TCW Pluris Strategy

Quarterly Commentary

September 30, 2013


The TCW Pluris portfolio rose 8.53% gross (8.25% net of fees and expenses) during the quarter. For comparison, the benchmark Russell 1000 Value Index gained 3.94% and the broad S&P 500 Index gained 5.24%.

Market Overview

The S&P 500 is up 19.79% year to date. The S&P 500 is now up 149% from the lows in 2009. Despite these good returns, memories of the sharp declines of 2008 live on in the minds of investors. The stock market recently traded at an all-time high, yet many remain underinvested in stocks. As we noted last quarter, we believe the market remains far less expensive today than it was at the peak in 2007/2008. The S&P 500’s price/earnings ratio of 17.3x in 2007 was 18% higher than today’s 14.7x. The price/book multiple was 25% higher in 2007 than it is today (3.0x vs. 2.4x, respectively) and the dividend yield is 22% higher today than it was in 2007 (1.7% vs. 2.1%, respectively). Today’s 6.8% earnings yield compares favorably to the 5.4% Baa corporate bond yield, versus 2007 when the market’s 5.8% earnings yield was below the 6.3% Baa corporate bond yield. In addition, we believe the balance sheets of public companies are much stronger today than in 2007. In our opinion, investors were too optimistic in 2007; today investors have a healthy degree of skepticism and caution far from what is seen at bull market tops.

Stocks Are Cheap Relative to Bonds

Our previous quarterly letters have noted the significant appreciation in U.S. Treasuries and many other fixed income assets over the past five years. Since the financial crisis of 2007 and 2008, the current income and the “perceived safety” of bonds have been favored over equities and the growth of capital invested. It appears many investors are more concerned with a return of capital than a return on capital invested. The real cost of this “safety” is a low return that may not keep up with inflation. Significantly more money has been invested in bonds funds than stock funds, despite the fact that stocks have significantly outperformed bonds on both a one- and three-year basis. We believe stocks remain attractively valued relative to bonds. This is evident in the following graph, which compares the S&P 500’s forward earnings yield to the Baa bond yield. We believe this investor mindset has created an attractive investment opportunity in stocks over bonds.


Housing is an important economic pillar and it continues to show signs of recovering from the downturn that started in 2007. New housing permits are up 11% year-over-year and have reached levels not seen since 2008. New home sales continue to rise. The second quarter average was up 51% from the cyclical bottom and was up 13% year-over-year. Housing drives many parts of the economy and is also important to the health of the banking industry. Rising home prices improve people’s financial situation and confidence in the economy. It also improves the credit quality of many bad loans on the banks’ balance sheets. As these bad loans improve, banks are able to lend to all sectors of the economy. As the chart below suggests, bank loan volume is growing.

Relative Valuation of Corporate Bonds and Stock Operating Earnings Yields

Monthly Data 2/28/1985 - 9/30/2013 (Log Scale)

Source: NDR

Bank Loans and Credit

All Commercial Banks in the United States, Seasonally Adjusted

Source: Federal Reserve Board

Confidence in sustainable economic growth is improving. Leading economic indicators continue to rise, overcoming the long list of concerns expressed by economist and market pundits. It appears there are no signs of excesses in aggressive bank lending or excessive capital spending. In fact, both remain well below average. As confidence grows, bank lending and capital spending should increase. We believe this will stimulate U.S. economic growth and earnings growth for companies, and in time should provide a strong foundation for higher stock prices.

S&P 500 Earnings

S&P 500 earnings grew at an above-average rate in 2010 and 2011 (33% and 13%, respectively) as the economy recovered from the 2008 - 2009 downturn. Going forward, we believe the S&P 500 will rise 5% in 2013 and another 8% in 2014. We believe returns on capital will be driven by moderate revenue growth, some margin expansion, and disciplined capital allocation.


Management capital allocation skill and results will ultimately determine a company’s long-term value. When stocks in our portfolio trade above their long-term intrinsic value, generally we will sell them and when they trade at a discount to this value generally we will buy them. We believe valuations are attractive for most companies, fundamentals continue to improve, and that the long-term investment outlook for the stock market is good. In our 2008 letter, we pointed out that the previous 10 years (1999-2008) was the worst 10-year period ever for the stock market. It is likely that the next 10 years (2009-2018) will provide very attractive returns. The S&P 500 is up 86% since the end of 2008. We believe equity returns will remain attractive for long-term investors.

Legal Disclosures

For Information Only

This publication is for general information purposes only. Past performance is no guarantee of future results. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision.

Subject to Change

Any opinions expressed are current only as of the time made and are subject to change without notice. TCW assumes no duty to update any such statements. 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. Any holdings of a particular company or security discussed herein are under periodic review by the author and are subject to change at any time, without notice. In addition, TCW manages a number of separate strategies and portfolio managers in those strategies may have differing views or analysis with respect to a particular company, security or the economy than the views expressed herein.

Forward Looking Statement

This report may include estimates, projections and other "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any such statements.

Not an Offer
This publication is not to be used or considered as an offer to sell, or a solicitation to an offer to buy, any security. Nothing contained herein should be considered a recommendation or advice to purchase or sell any security. 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.