Bond-fund upstart giving Pimco a run for its mone

Pimco, the Newport Beach, Calif., firm led by Bill Gross, is the closest thing there is to a fixed-income superstar. But just an hour's drive up the Pacific Coast in Los Angeles, a much smaller, younger firm is giving Pimco a run for its money.

Launched in 1996, Metropolitan West Asset Management offers six bond funds, five of which compete directly with similar Pimco products. Long-term results of the firms' flagship funds are almost indistinguishable from Pimco's. From its inception on March 31, 1997, to Oct. 2, Metropolitan West Total Return Bond M (symbol MWTRX) gained 7.1 percent annualized, and the administrative class of Pimco Total Return gained 6.9 percent annualized. Both Total Return funds are in the top 20 percent of their peer groups over the past five years.

The similarities in fund names, performance and management styles at Met West and Pimco aren't surprising. That's because three of Met West's founders once managed money at Pimco.

Met West insists that it has an edge over Pimco, despite their similar results: It is much smaller. Pimco runs $642 billion, and Met West controls $18 billion. Met West Total Return is a gnat ($2 billion in assets) to Pimco Total Return's elephant ($97 billion). "We could double in size and still be a gnat," says Tad Rivelle, Met West's chief investment officer.

Size matters little when a bond fund owns mostly Treasuries and other easy-to-trade issues in large supply. But once a fund dabbles in small corporate issues and other obscure bonds, it's easier to maneuver with fewer assets.

Met West Total Return Bond gives its managers enough flexibility to test this thesis. The fund invests in a mixed bag of IOUs, with the holdings and maturity strategy guided by the firm's economic outlook. Its average "duration," a measure of sensitivity to interest-rate swings, can range from two to eight years but is generally expected to be within a year of the duration of the Lehman Brothers Aggregate Bond index. (A fund with, say, an average duration of four years would likely gain 4 percent with each percentage-point drop in rates and sink by 4 percent for each point that rates rise.)

Lately, the managers have not been making any big interest-rate bets. And, concerned about a slowing economy, the Met West team had only 10 percent of assets in bonds rated below investment grade (the maximum is 20 percent).

Metropolitan West (www.mwamllc.com) is a reasonable choice for investors seeking conservatively managed bond funds. Total Return's annual expenses of 0.65 percent are below average. The fund recently yielded 5.3 percent.