I'VE BEEN ABLE TO TALK TO A LOT OF YOUR INVESTORS HERE.
WHAT ARE THEY TELLING YOU AND WHAT ARE YOU TELLING THEM ABOUT
THE WAY THE MANAGING TCW? KATIE: NOT EVERYBODY MAY BE FAMILIAR
BUT TCW MANAGES 200 $50 MILLION IN ASSETS, A RICH INVESTMENT
HERITAGE FOCUSED ON CREDIT, PUBLIC AND PRIVATE.
WE RUN ANOTHER VERY LIQUID FIXED INCOME BUSINESS.
WE RUN THE TEAM TOTAL RETURN BOND FUND.
EQUITIES, LENSES THROUGH WHICH TO VIEW THE CURRENT CRISIS.
THE QUESTION IS WHETHER OR NOT
WE WILL HAVE THIS ON THE MIND OF EVERYONE AND HOW WE PLAN TO
NAVIGATE THAT AND WE ARE IN THE CAMP OF HAVING A MEDIUM TO HARD
LANDING HERE. ALIX: ALREADY DIVERGING FROM THE
VIEWS THAT WE HAVE BEEN HEARING ALL DAY ABOUT MEDIUM LANDINGS
AND SOFT LANDINGS. WHY IS YOUR VIEW SO DIFFERENT?
KATIE: AS A NEW CEO I REALLY WANT TO
WRAP MYSELF IN THE WARM BLANKET OF A SOFT LANDING.
REMINDS ME OF OUR OLD FRIEND, INFLATION IS TRANSITORY.
BUT I DON'T THINK THAT'S THE SET UP HERE.
THE FIRST REASON IS IN MY EXPERIENCE, THE LONGER THE
RECOVERY, THE MORE IN A SMALL BLIP WE HAVE FOR THE SYSTEM.
THAT IS WHY WE SAW MONEY SUPPLY TREND LAST WEEK INTO ITS GUEST
NEW DIRECTION SINCE THE GREAT DEPRESSION.
AND SMALL BUSINESSES RELY ON SMALL BANKS AND THAT'S A BIG
PROBLEM.
CAPITAL AMERICANS ARE EMPLOYED BY SMALL BUSINESSES
CONTRIBUTING TO HALF THE GDP AND IF YOU LOOK AT COMPANIES
WITH 100 EMPLOYEES OR LESS, 70% OF THE COMMERCIAL INDUSTRIAL
FINANCING IS DEPENDENT ON BANKS WITH LESS THAN $250 BILLION IN
DEPOSITS. 30% DEPENDENT ON BANKS WITH 10
MILLION IN DEPOSITS. WE WILL HAVE A CREDIT CRUNCH
THAT WILL PUT DOWNWARD PRESSURE ON JOBS.
THIRD, WITH CAPITAL OVERPRICING AGGRESSIVELY, SOMETHING IS
GOING TO BREAK AND WE HAVE SEEN A FEW THINGS BREAK ALREADY WITH
THE BANKS THAT WE JUST MENTIONED BUT MORE THINGS WILL
BREAK ALONG THE WAY. THAT'S THE BAD NEWS.
THE GOOD NEWS IS THAT TCW IS A VALUE-ORIENTED MANAGER.
FOR OUR CLIENTS THIS SHOULD BE A RICH AND FIREMEN -- RICH
ENVIRONMENT. SONALI:
SUCH A HISTORIC DEAL HERE WITH THE FAILURE OF FIRST REPUBLIC.
IT'S ONE LESS MAJOR BANK IN AMERICA.
WHAT DOES IT MEAN FOR CREDIT CONTRACTION ON THE HEELS OF
CREDIT ALREADY CONTRACTING? KATIE:
WE ARE GOING TO HAVE A RECESSION, WE KNOW THAT.
THE WORLD LOSE IN CYCLES. CREDIT, CONTRACTING.
WE ARE IN THE MIDST OF THAT AND WE EXPECTED TO GET WORSE BUT WE
HAVE TO CONSIDER WHERE THE DISLOCATION IS GOING TO COME
FROM THERE ARE TWO AREAS WE ARE FOCUSED ON.
ONE, COMMERCIAL REAL ESTATE. THE SECOND, BROADER CREDIT
MARKETS. WE ARE UNDERWEIGHT ACROSS ALL
TCW. UNCOMFORTABLE WITH RESIDENTIAL.
WE THINK IT CAN PERFORM WITH CORRECTION.
WE HAVE EXCESS SAVINGS FROM CONSUMERS WITH MOST LOANS BEING
FIXED RATE, PEOPLE ARE HIGHLY INCENTIVIZED TO STAY IN THEIR
HOMES. THESE ARE ALL REASONS RESIDENTIAL LOOKS OK.
BUT COMMERCIAL IS VERY CHALLENGED.
THE HEADLINE I WOULD GIVE YOU THERE IS THAT $3 TRILLION OF
COMMERCIAL LOANS WILL COME UP FOR NEGOTIATION IN THE NEXT 24
MONTHS AT A RATE LEVEL THAT IS 24 MONTHS HIGHER.
A LOT OF PAIN IN THAT PART OF THE MARKET.
IF YOU LOOK AT COMMERCIAL MORTGAGE-BACKED SECURITIES,
THEY WILL NOT BE PRICED UNTIL THERE IS DETERRENCE IN THE KEY
SO THERE WILL BE A LONG TAIL OF OPPORTUNITY THERE THAT WE
BELIEVE WE CAN TAKE ADVANTAGE OF FOR OUR CLIENTS IN THE
SECURITIZED SPACE AND THROUGH DIRECT LENDING. SONALI:
INTERESTING BECAUSE THAT MEANS AT SOME POINT YOU WILL BE
TAKING REAL RISK IN STRESSED MARKETS. KATIE:
IT'S TRUE IN DRY POWDER BEST -- POWDER HIS KEY.
INVESTORS NEED TO THINK ABOUT THAT AND IT'S SOMETHING WE ARE
FOCUSED ON A TCW.
WE ARE POISED TO WORK WITH CLIENTS. ALIX:
YOU HAD 1 -- SONALI: YOU HAD ONE BIG HICCUP WITH CREDIT
SUISSE.
>> TO TAKE A STEP BACK, IT'S A GREAT ILLUSTRATION OF HOW TCW
IS A VALUE-ORIENTED MANAGER THAT NEEDS INTO THESE
DISLOCATIONS. WE HAVE A PHENOMENAL CREDIT
TEAM. IN 2022 WHEN THE REST OF THE
MARKET WAS RUNNING THROUGH IT, WE WENT INTO SWITZERLAND AND
SPENT TIME THERE AND DETERMINED THAT THEY HAD THIS VALUABLE
ASSET IN THE WEALTH MANAGER. THEY DID ALL THE FORENSIC
ANALYSIS TO DETERMINE THE CONCLUSION THAT A LOT OF
INSTITUTIONS, INCLUDING UBS, WOULD BE WILLING TO STEP INTO
THIS ASSET IF THINGS WENT SIDEWAYS AND DETERMINED TO HOLD
THE BONDS OF CREDIT SUISSE. SENIOR ENOUGH IN THE CAPITAL
STRUCTURE FOR ASSET COVERAGE, THEY LEANED INTO THAT POSITION
ON BEHALF OF OUR CLIENTS. I GIVE THE TEAM A LOT OF CREDIT.
IN THE WEEK LEADING UP TO THE MERGER THEY PUT FIVE HUNDRED
MILLION DOLLARS OF CLIENT CAPITAL IN THAT POSITION AND IT
HAS OBVIOUSLY WORKED OUT VERY WELL AND IS A GREAT
ILLUSTRATION OF HOW WE LEAN INTO DISLOCATION. ALIX:
TALK TO ME ABOUT DISLOCATION -- RELOCATION, THAT'S A NIMBLE AND
RISKY MOVE. YOU THINK ABOUT CREDIT, THE
SAFETY OF CREDIT RELATIVE TO EQUITIES, THIS IS NOT FOR THE
FAINT OF HEART. HOW ARE YOU LEANING INTO
POTENTIALLY RISKY ENTITIES NOW? KATIE:
THE ANSWER TO HOW YOU MANAGE THE RISK IS A VERY DEEP
EXPERIENCED TEAM THAT CAN DO THE DUE DILIGENCE AND THE WORK,
BUT THE WORK IN TO GET TO THE RIGHT ANSWER ON THOSE POSITIONS.
THE OTHER AREA WE ARE FOCUSED ON IS THE PRIVATE CREDIT SPACE
AND PEOPLE NEED TO BE PREPARED FOR ACCIDENTS AND PRIVATE
CREDIT. I WANT TO BE CLEAR THAT IT CAN
ALSO MAYBE BE ONE OF THE GREATEST INVESTMENT
OPPORTUNITIES OF THE NEXT DECADE IF YOU APPROACH IT IN
THE RIGHT WAY, BUT WE WILL SEE SOME MAJOR ACCIDENTS IN OUR
VIEW. THE MAIN REASON FOR THAT IS 96%
OF PRIVATE CREDIT FIRMS WERE STARTED POST GLOBAL FINANCIAL
CREDIT CRISIS IN AN ENVIRONMENT OF LOW RATES TO ZERO RATES AND
THAT'S AN EASY BACKDROP TO OPERATE AGAINST. AT THE OUTSET
OF THE INTERVIEW, HAVING ONLY BEEN HERE 10 WEEKS, AND ACTUAL
WARM BLANKET I'M WRAPPING MYSELF IN IS THAT OUR PRINT --
CREDIT TEAM LED BY RICK MILLER HAS BEEN AT THIS SINCE THE
EARLY TO THOUSANDS AND IS ONE OF THE FEW MANAGERS WHO HAS
BEEN THROUGH THREE RECESSIONS IN THE PRIVATE CREDIT EVERYONE
WATCHING IT, WHAT YOU WANT TO ASK YOUR MANAGERS IS ARE YOU IN
A COVENANT HEAVY PORTFOLIO BECAUSE WHEN THINGS GO SIDEWAYS
THEY GIVE YOU THE ABILITY TO BE AT THE TABLE. VERY IMPORTANT.
HAS THERE BEEN A LOT OF DILIGENCE ON THE ASSET?
WE HAD FIVE YEARS WHERE DILIGENT LIGHT BECAME A TERM.
THIRD OBSERVATION I WANT TO GIVE YOU THAT I DON'T THINK A
LOT OF PEOPLE ARE FOCUSED ON, YOU AND I REMEMBER THAT LAST
YEAR WHERE PEOPLE WERE SURPRISED THAT CREDIT AND
EQUITY WENT DOWN TOGETHER. WE HAVEN'T YET EXPERIENCED THAT
IN THE PRIVATE MARKETS AND I WANT TO SUGGEST TO PEOPLE THAT
WE MIGHT SEE CORRELATION BETWEEN PRIVATE EQUITY AND
PRIVATE CREDIT BECAUSE SO MUCH OF THE MARKET HAS BEEN TAKING
CREDIT FROM BIG SCALE PRIVATE EQUITY SPONSORS AND THERE WILL
BE CORRELATION OF ASSETS. HE WANT TO MAKE SURE THAT YOUR
MANAGER IS GOOD AT ORIGINATION AND NOT JUST DEPENDENT ON LARGE
PRIVATE EQUITY SPONSORS. SONALI: HOW MUCH PRESSURE IS THERE FROM
A PUBLIC CREDIT MANAGER TO PUSH INTO THE PRIVATE MARKETS GIVEN
THE SCALE OF FUND RISING RIGHT NOW? KATIE:
WE DON'T FEEL PRESSURE FROM CLIENTS, THERE'S ALWAYS DEMAND
FOR LIQUID CREDIT. THE REALITY IS 30% ARE NOW IN
THE PRIVATE SPACE. LOOKING AT IT BIG PICTURE, WHAT
ARE INVESTORS TRYING TO DO BROADLY?
THEY ARE TRYING TO OWN GLOBAL GDP ACROSS THE ASSET STRUCTURE
IN THIS COUNTRY IN PARTICULAR IS HEADING MORE AND MORE
TOWARDS PRIVATE MARKET SO IF YOU WANT TO MAKE A PORTFOLIO
REFLECTIVE OF RATE OPPORTUNITIES , YOU NEED TO
INVEST FROM THE PUBLIC ACROSS THE PRIVATE DIVIDE AND WE ARE
CERTAINLY GOING TO BE DOING MORE OF THAT AT TCW.
SONALI: I'M REALLY GOING TO ASK YOU TO
DOUBLE DOWN ON THAT. TO THE EXTENT YOU SEE >>, WHEN
DO THEY START TO SHOW UP? SONALI:
IN OUR VIEW IN THE NEXT -- KATIE:
IN OUR VIEW IN THE NEXT 12 TO 18 MONTHS AS WE GO THROUGH THE
INVESTMENT AROUND PRIVATE EQUITY BECOMING MORE REALIZED.
THERE COULD BE >>. I WANT TO BE CLEAR, THIS IS
ASSET CLASS WORK. PERHAPS MANAGER SELECTION
HASN'T MATTERED A LOT IN THE LAST 15 YEARS.
I'M JUST MAKING THE POINT THAT US AND OTHER MANAGERS OUT THERE
THAT HAVE BEEN VERY CONSERVATIVE , THEY REALLY DO
CARE ABOUT THE COVENANT AND ARE DOING A LOT OF DILIGENCE IN
THEIR OWN ORIGINATION, THEY WILL HAVE THE OPPORTUNITY TO
DIFFERENTIATE THEMSELVES AS THIS CREDIT MARKET DETERIORATES.
SONALI: THERE IS STILL A MASSIVE RUSH
TO MONEY MARKET FUNDS. BECAUSE WHY TAKE ON CREDIT RISK?
KATIE: THERE IS STILL A NEED TO. IN A MONEY MARKET SPACE THE
REAL RETURN IS VERY SMALL. INVESTORS NEED TO COME DOWN TO
SOMETHING MUCH HIGHER ON THE REAL RETURN BASIS, SO I BELIEVE
THEY WILL CONTINUE TO COME TO THE CREDIT MARKETS FOR PUBLIC
AND PRIVATE AND AFTER THINGS RECOVER, EQUITY WILL ALWAYS GET
BACK. SONALI:
ON THE CREDIT SIDE, SOMETHING THAT IS SAFE ONE DAY, WE SAW
THE SPEED DOWNGRADE QUICKLY. DO YOU WORRY ABOUT THAT GIVEN
YOUR HARD LANDING?
KATIE: WE ARE SECURE ACROSS TCW IN THE
MORE PROGRESSIVE SECTORS IN THE GLOBALLY SYSTEMIC IMPORTANT
BANKS ARE A GOOD PLACE TO BE INVESTED FOR THE REASONS THAT
WE ALREADY DISCUSSED. THE REGIONAL BANKS ARE IN AREA
THAT WE ARE CONCERNED ABOUT BECAUSE OF DEPOSIT FLIGHT AND
THEY HAVE THE HIGHEST EXPOSURE TO PARTIAL REAL ESTATE.
WHICH WE HAVE ALREADY EXPLAINED IS AN AREA WE ARE CONCERNED
ABOUT AND THAT IS REFLECTED IN THE POSITIONING. SONALI:
SO ARE THERE THINGS LIKE REGIONAL BANK BONDS THAT HE
WOULDN'T BE WILLING TO TOUCH? KATIE:
WE ARE UNDERWEIGHT ON REGIONAL BANKS AND THAT IS TRUE IN THE
EQUITY PORTFOLIO AND THERE WILL BE A LOT OF -- AREAS OF THE
MARKET THAT WILL NOT PERFORM IN RECESSION AND WILL BE
UNDERWEIGHT AND WHEN WE CAN WE WILL SHORT THEM.
SONALI: 10 WEEKS ON THE JOB, WHAT CAN
PEOPLE EXPECT FROM YOU? KATIE:
ONE OF THE MOST EXCITING THINGS IS THE CALIBER.
WE ARE HAVING FUN WORKING TOGETHER AND I WANT TO DO THE
FOLLOWING THING. THIS IS THE ADVICE I GOT FROM
THE CEO LEADING THIS INCREDIBLE LA-BASED INSTITUTION, BOB IGER,
WE HAVE TO RESPECT AND THAT IS WHAT YOU WILL SEE FROM TCW,
RESPECT FOR OUR CREDIBLE HERITAGE OVER 50 YEARS,
EVOLVING FOR THE FUTURE, DOING THINGS LIKE INTERNATIONALIZING
THE BUSINESS, GETTING MORE INVESTORS AROUND THE WORLD.
RISKTAKERS, INTERNATIONALIZING THE CLIENT BASE.
USING TECHNOLOGY AND QUANTITATIVE TOOLS IN THE
MANAGING AND DELIVERY OF PORTFOLIOS TO CLIENTS.
THE THIRD THING THAT WE HAVE TALKED ABOUT IS PUSHING INTO
ALTERNATIVE ASSET CLASSES AND EXTENDING LEADERSHIP POSITIONS.
SONALI: YOU LEFT THE DOOR WIDE OPEN FOR
CHAT GPT AND AI. [LAUGHTER] KATIE:
WE HAVE REALLY OPENED THE DOOR ON THAT, IT'S GOING TO REQUIRE
A LARGE INVESTMENT BUT THE TEAM IS REALLY COMMITTED TO DOING
THAT.