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Market Review: Balancing Act
In contrast to what was a largely synchronized global tightening cycle, monetary policy among major economies began diverging in recent months given differing paths of inflation, growth, and labor markets. While emerging market economies are already well into their cutting cycles, developed markets have been slower to begin due to surprisingly strong economic data and sticky inflation. However, measured inflation moderated in the second quarter after a (seasonally affected) early- year bump to fall back in line with the broader trend observed over the past twelve months. In the U.S., both core CPI and core PCE – the latter being the Federal Reserve’s (Fed’s) preferred measure of inflation in the U.S. economy – fell on a year- over-year basis to levels not seen since 2021, clearly indicating some degree of success on the Fed’s part after launching the most aggressive hiking cycle in decades. Similarly, the UK annual inflation rate fell to a three-year low of 2% in May, while Euro area inflation eased throughout the quarter, reaching 2.5%. This progress, along with continued slowing in European growth cemented the first rate cut by the European Central Bank (ECB) since 2019, though the committee expressed a cautious outlook on inflation and the pace of rate cuts. The Riksbank and the Bank of Canada also cut rates, in May and June, respectively, joining the ECB and the Swiss National Bank (which cut rates in March 2024) as the first G10 economies to tighten monetary policy this cycle. In the U.S. however, Fed officials pushed back on expectations by preaching patience, emphasizing data dependency, and cautioning against easing policy too soon, for fear of reigniting inflationary pressures. With this, the prospect of a potential rate hike gained traction in April and caused an early-quarter surge in both U.S. and global sovereign yields that was unable to be fully reversed by bond-friendly data releases in May and June, ultimately resulting in higher rates across sovereign curves for the quarter.
With the Federal Reserve keeping U.S. rates on hold while other central banks began their cutting cycles, the U.S. dollar strengthened versus a broad-based basket of currencies. The DXY Dollar Index reached year-to-date highs of over 106 in mid- April before declining later in the period alongside falling Treasury yields. Meanwhile, the Australian dollar outperformed as stickier inflation in Australia brought renewed potential for an additional rate hike. New Zealand dollar and Norwegian krone also outperformed the U.S. dollar over the quarter, with the former supported by higher than expected inflation and the latter supported by a hawkish Norges bank and slowing U.S. data.
Equity markets seemed unfazed by the imminent return to accommodation, with the S&P 500 Index (SP500, SPX) up 4.3% in the second quarter, bringing the year-to-date advance to 15.3%, and the European Stoxx 600 Index (STOXX) up 2.4%. However, these gains have been largely driven by the top cohort of names in the Index, while the small-cap Russell 2000 fell by 3.3% and the Euro Stoxx 50 (SX5E) lost nearly 1.6%, perhaps painting a more realistic picture of current conditions. Fixed income sectors bore the brunt of rising sovereign yields, with the Bloomberg Global Aggregate Bond Index (“Index”) down 1.1% for the quarter due to a negative 2% return for Global Treasuries. Global investment grade corporates fell a more modest 0.2% but outpaced duration-matched Treasuries by 6 bps, led by European issues. Meanwhile, equity-like enthusiasm supported the high yield cohort which notched a 1.1% gain for the quarter and led fixed income sectors on a duration-adjusted basis. In securitized markets, asset-backed securities (ABS) led with a 0.9% advance on continued strong new issue sponsorship, followed by commercial mortgage-backed securities (‘CMBS’) with a 0.7% gain as private label issues continued their run of strong performance. Finally, in residential MBS, the non-agency sector rode the tailwinds of sustained demand, limited net issuance and resilient home prices, while elevated yields and rate volatility weighed on agency MBS which produced total returns of just 0.1%.
You should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. A Fund’s Prospectus and Summary Prospectus contain this and other information about the Fund. To receive a Prospectus, please call 800-386-3829 or you may download the Prospectus from the Fund’s website at TCW.com. Please read it carefully.
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Performance
The TCW Global Bond Fund I-Class (MUTF:TGGBX, “Fund”) fell 1.34% (net of fees) during the second quarter of 2024, while the Bloomberg Global Aggregate Bond Index lost 1.10%. Relative returns were held back by currency positioning during the quarter, with the overweight to Japanese yen detracting as the currency significantly underperformed a broader basket of global currencies amid outflows from Japan and surprisingly dovish tone from the Bank of Japan. Additionally, exposure to Brazilian real was added during the quarter as valuations became more attractive. The currency weakened amid fiscal instability and the Fed’s delayed rate cuts, but expectations for steady Brazil Central Bank policy, and the imminent cut by the Federal Reserve inform a positive outlook for the currency. An additional, but smaller, headwind came from the overweight position in South Korean won which weakened amid growing geopolitical risks. With global sovereign yields generally rising during the quarter, the overweight to U.S., New Zealand, and UK duration also weighed on relative performance for the quarter, though the underweight to Japanese duration and favorable positioning across sovereign curves contributed. Turning to sector allocation, the Fund remained underweight developed market corporates given historically tight valuations, and overweight higher quality securitized products. This positioning overall had little impact for the quarter as yield premiums in these sectors increased in April, then fell in May and June. However, issue selection contributed, particularly among securitized credit. Among CMBS, private label issues outperformed, with the emphasis on single asset-single borrower deals contributing to relative performance. Off-index exposure to non-agency MBS also added to relative performance as demand for yield and strong credit fundamentals – ongoing home price appreciation, declining loan-to-value ratios – supported prices in the sector. Finally, among ABS, CLOs held in the Fund provided a tailwind given attractive yields and strong market technicals as demand continued to outweigh supply.
Outlook and Positioning
Though traditional measures of volatility remain suppressed, the differing paths of global economies towards their long-run sustainable levels creates the potential for varying outcomes, and opportunities. A host of presidential, parliamentary, and legislative elections adds to the shifting global landscape and potential for increased volatility, with over sixty countries scheduled for some type of election over the year. Illustratively, France’s snap election late in the quarter caught market participants by surprise, and the potential for an unsustainable fiscal policy led to underperformance among French banks, higher yields on French government bonds (‘OATS’), and a widening of the spread between 10-year French OATs and German Bunds to multi-year levels. In contrast, in the UK, expectations for a Labour party victory were realized shortly after the quarter ended, portending a step-up in long term political stability and an improved relationship with the European Union that should encourage flows into GBP assets to help offset the imminent start to the Bank of England’s rate-cutting cycle.
Against this backdrop, the Fund maintains exposure across higher quality sovereign issuers with strong or improving macroeconomic outlooks that can weather uncertainties, while caution is warranted in countries with strained economic fundamentals such as weak household consumption given higher borrowing costs, particularly mortgages. Duration positioning favors advanced economies where real yields are attractive and central banks are getting closer to easing, particularly the U.S., New Zealand, and the UK. China and Japan remain the largest duration underweights as the Bank of Japan (BoJ) finally ended yield curve control and exited negative interest rate policy (NIRP) in March 2024, while the People’s Bank of China (PBoC) will maintain easy policy to address the distressed property sector, excessive local government debt, and deflation. As it relates to currency positioning, expectations for rate cutes and a more aggressive path than markets currently anticipate informs an underweight position to the currency relative to the benchmark. The Fund is also short Euro-denominated assets versus Japanese yen and Indian rupee given expectations for a weaker Euro as the ECB cuts rates, while the yen will likely benefit as the BoJ tightens policy and the rupee offers stable, high carry. Finally, the Norwegian krone and South Korean won are attractive given low valuations and improving trade balances.
The performance data presented represents past performance and is no guarantee of future results. Returns assume all income items are reinvested. Current performance may be lower or higher than the performance data presented. Performance data current to the most recent month end is available on the Fund’s website at TCW.com. Investment returns and principal value will fluctuate with market conditions. The value of an investment in the Fund, when redeemed, may be worth more or less than its original purchase cost.
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Sector positioning is informed by a recognition that valuations in certain markets do not reflect the prospective risks of a slowing economy. This is particularly true in the corporate markets, where yield premiums remain near the lowest levels experienced since the Global Financial Crisis. As such, the Fund remains underweight corporate credit overall, with existing positions more defensive in nature via higher quality exposures and an emphasis on industries that typically better withstand cyclical volatility like communications, non-cyclicals, and those not closely tied to consumer discretionary spending. Unlike corporate markets, securitized sectors provide more attractive opportunities given better risk compensation and more favorable outlooks, especially agency MBS. The risk-adjusted return potential is supported by very attractive yield premiums (relative to the sector’s history and versus other high-quality segments of the market) and favorable fundamentals including abundant liquidity and limited credit risk given the government guarantee, while the return of overseas and bank demand join increased money manager flows to further support the sector. Non-agency MBS also exhibits attractive yields and solid fundamentals given years of amortization and house price appreciation that has built up substantial equity in the underlying properties, which incentivizes homeowners to remain current and helps insulate bondholders from potential losses. Meanwhile, CMBS represents a small and targeted allocation, focused on deals backed by trophy property collateral and/or strong, experienced sponsors that can withstand prospective volatility in the sector. Finally, ABS positions similarly reflect targeted allocations given the challenges weaker structures or those backed by unsecured collateral are likely to face in a slowing economy, with European CLOs comprising the bulk of the exposure, with smaller positions in ABS backed by shipping containers, data centers, and select FFELP student loans.
IMPORTANT DISCLOSURE
This material may include estimates, projections and other “forward-looking” statements. Actual events may differ substantially from those presented. TCW assumes no duty to update any such statements.
This material reflects the current opinions of the author but not necessarily those of TCW and such opinions are subject to change without notice. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. This material may include estimates, projections and other “forward-looking” statements. Actual events may differ substantially from those presented. TCW assumes no duty to update any such statements. All projections and estimates are based on current asset prices and are subject to change.
Performance Detail as of June 30, 2024
Annualized
(%)
June
YTD
2Q
1 Year
3 Year
5 Year
10 Year
Since Inception 1
TGGBX (I Share) Inception Date 11/30/2011
0.37
-3.67
-1.34
1.62
-5.77
-1.50
-0.20
0.98
MUTF:TGGFX (N Share) Inception Date 11/30/2011
0.37
-3.72
-1.24
1.52
-5.86
-1.59
-0.25
0.94
Bloomberg Global Aggregate Bond Index
0.14
-3.16
-1.10
0.93
-5.49
-2.02
-0.42
0.23-I&N
Expense Ratio (%)
I Share
N Share
Gross
1.71
2.00
Net 2
0.63
0.73
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Annual fund operating expenses as stated in the Prospectus dated March 1, 2024, excluding interest and acquired fund fees and expenses, if any.
The performance data presented represents past performance and is no guarantee of future results. Returns assume all income items are reinvested. Current performance may be lower or higher than the performance data presented. Performance data current to the most recent month end is available on the Fund’s website at TCW.com. Investment returns and principal value will fluctuate with market conditions. The value of an investment in the Fund, when redeemed, may be worth more or less than its original purchase cost.
The annualized since inception return for the index reflects the inception date of the Class I & N Share Funds. For period 11/30/2011-6/30/2024. Effective March 1, 2024, the Fund’s investment advisor has agreed to waive fees and/or reimburse expenses to limit the Fund’s total annual operating expenses (excluding interest, brokerage, extraordinary expenses and acquired fund fees and expenses, if any) to 0.60% of average daily net assets with respect to Class I shares and 0.70% of average daily net assets with respect to Class N shares. The contractual fee waiver/expense reimbursement will remain in place through March 1, 2025 and before that date, the investment advisor may not terminate this arrangement without approval of the Board of Directors.
Bloomberg Global Aggregate Bond Index – Provides a broad-based measure of the global investment grade fixed-rate debt markets. The index is not available for direct investment; therefore its performance does not reflect a reduction for fees or expenses incurred in managing a portfolio. The securities in the index may be substantially different from those in the Fund. Portfolio characteristics and securities are subject to change at any time.
Source: TCW, FactSet, State Street B&T
Index Disclosure
“Bloomberg®” and each of the Bloomberg fixed income indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by TCW. Bloomberg is not affiliated with TCW, and Bloomberg does not approve, endorse, review, or recommend any TCW product or portfolio. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any TCW product or portfolio.
Investment Risks
It is important to note that the Fund is not guaranteed by the U.S. Government. Fixed income investments entail interest rate risk, the risk of issuer default, issuer credit risk, and price volatility risk. Funds investing in bonds can lose their value as interest rates rise and an investor can lose principal. Mortgage-backed and other asset-backed securities often involve risks that are different from or more acute than risks associated with other types of debt instruments. MBS related to floating rate loans may exhibit greater price volatility than a fixed rate obligation of similar credit quality. With respect to non-agency MBS, there are no direct or indirect government or agency guarantees of payments in pools created by non-governmental issuers. Non-agency MBS are also not subject to the same underwriting requirements for the underlying mortgages that are applicable to those mortgage-related securities that have a government or government-sponsored entity guarantee. Fund share prices and returns will fluctuate with market conditions, currencies, and the economic and political climates where the investments are made. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile. The Fund’s investments denominated in foreign currencies will decline in value if the foreign currency declines in value relative to the U.S. dollar. The Fund may use leverage to increase its net income, but these activities entail the risk that under certain market conditions the cost of leverage could exceed the return of the fund, reducing returns to shareholders. The use of leverage may cause a Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. This may cause a Fund to be more volatile, which may increase the risk of investment loss. Shares of closed-end investment companies frequently trade at a discount to their net asset value, which may increase investors’ risk of loss. A closed- end fund is not continuously offered. After the initial public offering, shares are sold on the open market through a stock exchange. This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. Please see the Fund’s Prospectus for more information on these and other risks.
IMPORTANT DISCLOSURE
Glossary of Terms
ABS (Asset-Backed Securities)- A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. Agency MBS- The purchase of mortgage-backed securities issued by government-sponsored enterprises such as Ginnie Mae, Fannie Mae or Freddie Mac. Amortization- The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Basis Point (‘bps’)- One hundredth of one percent, used chiefly in expressing differences of interest rates. BOJ (Bank of Japan)- Japanese central bank. Central Bank- A monopolized and often nationalized institution given privileged control over the production and distribution of money and credit. CLO (Collateralized Loan Obligations)- A special purpose vehicle (SPV) with securitization payments in the form of different tranches. Financial institutions back this security with receivables from loans. CMBS (Commercial Mortgage-Backed Securities)- A debt obligation that represents claims to the cash flows from pools of mortgage loans on commercial property. Cohort- A group who shared a particular characteristic or a particular time span. Collateral- Property or other assets that a borrower offers a lender to secure a loan. Core CPI (Core Consumer Price Index)- A measure that examines the weighted average of prices of a basket of consumer goods and services excluding food and energy. Core PCE Index- Measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Corporate – Of or relating to a bond issued by a corporation as opposed to a bond issued by the U.S. Treasury, a non-U.S. government or a municipality. Corporate Credit- A term that is used in written investment materials and commentaries to refer to a corporation’s debt or to the corporate debt market as a whole. CPI (Consumer Price Index)- Measures the average change in prices over time that consumers pay for a basket of goods and services. Cyclical – A cyclical stock is a stock highly correlated to changes in the economy. Developed Markets- Countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets. Dove/Dovish- An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that inflation and its negative effects will have a minimal impact on society. Statements that suggest that inflation will have a minimal impact are called “dovish.” Duration- A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. DXY (U.S. Dollar Index)- An index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. ECB (European Central Bank)- The European Central Bank (ECB) is the central bank responsible for monetary policy of the European Union (EU) member countries that have adopted the euro currency. This currency union is known as the eurozone and currently includes 19 countries. The ECB’s primary objective is price stability in the euro area. Emerging Markets Credits- Emerging markets bonds (debt). Federal Reserve (the Fed)- The central bank of the United States which regulates the U.S. monetary and financial system. FFELP (Federal Family Education Loan Program)- Student loans made through this program are funded by private lenders and are insured by guaranty agencies and reinsured by the federal government. GBP- British pound. G10- The Group of Ten or G10 is a group of 11 industrialized nations that have similar economic interests. The G10 was formed when the wealthiest members of the International Monetary Fund (IMF) agreed to be part of the General Agreements to Borrow (‘GAB’), so as to provide more funding for the IMF’s usage. Hawkishness- Generally favoring relatively high interest rates in order to keep inflation in check. High Yield- A bond that is rated below investment grade. Inflation- A condition of a rise in the general level of prices of goods and services in an economy over a period of time. Inflationary- Of, associated with, or tending to cause inflation. Investment Grade- A bond that is rated Baa3/BBB- or higher by Moody’s, Standard & Poors and Fitch. Labor Market- The nominal market in which workers find paying work, employers find willing workers, and wage rates are determined. LTV (Loan to Value)- A ratio of the percentage of a loan to the value of an asset purchase. Macroeconomic- Relating to the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity. MBS (Mortgage- Backed Securities)- A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution. Monetary Policy- The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Non-Agency MBS- Mortgage backed securities sponsored by private companies other than government sponsored enterprises such as Fannie Mae or Freddie Mac. Non-cyclical- Non-cyclical stocks repeatedly outperform the market when economic growth slows. Non-cyclical securities are generally profitable regardless of economic trends because they produce or distribute goods and services we always need, including things like food, power, water, and gas. Off-Index- Securities that are not part of the Fund’s benchmark index. Outperform- Outperform is when an investment is expected to perform better than the return generated by a particular index or the overall market. Since the performance of many investments is compared to a benchmark index, outperform refers to generating a higher return than a particular benchmark over time. Outperform also refers to an analyst’s rating on a security, and outperform is a better rating than neutral and worse than a strong buy recommendation. Overweight – A condition where the portfolio exposure to a given asset class (or risk measure) exceeds that of the benchmark index. PBOC (People’s Bank of China)- China central bank. PCE (Personal Consumption Expenditure)- The primary measure of consumer spending on goods and services in the U.S. economy. S&P 500- The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The index actually has 503 components because three of them have two share classes listed. Securitized- When a bank pools together different kinds of loans to clear them off its balance sheet, to free up credit for new lenders, and to create new securities that can be marketed and sold to investors. Sovereign- A national government within a given country. Sovereign Yield- The interest rate paid on a government (Sovereign) bond. In other words, it is the rate of interest at which a national government can borrow. Spread- The difference between the bid and the ask price of a security or asset. Tightening- Short for tight monetary policy. A situation in which a central bank enacts relatively high target interest rates to lower the available of credit. Effectively “tightening” the supply of credit. Underperformance- When an investment is underperforming, it is not keeping pace with other securities or indices. Underweight- A condition where a portfolio does not hold a sufficient amount of a particular security when compared to the security’s weight in the underlying benchmark portfolio. U.S. Treasury- The U.S. Treasury is the government department responsible for issuing all Treasury bonds, notes and bills. Volatility- A measure of the risk of price moves for a security calculated from the standard deviation of day to day logarithmic historical price changes. Yield- The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. Yield Curve- A curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity. Yield Premium- Additional return.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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