FD1000 said:

    FD1000 said:

    This is exactly the type of fund I love to own. Great managers, new fund, small AUM, under the radar fund. In the Multi sector bond category it has the best year to date performance + great volatility + very high yield. The fund has about 50% in MBS/securitized and about 55% in IG(investment grade) bonds, duration about 2.7.

    My numbers are from TCW(link) then Portfolio Composition.

    You can see SD compared to PIMIX,JMUTX,PUCZX since inception, see PV(link)

    Why are you still 'pumping' risky funds with low SD?
    SD deviation does not necessarily equate to risk.

    Haven't you learned from the other funds you 'pumped' like SEMMX, IOFFX, JMUTX and PUCZX because they have short term 'momentum' with low SD?
    Some of these funds were down 17% in one month.

    Promoting a fund which has a small AUM, risky assets and low liquidity is irresponsible.

    If investors flee from small AUM funds, it will put pressure on the fund to sell illiquid assets. The fund will be selling these illiquid assets at huge discounts resulting in significant losses.

    An investor only has to look at what happened to Third Avenue Focus Credit fund to see the result.

    https://www.cnbc.com/2015/12/11/third-avenue-to-liquidate-junk-bond-fund-that-bet-big-on-illiquid-assets.html

    Here we go again. We haven't seen you for a while.

    Just because I like a fund doesn't mean you should own it. Do your own due diligence. I have used it for my own purposes successfully.
    Even a fund with 1-3 billion in AUM doesn't guarantee to be liquid. In 2008 money market fund broke the buck(link)

    VCIT, about 100% investment-grade fund from Vanguard, lost about 13% from peak to trough. It did recover after the Fed promised to buy bonds but you could not forecast that.
    When a black swan shows up bad things happen.

    There is a reason for..."Past performance is no guarantee of future results"

    Now, if you have any data please post about it. Is this fund resembles SEMMX,IOFIX or Third Avenue Focus Credit fund?
  • The difference between VCIT and some of the funds you are “pumping” is VCIT has recovered its losses and most of your other funds are still down YTD.
  • BigTom, would you attribute the relatively small 5.2% peak to trough loss from 3/15 to 3/25 to the illiquid nature of many of these holdings not being priced mark to market?

    With management owning about 90% of the AUM, I’m not concerned about redemptions yet. It will be an issue at some point though

    I understand your concern, but I don’t think any of us are pumping this fund. I’m genuinely interested in what they are doing and how they are doing it.
  • edited July 1
    BigTom said:

    The difference between VCIT and some of the funds you are “pumping” is VCIT has recovered its losses and most of your other funds are still down YTD.

    Other funds? I don't own any of these funds. I already explained why VCIT recovered so why repeat it but if you look at YTD (chart) of MWFSX,M* multi sector category+SEMMX+VCIT you can see that MWFSX peak to trough was about 6% and better than VCIT. It was also better than a typical Multi sector fund and definitely better than SEMMX. It is up 7.7% YTD.

  • BigTom, I do see this fund as aggressive for a bond holding, but I think there is room for aggressive bond funds within an overall portfolio, especially when managers like Scott Minerd are saying stocks are priced for perfection but there is still value in certain sectors of fixed income.
  • JayRock82 said:

    BigTom, I do see this fund as aggressive for a bond holding, but I think there is room for aggressive bond funds within an overall portfolio, especially when managers like Scott Minerd are saying stocks are priced for perfection but there is still value in certain sectors of fixed income.

    JayRock82,

    If you are comfortable with the risks associated with holding illiquid bonds in a MF than go ahead and purchase it. I will say that chasing enticing yields or returns in a bond fund can be detrimental to your portfolio. In certain financial conditions, these funds can drop 20% or more in a couple of weeks. Typically, bonds are used to stabilize a portfolio (less risk) and equity is used to increase risk and returns. It's a personal decision that only you can make if you want to add risk to the bond side of your portfolio.

    As for how mwfex/mwfsx fund can have such a high yield, only a portfolio manager can truly tell you how the portfolio is positioned to obtain that high yield.
    It's true that you can look at MF portfolio holdings to see where some of that yield may be coming from but those holding are usually a 3+ months old.
    Some funds use derivatives, leverage and/or high yielding/illiquid bonds to juice returns.


  • A note from the moderators -

    This thread has been repeatedly flagged. I didn't have time for more than a brief review, but based on what I saw I removed a few posts and edited one other. I left the posts that seemed mostly related to fund discussions and removed those containing personal attacks. Please try to keep it friendly!
  • JayRock82 said:

    BigTom, I do see this fund as aggressive for a bond holding, but I think there is room for aggressive bond funds within an overall portfolio, especially when managers like Scott Minerd are saying stocks are priced for perfection but there is still value in certain sectors of fixed income.

    That's correct. It depends on your style, age and goals. I use mostly bond funds and doing pretty good.

    In the biggest meltdown in the last 10 years, MWFSX peak to trough was about 6%, VCIF was about 13%, BND (US bond index) all investment grade was about 6.5%. It shows that MWFSX managers did a great job. Is it a guarantee? of course not.

    BTW, the Portfolio Composition(Characteristics,Sector Weight,Credit Quality,Duration Maturity) for MWFSX is as of 5/31/2020 based on real data. See (link).

    Another observation, the monthly yield keeps getting smaller in the last 5 months.

    So, only you can make this decision after gathering all the information.

  • maybe David and the team can interview the managers?
  • JayRock82 said:

    Because of the low AUM, they own very illiquid, very high yielding bonds. The volatility of these bonds is probably much higher than what the Morningstar performance chart suggests, but due to the illiquidity, you don’t see the big price swings.

    As @LewisBraham wrote, "mutual funds are restricted to a maximum private equity exposure of 15% for liquidity reasons. There have been disastrous examples despite those constraints. f I recall correctly, the Van Wagoner funds were among the worst."

    A current SEC regulation prohibits funds from acquiring illiquid securities if they would put the fund over the 15% threshold. Further, should a fund drift over that limit, it is required to create a plan to get the fund back into compliance within a reasonable amount of time.

    A key facet of the regulation is its definition of "illiquid": An illiquid investment is an investment that the fund reasonably expects cannot be sold in current market conditions in seven calendar days without significantly changing the market value of the investment.
    https://www.sec.gov/divisions/investment/guidance/secg-liquidity.htm

    The Van Wagoner funds predate this regulation by a decade or two. So it's not an example of a disaster in spite of this reg. However, Big Tom gave a different example that is more problematic:
    BigTom said:


    An investor only has to look at what happened to Third Avenue Focus Credit fund to see the result.

    In theory, if a fund is 15% illiquid, it could sell off all assets for at least 85% of NAV (recovering 100% of the value of its liquid securities by definition, and 0% or more on the illiquid securities).

    What happened with Focus Credit was that in no small part because of withdrawals, the fund shrank about 40% in half a year. Even with this stress, the fund barely exceeded the 15% illiquidity limit. Nevertheless, at that point, the fund halted redemptions, saying that it could not sell off enough assets at "rational" prices.

    It is worth noting that shareholders ultimately recovered 85% of the NAV as of the date the fund halted redemptions, Dec 9, 2015.

    https://www.nytimes.com/2016/01/12/business/dealbook/a-new-focus-on-liquidity-after-a-funds-collapse.html
    https://www.reuters.com/article/us-thirdavenue-settlement-idUSKBN1722N4

    Funds like IOFIX must comply with this reg. In fact, the IOFIX summary prospectus says: "The Fund may hold up to 15% of its net assets in illiquid securities."

    The poor performance of IOFIX and its close peers suggests there's something inherent in the nature of their portfolios beyond having 15% (or less) in illiquid securities. Such as the remaining securities being liquid most of the time, but not under exceptional conditions (as opposed to the "current market conditions" of the regulation). Which unfortunately is precisely when one demands liquidity.
    JayRock82 said:

    would you attribute the relatively small 5.2% peak to trough loss from 3/15 to 3/25 to the illiquid nature of many of these holdings not being priced mark to market?

    Funds are required to price their securities daily. That this is difficult does not relieve them of this responsibility or allow them to cheat investors by misrepresenting prices. (IMHO the poster child for that sort of cheating is Heartland Funds.) They must mark to market, albeit with fair value pricing as needed.

    From the NYTimes article link above:
    Regulatory experts say that if the S.E.C. does decide to crack down on Third Avenue, it will be related to this pricing issue ... The message was clear: Mutual fund boards are responsible for making sure that the investment adviser acts responsibly in pricing securities and ensuring there is enough cash on hand for investors looking to sell.

    But experts worry that mutual fund boards these days do not have the expertise or the muscle to do this job effectively.
    I figure that TCW/MetWest has the necessary expertise.

    Regarding volatility, I believe you'll find that this fund is using some of the same techniques that Bob Rodriguez used over at FPNIX to manage a very stable, albeit low-yielding fund. Which brings us full circle back to the question of where those interest payments are coming from.
    BigTom said:


    Some funds use derivatives, leverage and/or high yielding/illiquid bonds to juice returns.

    I don't see leverage here, and as I just noted, the other tools can just as easily be used to reduce volatility. Can you point to securities that juiced returns to 18%? I haven't found them yet.
  • If MWFSX could mimic FPNIX returns, without a transaction fee, I would be a happy camper!
  • @BigTom is right-on in my opinion (on a few things here but we'll discuss liquidity). Investing in a fund with liquidity concerns in today's times is very risky. How soon we forget (?) I learned my lesson with IOFAX and will never purchase another fund with illiquid assets.
  • edited July 1
    MikeM said:

    @BigTom is right-on in my opinion (on a few things here but we'll discuss liquidity). Investing in a fund with liquidity concerns in today's times is very risky. How soon we forget (?) I learned my lesson with IOFAX and will never purchase another fund with illiquid assets.

    I don't own the fund but do you realize that BigTom didn't post any analysis or looked specifically into this fund, so what led you to believe that this fund has a liquidity issue.

    Then you mentioned IOFIX. Do IOFIX bond ratings are close to MWFSX? Was the YTD performance similar? So, why do you think MWFSX is similar to IOFIX?

    I don't have a bone in this fight, I know several investors that only use Vanguard funds and I wish them good luck but we can't generalize all funds.

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