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TCW portfolio managers present 'core plus' strategy, defend long-duration positioning to Norwalk pension boards
Summary
Representatives from TCW described their team-based, value-driven core-plus fixed-income strategy and addressed board questions about duration exposure, mortgage-backed securities and recent performance. Managers said duration exposure sits mainly in 2- and 5-year buckets and argued current compensation justifies the positioning.
Mark McNeil and Jerry Kudzel of TCW presented the firm's U.S. fixed-income strategy and portfolio positioning to the Norwalk City pension boards on Feb. 12, describing a team-based, value-driven process and defending an overweight to duration concentrated in the belly of the curve.
McNeil opened with firm context and scale, noting TCW manages roughly $195 billion in total firm assets and that fixed income is the lion's share of that total. He introduced Jerry Kudzel as one of three generalist portfolio managers on the U.S. fixed-income team.
Kudzel summarized the team's approach: "If we had to sum up our process... it's a team based, consensus driven process. It's fundamental value, and it's a dynamic approach to risk." He said senior portfolio managers meet weekly in a fixed-income investment committee to share ideas, shape views and surface risks.
On positioning, Kudzel said the firm has extended duration during recent years and that the majority of that exposure is concentrated in the "belly" of the curve—primarily two- and five-year maturities—rather than the very long end. "We have extended duration as interest rates rose in the marketplace... the majority of that exposure is focused on 2 year and 5 year," he said.
Kudzel also defended the portfolio's sector mix: an underweight to corporate credit, an overweight to agency and non‑agency mortgages (including CMBS and high‑quality CLO tranches), and a small allocation to below‑investment‑grade credit (he said the strategy's limit for below‑investment‑grade is 0–20 percent, with current usage about 2.5 percent).
Board members pressed managers on recent underperformance tied to duration positioning. Kudzel acknowledged that the duration overweight hurt attribution in 2022 but said it produced positive results in late 2023: "When you take those two years, they somewhat offset each other." He described the firm's implementation approach as dollar‑cost averaging into duration and using a range (plus or minus one year) around target duration rather than making abrupt speculative bets.
When asked why investors should not instead buy the 10‑year Treasury at today's yields, Kudzel pointed to active management levers below the surface, including security selection, mortgage exposure and CLOs. He said the portfolio currently yields above the index and aims to outperform the Bloomberg Barclays U.S. Aggregate by roughly 100 basis points over a full cycle.
Managers also described hedging actions: modest TIPS purchases and payer swaptions used as limited hedges against a rapid rise in rates.
The board requested further numerical attribution showing year‑by‑year sources of alpha; staff and managers agreed to follow up after the meeting. No formal action was taken on the investment presentation.
Kudzel: "We always try to take the new information and say, are we being properly compensated to take the risk that we're doing?"
