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An Introduction to the MetWest Total Return Bond Fund

June 29, 2010


MetWest is a wholly-owned subsidiary of The TCW Group, Inc.
Presented by:
Tad Rivelle
Chief Investment Officer
High Grade Fixed Income
Agenda
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I. Organizational Update/Team History
II. MetWest Total Return Bond Fund Overview
III. Investment Thesis
IV. Portfolio Opportunities
V. Q & A
The information contained herein may include estimates, projections, and other forward-looking statements. Actual events may differ substantially from those
presented herein. TCW assumes no duty to update any such statements.
Any opinions expressed are current only as of the time made and are subject to change without notice. The views expressed herein are solely those of the author
and do not represent the views of TCW as a firm or of any other portfolio manager or employee of TCW.
You should consider the investment objectives, risks, charges and expenses of the Metropolitan West Funds carefully before investing. A prospectus with
this and other information about the funds may be obtained by calling (800) 241-4671 or download one at www.mwamllc.com. It should be read carefully
before investing.
Shares of the Metropolitan West Funds are distributed by PFPC Distributors, Inc., 760 Moore Road, King of Prussia, PA 19406.
I. Organizational Update/Team History
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TCW Overview
Established in 1971 in Los Angeles, California
The TCW Group (TCW

) entities principally include:


The TCW Group, Inc.
Holding company
Trust Company of the West
An independent trust company chartered by the State of California
TCW Asset Management Company (TAMCO)*
Institutional and private client separate accounts
TCW Investment Management Company (TIMCO)*
Mutual funds and retail managed accounts
Metropolitan West Asset Management, LLC (MetWest)*
Mutual funds, institutional separate accounts and private client separate accounts
Approximately $115 billion under management or committed to management as of March 31, 2010
Approximately 1,400 institutional and private clients
Over 558,000 retail accounts**
TCW staff of approximately 735 individuals, including over 440 investment and administrative professionals***
The TCW Group, Inc. is an indirect majority-owned subsidiary of Socit Gnrale, S.A.
TCW offers strategies that invest in major world equity, fixed income and alternative markets, with offices in Los Angeles, New York and Houston
* Investment advisors registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Other registered investment advisor entities are also included in the TCW Group.
** Number reported semi-annually, as of December 31, 2009.
***Assistant Vice President and above.
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TCW Assets Under Management
or Committed to Management as of March 31, 2010
Total Assets: $114.8 Billion U.S. Fixed Income Assets: $71.1 Billion
Equities ($23.7)
Fixed Income ($71.1)
International ($5.3)
Alternative
Investments ($14.2)
Core Balanced ($0.5)
Mortgage-Backed
Securities ($31.3)
Core Fixed Income ($23.3)
Short/Long Duration ($7.2)
Bank Loans ($3.3)
Government/Corporate
Investments ($2.7)
High Yield Bonds ($2.7)
Alpha Trak ($0.6)
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TCW Asset Breakdown By Product
As of March 31, 2010
Product Categories $ Billions
U.S. Fixed Income $71.1
Mortgage-Backed Securities 31.3
Core Fixed Income 23.3
Short/Long Duration 7.2
Bank Loans 3.3
Government/Corporate Investments 2.7
High Yield Bonds 2.7
Alpha Trak 0.6
U.S. Equities $23.7
Relative Value 6.0
Large Cap Value 5.7
Concentrated Core 3.4
Large Cap Growth 3.2
Small/Mid Growth 2.7
Small/Mid Value 1.7
Comprehensive Asset Allocation 0.8
Convertibles 0.1
Other 0.1
Product Categories $ Billions
Alternative Investments $14.2
Energy 6.2
Mezzanine 4.9
Real Estate 1.1
Private Equities/Other Alternatives 0.9
Distressed Debt 0.7
Commodities 0.4
Core Balanced $0.5
Balanced 0.3
Strategic Income Fund 0.2
International $5.3
Joint Ventures 2.8
International/Emerging Markets Securities 1.6
Worldwide Opportunities 0.9
Total Assets Under Management or
Committed to Management $114.8
Team History & Evolution
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The Team of generalist portfolio managers, Tad Rivelle, Laird Landmann, and Steve Kane, have conjunctively
managed fixed income assets for over 20 years
TCW/MetWest is responsible for the management of all high grade fixed income assets at TCW
Source: MetWest, PIMCO
PIMCO AUM figures refer to the entire firm; other AUM references relate solely to the fixed income assets managed by the MetWest Investment Team.
PIMCO
1990-1992
$20 Billion
AUM
Approx. 100
Total Employees
29
Investment Professionals
Hotchkis & Wiley
1992-1996
$200 Million - $2 Billion
AUM
6
Total Employees
5
Investment Professionals
MetWest
1996-2009
$2 Billion - $30 Billion
AUM
7
Total Employees
5
Investment Professionals
TCW/MetWest Today
As of 5/31/2010
$71 Billion
AUM (Fixed Income)
737
Total Employees
212
Investment Professionals
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High-Grade Fixed Income Expertise
As of June 2010
Portfolio Investment Team
Eric Arentsen
Pat Doyle
Mitch Flack
John Friedman
Bryan Whalen, CFA
Analysts/Traders
Pat Ahn
Scott Austin, CFA
Elissar Boujaoud
Helen Chen, CFA
Harrison Choi
Jae Choi
Beth Clarke
Melissa Conn
David Doan
Philip Dominquez
Daniel Dy
Michael Hsu
Tony Lee
Lifen Li
Brian Loo, CFA
Sonia Mangelsdorf
Jonathan Marcus
Sagar Parikh
Palak Pathak, CFA
Brian Rosenlund, CFA
Brett Roth, CFA
Charles Tu
Nanlan Ye
Zhao Zhao
Portfolio Investment Team
Claude Erb
Jay Gerard
Matthijs Randsdorp
Portfolio Investment Team
Bret Barker
Lawrence Rhee
Analysts/Traders
Richard Eldred
Jeannie Fong
Jeffrey Lee
Dolores Talamantes
Katherine Wu
Stephen Burns, PhD
Marcos Gutierrez
Erik Huynh
Daniel Kale
Joseph Lopez
Melicia Shen
Andy Wu
Bing Bing Yu
Christina Bau
Julie Cooper
Tracy Gibson
Christine Hendrickson
Irene Mapua
Patrick Moore
Marie Thomasson
David Vick
Portfolio Investment Team
Penny Foley
David Robbins
Javier Segovia
Analysts/Traders
Blaise Antin
Stephen Keck
Evelyn Leyva
Marcela Meirelles, PhD
Brett Rowley
Jean-Charles Sambor
Jason Shamaly
Alex Stanojevic
Government/Rates
Mortgage-Backed
Securities
Corporate/High Yield Commodities
Investment
Risk Management
Product Management Emerging Markets
Portfolio Investment Team
Jamie Farnham
Tammy Karp
Thomas Lyon
Gino Nucci, CFA
Analysts/Traders
Rahul Bapna, CFA
Sinjin Bowron
Mike Carrion
Marie Choi
RJ Cruz, CFA
Joel Shpall
Kenneth Toshima
Jen Raye Adams
Brian Cone
Michael Frazier
Ritsuko Hertrich
Alex Jenkins
John MacNeil
John Mendell
Chris Scibelli
Conor Shalloe
Kimberly Yamamoto
Marketing
Generalist Portfolio Team
Stephen Kane, CFA
Laird Landmann
Barr Segal, CFA, CIC
Ruben Hovhannisyan, CPA Analyst
Chief Investment Officer
Tad Rivelle
II. MetWest Total Return Bond Fund Overview
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MetWest Funds and MetWest Total Return AUM and Fund Flows
1
YTD Net Flows MetWest
Funds
AUM
YTD Net Flows MetWest Total Return
Bond Fund
AUM
$1.7
$12.5
$1.3
$9.4
1 1
Billion
Billion
Billion
Billion
1 Through June 17, 2010.
MetWest Total Return Bond Fund
MWTIX (I-Class) as of March 31, 2010
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Net Performance Total Returns
The performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher. Performance data current to the most recent month-end may be obtained at
www.mwamllc.com. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Without fee waivers, returns would have
been lower. The Fund offers another class, the performance for which will vary due to fees and expenses. You should consider the investment objectives, risks, charges, and expenses of the Metropolitan West Funds carefully
before investing. A prospectus with this and other information about the Funds may be obtained by calling (800) 241-4671 or you can download one at www.mwamllc.com. It should be read carefully before investing.
As of the year ending March 31, 2009, for MWTIX the total expense ratio is 0.44%. Expenses reflect a contractual agreement by the Adviser to reduce its fees and/or absorb expenses to limit the funds total annual
operating expenses until March 31, 2011. For more information about fees and expenses, please read the prospectus.
1 Total return figures assume reinvestment of all distributions. Total returns reflect fee waivers in effect. Without fee waivers returns would have been lower.
2 The Barclays Capital Aggregate Index is an unmanaged index of investment grade fixed-rate debt issues with maturities of at least one year. Unlike a mutual fund, the performance of an index assumes no taxes,
transaction costs, management fees, or other expenses, and is not available for direct investment.
Bond Funds have the same interest rate, high yield, and credit risks associated with the underlying bonds in the portfolio, all of which could reduce the Funds value. As interest rates rise, the value of the Fund can decline
and an investor can lose principal.
Shares of the Metropolitan West Funds are distributed by PFPC Distributors, Inc., 760 Moore Road, King of Prussia, PA 19406
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MetWest Total Return Bond Fund Class I Performance
As of May 31, 2010
YTD 1 Year 3 Year
(annualized)
5 Year
(annualized)
7 Year
(annualized)
10 Year
(annualized)
Since Inception
(annualized)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
6.03%
3.71%
19.87%
8.42%
8.86%
6.88%
7.31%
5.32%
7.20%
4.69%
7.42%
6.52%
7.27%
6.37%
MetWest Total Return Performance (Net of fees) Barclays Aggregate
1
1 Class I inception date was March 31, 2000.
The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Performance data current to the most recent month-end may be
obtained at www.mwamllc.com. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Without fee
waivers, returns would have been lower. The Fund offers another class, the performance for which will vary due to fees and expenses. For MWTRX the total expense ratio is 0.65%. Expenses reflect a contractual
agreement by the Adviser to reduce its fees and/or absorb expenses to limit the funds total annual operating expenses until March 31, 2011. For more information about fees and expenses, please read the
prospectus. Bond Funds have the same interest rate, yield and credit risks associated with the underlying bonds in the portfolio, all of which could reduce the Funds value. As interest rates rise, the value of the
Fund can decline and an investor can lose principal.
MetWest Total Return Summary Characteristics
1
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Sector Composition
MetWest Barclays
Total Return Fund Aggregate
Agency MBS 27.2% 34.7%
Non-Agency MBS/ABS 17.4% 0.3%
CMBS 10.1% 3.1%
U.S. Treasuries/Agencies 21.1% 43.8%
2
IG Corporates 18.8% 18.1%
High Yield/Bank Loans 4.8% 0.0%
Cash/Money Markets/Other 0.6% 0.0%
Quality Composition
3
MetWest Barclays
Total Return Fund Aggregate
UST/Agency
4
48.6% 74.3%
AAA 10.9% 4.1%
AA 8.7% 4.3%
A 9.2% 9.3%
BBB 9.0% 8.0%
BB 4.1% 0.0%
B & below 9.5% 0.0%
MetWest Barclays
Total Return Fund Aggregate
Portfolio Duration 4.1 Years 4.5 Years
SEC Yield 4.54% N/A
Average Maturity 7.2 Years 6.8 Years
Yield-to-Maturity 5.39% 3.19%
1 As of May 31, 2010.
2 Barclays Aggregate Index includes supranationals, sovereign bonds, and local authorities.
3 Quality ratings by Moody's, Standard & Poor's and Fitch, such as "AAA" refer to portfolio securities and not to the fund itself. When ratings vary, the highest rating is used. Securities rated below BBB are considered
more speculative and are subject to greater risks than higher rated bonds. Portfolio composition may change at any time. Holdings rated below B were purchased at B or better.
4 UST/Agency % includes U.S. Treasury securities, U.S. Agency debentures, and mortgage- and asset-backed securities that are issued by the U.S. Government and government agencies.
U.S. Fixed Income Investment Philosophy
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Consistent Outperformance Can Be Achieved Through:
Implementation of multiple fixed income strategies
Focus on sector management and issue selection
Application of fundamental value-driven research process
Philosophical Tenets
Fixed income markets/securities are mean reverting
Technical factors can temporarily drive pricing away from fundamentals
Persistent inefficiencies in fixed income market can be exploited through disciplined research and
bottom-up issue selection
Investment Process
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QUARTERLY
DAILY
MONTHLY
Portfolio Structure
Diversified
Optimized
Controlled Risk
Mean reversion
Patience
Discipline
Understanding of macro risks
Intensive search for value
Understanding of micro risks
Duration Management
Yield Curve Management
Sector Management
Long-Term
Economic Outlook
Security Selection
Buy / Sell Execution
Client
Objectives
& Guidelines
III. Investment Thesis
Illusion of Wealth Effect: Consumer Behavior
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Asset price bubbles create an illusion of wealth
Consumers wake up rich, consume excessively
Inaccurate self-perception of wealth led to:
Unsustainable elevation in consumption
Massive trade deficits
Overleveraged consumer
U.S. Economy Has Suffered An Immense Loss of Wealth
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While an illusion, the net-worth estimates of consumers had been unduly elevated in the bubble years
This loss of net worth translates into:
Less private sector consumption
Increase in savings rate
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U.S. Residential Real Estate (Households and Nonprofits) Savings Rate
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Source: Federal Reserve Source: Bloomberg
Economic Retrenchment Has Been Severe
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Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010
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2.1
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While The Great Recession has technically ended...
(economic growth a flow variable has turned positive)
...Measures of recessionary conditions (stock variables) say otherwise
Labor market in worst condition since World War II
Housing markets remain challenged
Private sector continues to de-lever
Source: Bloomberg
4.0
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Both Narrow and Broad Measures of Unemployment are Very High
19 MKTcc347 6/28/10
Historical Unemployment (U-3)
Historical Unemployment
and Underemployment Rate (U-6)
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Jan-94 Jan-98 Jan-02 Jan-06 Jan-10
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Source: Bloomberg
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Other Labor Market Metrics Remain Dismal
20 MKTcc347 6/28/10
Private sector is challenged from the standpoint of re-allocating U.S. labor force
Average Unemployment Duration (SA) Jobless Benefit Exhaustion Rate (12 Month Average)
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Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Federal Government Has Provided Vast Assistance to Housing Sector
21 MKTcc347 6/28/10
Fed has purchased $1.25 Trillion in agency MBS
U.S. Treasury bought an additional $250 Billion
FNMA, FHLMC unofficial wards of the state
Tax credits for first time home buyers
Probable arm twisting to limit foreclosures
Fed Balance Sheet
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0
5
S
e
p
-
2
0
0
5
J
a
n
-
2
0
0
6
M
a
y
-
2
0
0
6
S
e
p
-
2
0
0
6
J
a
n
-
2
0
0
7
M
a
y
-
2
0
0
7
S
e
p
-
2
0
0
7
J
a
n
-
2
0
0
8
M
a
y
-
2
0
0
8
S
e
p
-
2
0
0
8
J
a
n
-
2
0
0
9
M
a
y
-
2
0
0
9
S
e
p
-
2
0
0
9
J
a
n
-
2
0
1
0
M
a
y
-
2
0
1
0
4
6
8
10
12
14
16
18
T
i
m
e
l
i
n
e

(
w
e
e
k
s
)
Delinquency Foreclosure
Delinquency and Foreclosure Timeline
3
/
2
9
/
2
0
0
6
7
/
1
2
/
2
0
0
6
1
0
/
2
5
/
2
0
0
6
2
/
7
/
2
0
0
7
5
/
2
3
/
2
0
0
7
9
/
5
/
2
0
0
7
1
2
/
1
9
/
2
0
0
7
4
/
2
/
2
0
0
8
7
/
1
6
/
2
0
0
8
1
0
/
2
9
/
2
0
0
8
2
/
1
1
/
2
0
0
9
5
/
2
7
/
2
0
0
9
9
/
9
/
2
0
0
9
1
2
/
2
3
/
2
0
0
9
4
/
2
1
/
2
0
1
0
0
500
1,000
1,500
2,000
2,500
U
.
S
.

D
o
l
l
a
r
s

(
B
i
l
l
i
o
n
s
)
UST
Agency
MBS
Repos
Term Auction Credit (TAF)
Primary, Secondary and Seasonal Credit
Primary Dealer Credit Facility (PDCF)
AMLF
Credit to AIG
TALF
Other Credit Extensions
CPFF
ML I,II,III
Liquidity Swaps
Gold
SDRs
Treasury Currency
Other
Source: Bloomberg
Source: TCW
...Yet Pricing and Credit Trends in Housing Have Not Recovered
22 MKTcc347 6/28/10
3
/
3
1
/
1
9
9
8
9
/
3
0
/
1
9
9
9
3
/
3
1
/
2
0
0
1
9
/
3
0
/
2
0
0
2
3
/
3
1
/
2
0
0
4
9
/
3
0
/
2
0
0
5
3
/
3
1
/
2
0
0
7
9
/
3
0
/
2
0
0
8
3
/
3
1
/
2
0
1
0
0
2
4
6
8
10
12
14
16
F
o
r
e
c
l
o
s
u
r
e

R
a
t
e

(
%
)
Prime Foreclosures (%)
Subprime Foreclosures (%)
1
/
3
1
/
2
0
0
0
4
/
3
0
/
2
0
0
1
7
/
3
1
/
2
0
0
2
1
0
/
3
1
/
2
0
0
3
1
/
3
1
/
2
0
0
5
4
/
3
0
/
2
0
0
6
7
/
3
1
/
2
0
0
7
1
0
/
3
1
/
2
0
0
8
1
/
3
1
/
2
0
1
0
80
100
120
140
160
180
200
220
1
/
1
/
2
0
0
0
4
/
1
/
2
0
0
1
7
/
1
/
2
0
0
2
1
0
/
1
/
2
0
0
3
1
/
1
/
2
0
0
5
4
/
1
/
2
0
0
6
7
/
1
/
2
0
0
7
1
0
/
1
/
2
0
0
8
1
/
1
/
2
0
1
0
80
100
120
140
160
180
200
220
240
Prime & Subprime Foreclosure Rates
S&P/Case-Shiller Composite-20 Home Price Index OFHEO U.S. Purchase Only Index (SA)
Constant Default Rate (CDR) Trends
J
a
n
-
2
0
0
3
M
a
y
-
2
0
0
3
S
e
p
-
2
0
0
3
J
a
n
-
2
0
0
4
M
a
y
-
2
0
0
4
S
e
p
-
2
0
0
4
J
a
n
-
2
0
0
5
M
a
y
-
2
0
0
5
S
e
p
-
2
0
0
5
J
a
n
-
2
0
0
6
M
a
y
-
2
0
0
6
S
e
p
-
2
0
0
6
J
a
n
-
2
0
0
7
M
a
y
-
2
0
0
7
S
e
p
-
2
0
0
7
J
a
n
-
2
0
0
8
M
a
y
-
2
0
0
8
S
e
p
-
2
0
0
8
J
a
n
-
2
0
0
9
M
a
y
-
2
0
0
9
S
e
p
-
2
0
0
9
J
a
n
-
2
0
1
0
M
a
y
-
2
0
1
0
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
C
D
R

(
%
)
Prime
AltA
OptArm
Subprime
Down 29% from peak Down 13% from peak
Source: Bloomberg Source: Office of Federal Housing Enterprise Oversight
Source: TCW Source: Bloomberg
Private Sector Continues to De-Lever
23 MKTcc347 6/28/10
Commercial and Industrial Loans Outstanding Commercial Paper Outstanding: Financial and Asset-Backed
J
a
n
-
2
0
8
8
A
u
g
-
2
0
8
9
M
a
r
-
1
9
9
1
O
c
t
-
1
9
9
2
M
a
y
-
1
9
9
4
D
e
c
-
1
9
9
5
J
u
l
-
1
9
9
7
F
e
b
-
1
9
9
9
S
e
p
-
2
0
0
0
A
p
r
-
2
0
0
2
N
o
v
-
2
0
0
3
J
u
n
-
2
0
0
5
J
a
n
-
2
0
0
7
A
u
g
-
2
0
0
8
M
a
r
-
2
0
1
0
200
400
600
800
1000
1200
1400
1600
B
i
l
l
i
o
n
s

(
$
)
Commercial and Industrial Loans at All Commercial Banks
Commercial and Industrial Loans of Large Commercial Banks
1
/
3
/
2
0
0
1
1
0
/
1
0
/
2
0
0
1
7
/
1
7
/
2
0
0
2
4
/
2
3
/
2
0
0
3
1
/
2
8
/
2
0
0
4
1
1
/
3
/
2
0
0
4
8
/
1
0
/
2
0
0
5
5
/
1
7
/
2
0
0
6
2
/
2
1
/
2
0
0
7
1
1
/
2
8
/
2
0
0
7
9
/
3
/
2
0
0
8
6
/
1
0
/
2
0
0
9
3
/
1
7
/
2
0
1
0
200
400
600
800
1000
1200
1400
B
i
l
l
i
o
n
s

(
$
)
Financial Commercial Paper Outstanding (SA)
Asset-backed Commercial Paper Outstanding (SA)
Banking Sector Shadow Banking System
Source: Federal Reserve Bank of St. Louis Source: Federal Reserve Bank of St. Louis
America Goes for Broke:
Government Levers Up as Private Sector Levers Down
24 MKTcc347 6/28/10
GDP = C + I + G + (X M)
In classic fashion, government is replacing the loss of consumption from the private sector by implementing
borrow and spend stimulative programs
U.S. Public Debt Outstanding U.S. Total Public Debt Outstanding as a % of GDP
M
a
r
-
1
9
9
6
M
a
r
-
1
9
9
7
M
a
r
-
1
9
9
8
M
a
r
-
1
9
9
9
M
a
r
-
2
0
0
0
M
a
r
-
2
0
0
1
M
a
r
-
2
0
0
2
M
a
r
-
2
0
0
3
M
a
r
-
2
0
0
4
M
a
r
-
2
0
0
5
M
a
r
-
2
0
0
6
M
a
r
-
2
0
0
7
M
a
r
-
2
0
0
8
M
a
r
-
2
0
0
9
M
a
r
-
2
0
1
0
50%
55%
60%
65%
70%
75%
80%
85%
90%
T
o
t
a
l

P
u
b
l
i
c

D
e
b
t

a
s

a

%

o
f

G
D
P
Jan-2000 Jan-2007 Dec-2009
3.2
2.5
4.3
4.4
7.3
5.0
Marketable Non-Marketable
$5.7 Trillion
$12.3 Trillion
$8.7 Trillion
Source: Bloomberg, U.S. Treasury Source: Bloomberg, U.S. Treasury
Benefit: Government Spending Providing Bridge Financing
25 MKTcc347 6/28/10
Do the Feds have the willingness and the ability to sustain the stimulus until private sector balance sheets recover
and growth resumes?
Transfer Payments as a Share of Personal Income
8%
10%
12%
14%
16%
18%
20%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Source: Bloomberg
Cost: Federal Debt Interest Payments
26 MKTcc347 6/28/10
Interest-Bearing Debt
Rate*
T-bills 0.24%
Treasury Notes 2.74%
Treasury Bonds 6.23%
TIPS 2.24%
Other 4.63%
Non-Marketable 4.37%
Total 3.21%
Interest service over $400 Billion per annum
* As of May 31, 2010.
Source: U.S. Treasury
Central Conundrum
27 MKTcc347 6/28/10
Public debt/GDP has risen from 55% to nearly 90% over the 00s
Trend is not sustainable unless private sector begins to grow substantially more rapidly
Private sector must replenish the demand that will be lost when deficit spending moderates
Once debt/GDP equals 100%...
GDP must grow as fast as debt service rate or debt/GDP worsens (forever)
Interest-bearing debt rate of 3.2% suggests that nominal GDP growth rate must sustain itself over this figure
$14.6 Trillion
National
Economy
(GDP)
$13.0 Trillion
Public and
Non-Marketable
Federal Debt
28 MKTcc347 6/28/10
YTD
1
Performance In Context
ABX
2007-2
AAA
Gold ABX
2006-1
AAA
IG
Corporates
Treasuries/
Agencies
Barclays
Aggregate
Agency
MBS
High
Yield
Case-Shiller
Home
Price Index
Cash S&P 500
(CRB)
-15%
-10%
-5%
0%
5%
10%
15%
20%
16.00%
10.50%
5.84%
3.95%
3.69% 3.68% 3.49%
3.39%
0.08% 0.04%
-1.45%
-10.10%
2
Commodities
1 Through May 31, 2010.
2 Q1 2010.
Interestingly, gold is up but commodities are down
Commodity pricing signaling global economic weakness
Higher gold prices a vote of no confidence on currencies?
Fundamentally: How Do You Solve a Problem Like a Debt Burden?
29 MKTcc347 6/28/10
1. Depression: Cancel debt via forgiveness/bankruptcy
Creates vicious cycle of foreclosure and bankruptcy forcing asset sales and still more bankruptcies
Democratic systems do not voluntarily choose this as the primary solution
2. Inflation: Reduce the debt burden over time via expansion of money and credit
Allow the real adjustment to be masked by a nominal change in price level
Socializes the costs of adjustment
3. Prosperity: Grow your way out: Fix private sector balance sheets
Re-allocate labor/capital facilitating real GDP growth
Not directly determined by policy makers in Washington
Conclusions
30 MKTcc347 6/28/10
Fundamental economic imbalances resulting from housing bubble remain
Stock of U.S. residential real-estate still excessive given price level of homes
Long arm of Federal intervention will continue to:
Impede the price adjustment of the U.S. housing stock
Slow the re-allocation of labor and capital resources
Keynesian stimulus will be pulled back
Endogenously: by deficit hawks pre-emptively cutting the budget or raising taxes
Exogenously: by global financial markets reducing its preference for U.S. Treasuries
Hence, growth will remain very muted
Think early 1990s
Secular headwinds, jobless recovery
IV. Portfolio Opportunities
Key Alpha Drivers
32 MKTcc347 6/28/10
Senior Non-Agency MBS
Super-Senior, 30% enhanced CMBS
Systemically critical financial corporate bonds
Aircraft EETCs
Bank Loans
Taxable Munis
33 MKTcc347 6/28/10
Non-Agency MBS Investing
3
rd
Party Data Provider
Trustee Alternative
TCW Loan Level Database
Over 33 million loans
Investments in Non-Agency MBS are supported by a comprehensive proprietary mortgage loan database
34 MKTcc347 6/28/10
Raw Data:
Zip Code
Documentation
Purpose
FICO
Original LTV
Mark-to-Market LTV
Modification Activity
Interest Rate
Loss Amount
Property Type
Loan Balance
Maturity Date
Origination Date
Occupancy
Origination Date
Principal and Interest Payment
Servicer
Originator
Negative Amortization Cap
Original Appraisal Value
Debt to Income Ratio
Margin
Index
Cap Information
Lien
Prepayment Penalty Information
Term
Amortization Term
Interest Only Period
Rate Reset Period
Mortgage Insurance Information
Delinquency Status
60++ Delinquency
Severities
Prepayments
Defaults
Weighted average Mark-to-Market
LTV Distributions
Servicer metrics
Recidivism
Cash Flow Velocity
Advancing Behavior
Modification Amount
Modification Type
Cure Rates
State Specific Severities
State-Specific Liquidation Timelines
Negative Amortization Recast Details
Always Current Percentages
Reperforming Statistics
% loans with equity
in the home
Cashflow Modeling Outputs
Cohort level statistics to gauge
securitys relative performance
Generates over three hundred analytical
fields available to each cusip
35 MKTcc347 6/28/10
Finding loans whose borrowers have equity in the property is a primary objective in security
analysis. For deal A we take its 3,000 loans and find the distribution of mark-to-market LTVs
using two approaches:
Index-Based Approach
Zip code level index is used to map monthly
changes in index values to the loans original
appraisal amount attempting to approximate the
propertys value over time.
Distressed Sales Approach
We use zip code level severities to back into
local distressed sale home prices to avoid many
of the pitfalls of an index-based approach.
Mark-to-Market LTV
Non-Agency Mortgages: Credit Trends
Loss Severity Trends 60+ Delinquency Trends
36 MKTcc347 6/28/10
J
a
n
-
2
0
0
5
M
a
y
-
2
0
0
5
S
e
p
-
2
0
0
5
J
a
n
-
2
0
0
6
M
a
y
-
2
0
0
6
S
e
p
-
2
0
0
6
J
a
n
-
2
0
0
7
M
a
y
-
2
0
0
7
S
e
p
-
2
0
0
7
J
a
n
-
2
0
0
8
M
a
y
-
2
0
0
8
S
e
p
-
2
0
0
8
J
a
n
-
2
0
0
9
M
a
y
-
2
0
0
9
S
e
p
-
2
0
0
9
J
a
n
-
2
0
1
0
M
a
y
-
2
0
1
0
0%
10%
20%
30%
40%
50%
60%
70%
3
-
M
o
n
t
h

R
o
l
l
i
n
g

A
v
g
.

L
o
s
s

S
e
v
e
r
i
t
y

(
%
)
Prime AltA OptArm Subprime
J
a
n
-
2
0
0
5
A
p
r
-
2
0
0
5
J
u
l
-
2
0
0
5
O
c
t
-
2
0
0
5
J
a
n
-
2
0
0
6
A
p
r
-
2
0
0
6
J
u
l
-
2
0
0
6
O
c
t
-
2
0
0
6
J
a
n
-
2
0
0
7
A
p
r
-
2
0
0
7
J
u
l
-
2
0
0
7
O
c
t
-
2
0
0
7
J
a
n
-
2
0
0
8
A
p
r
-
2
0
0
8
J
u
l
-
2
0
0
8
O
c
t
-
2
0
0
8
J
a
n
-
2
0
0
9
A
p
r
-
2
0
0
9
J
u
l
-
2
0
0
9
O
c
t
-
2
0
0
9
J
a
n
-
2
0
1
0
A
p
r
-
2
0
1
0
0%
10%
20%
30%
40%
50%
60%
A
v
e
r
a
g
e

6
0
+

D
e
l
i
n
q
u
e
n
c
y

(
%
)
Prime
AltA
OptArm
Subprime
Source: TCW Source: TCW
Example: Senior Non-Agency MBS
37 MKTcc347 6/28/10
Opportunity: Subprime, Sequential 3rd Pay
Current Collateral Characteristics:
Credit Enhancement: 37%
60+ Delinquent: 42% (down from 46%)
Cumulative Defaults: 19%
Always Current: 23% (of current pool)
Average Loan Balance: $185,000 (at time of origination)
Base Case Scenario (Go Forward Assumptions):
Loss Severities: 75%
Cumulative Defaults: 90%
CPR: 0.5%
Commercial Mortgage Market: Pricing Trends
38 MKTcc347 6/28/10
Moodys/REAL Commercial Property Price Index (CPPI)
While commercial real estate has not performed well as an asset class, we believe heavily credit enhanced and well
diversified securitizations (AAA super seniors) will likely perform very well
D
e
c
-
2
0
0
0
J
u
n
-
2
0
0
1
D
e
c
-
2
0
0
1
J
u
n
-
2
0
0
2
D
e
c
-
2
0
0
2
J
u
n
-
2
0
0
3
D
e
c
-
2
0
0
3
J
u
n
-
2
0
0
4
D
e
c
-
2
0
0
4
J
u
n
-
2
0
0
5
D
e
c
-
2
0
0
5
J
u
n
-
2
0
0
6
D
e
c
-
2
0
0
6
J
u
n
-
2
0
0
7
D
e
c
-
2
0
0
7
J
u
n
-
2
0
0
8
D
e
c
-
2
0
0
8
J
u
n
-
2
0
0
9
D
e
c
-
2
0
0
9
80
100
120
140
160
180
200
220
Source: Bloomberg
39 MKTcc347 6/28/10
Example: Super Senior Commercial Mortgages
Opportunity: 2006 CMBS Securitization Rated Aaa/AA-
Description:
Credit Enhancement: 31%
60+ Delinquent: 6%
Special Serviced: 9% (Includes REO, foreclosures, as well as some performing loans)
Watchlist: 17%
Cumulative Losses: 0.1%
DSCR: 1.45x
Collateral Overview:
100% 1st liens on 329 properties
Well diversified by property type:
Retail 33.9%
Office 17.3%
Multi-Family 15.7%
Lodging 10.8%
Industrial 4.5%
Other 4.0%
Largest 50 loans comprise 2/3rds of total notional
40 MKTcc347 6/28/10
Example: Super Senior Commercial Mortgages (contd)
Opportunity: 2006 CMBS Securitization Rated Aaa/AA-
Analysis:
Bond begins receiving principal in 2014
Same 40% of the pool defaulting at 75% loss severity is necessary to lose first dollar of principal
41 MKTcc347 6/28/10
Example: Airline EETCs
Opportunity: DAL 2002 Transaction (Ba2/BB+)
Description:
Bond wrapped by MBIA
Collateral package is 32 aircraft
17 737-800 (98 - 02)
8 767-300 ER (95 - 97)
6 767-400 ER (00)
1 757-200 (01)
Bond downgraded by ratings agencies due to MBIA Wrap
Analysis:
DAL has a strong balance sheet, including $6+ Billion in unrestricted liquidity
Bonds stressed LTV approximates 95% (high) but on track to de-lever to 75% by July 2012
Why Regulatory Forbearance Remains the Order of the Day
42 MKTcc347 6/28/10
Banking is an inherently unstable enterprise
Depositors can call their money back at par with few limitations
Bank has committed long-term real-estate, consumer and commercial loans
Loss of confidence results in a banking panic
Forced liquidation of assets by banks experiencing a run
Bank failures
Economic depression
As lender of last resort, Fed must credibly demonstrate that it is able and willing to preserve, protect and defend
the banking system
Banks will continue to be given the opportunity to play through, earn their way to a better capital position
Systemically Critical Financials
43 MKTcc347 6/28/10
Consolidation of major banking/brokerage franchises have continued
JP Morgan acquired Bear Stearns and WAMU
B of A acquired Merrill Lynch, Countrywide
Regulatory forbearance enables these franchises to play through to a highly profitable future
B of A JP Morgan Citicorp Wells Fargo Goldman Sachs Morgan Stanley
$2.03 Trillion
$1.70 Trillion
$2.22 Trillion
$1.13 Trillion
$849 Billion
$771 Billion
Balance Sheet Barclays U.S. Corporate Index OAS
1
/
2
9
/
1
9
9
9
1
0
/
2
9
/
1
9
9
9
7
/
3
1
/
2
0
0
0
4
/
3
0
/
2
0
0
1
1
/
3
1
/
2
0
0
2
1
0
/
3
1
/
2
0
0
2
7
/
3
1
/
2
0
0
3
4
/
3
0
/
2
0
0
4
1
/
3
1
/
2
0
0
5
1
0
/
3
1
/
2
0
0
5
7
/
3
1
/
2
0
0
6
4
/
3
0
/
2
0
0
7
1
/
3
1
/
2
0
0
8
1
0
/
3
1
/
2
0
0
8
7
/
3
1
/
2
0
0
9
4
/
3
0
/
2
0
1
0
0
100
200
300
400
500
600
700
800
O
A
S

(
b
p
s
)
Barclays U.S. Corporate Index
Barclays U.S. Corporate Index - Financials
Source: Barclays Capital
Source: SEC Website
Additional Fixed Income Opportunities
44 MKTcc347 6/28/10
Taxable munis
Illinois GO (A1/A+)
4 1/2% to 2014 vs. 1 1/2% U.S. Treasuries
Bank Loans
First lien loans from health care, energy, etc.
Loans priced $75-$95
Fed Funds, FRNs
Agency credit
Spread +40 over comparable money-market securities
V. Q & A
46 MKTcc347 6/28/10
A Word About Risk
The primary risks affecting this Fund are interest rate risk (including extension risk and prepayment risk), liquidity risk,
market risk, and credit risk.
Interest rate risk refers to the possibility that the value of the Funds portfolio investments may fall since fixed income securities
generally fall in value when interest rates rise.
Extension risk is the possibility that rising interest rates may cause owners of the underlying mortgages to pay off their mortgages at a
slower than expected rate. This particular risk may effectively change a security which was considered short or intermediate term into a
long-term security. Long-term securities generally drop in value more dramatically in response to rising interest rates than short or
intermediate-term securities.
Prepayment risk refers to the possibility that falling interest rates may cause owners of the underlying mortgages to pay off their
mortgages at a faster than expected rate. This tends to reduce returns since the funds prepaid will have to be reinvested at the then
lower prevailing rates.
Liquidity risk refers to the possibility that the Fund may lose money or be prevented from earning capital gains if it cannot sell a security
at the time and price that is most beneficial to the Fund.
Market risk is the possibility that the returns from the types of securities that the Fund invests in will underperform returns from the
various general securities markets or different asset classes.
Credit risk refers to the loss in the value of a security based on a default in the payment of principle and/or interest of the security, or
the perception of the market of such default. The value of the Funds share price will fluctuate up or down based on the value of the
portfolio holdings, which can be affected by these risks.