ASSET ALLOCATION FUND

144 Pages·2016·0.88 MB·English

OCTOBER31
A N N U A L
R E P O R T
EQUITY FUNDS
TCWArtificialIntelligence EquityFund
TCWFocused EquitiesFund
TCWGlobalRealEstateFund
TCWHigh DividendEquitiesFund
TCWNewAmerica Premier EquitiesFund
TCWRelativeValue DividendAppreciationFund
TCWRelativeValue Large CapFund
TCWRelativeValue MidCapFund
TCWSelect EquitiesFund
ASSET ALLOCATION FUND
TCWConservativeAllocationFund
TCW Funds, Inc.
Table of Contents
LettertoShareholders ........................................................... 1
ManagementDiscussions ........................................................ 4
SchedulesofInvestments: ........................................................ 27
TCWArtificialIntelligenceEquityFund ............................................ 27
TCWConservativeAllocationFund ............................................... 31
TCWFocusedEquitiesFund .................................................... 34
TCWGlobalRealEstateFund ................................................... 37
TCWHighDividendEquitiesFund ............................................... 39
TCWNewAmericaPremierEquitiesFund ......................................... 42
TCWRelativeValueDividendAppreciationFund.................................... 45
TCWRelativeValueLargeCapFund .............................................. 49
TCWRelativeValueMidCapFund ............................................... 53
TCWSelectEquitiesFund ...................................................... 57
StatementsofAssetsandLiabilities ................................................ 60
StatementsofOperations ........................................................ 62
StatementsofChangesinNetAssets ............................................... 64
NotestoFinancialStatements .................................................... 69
FinancialHighlights ............................................................. 87
ReportofIndependentRegisteredPublicAccountingFirm .............................. 107
ShareholderExpenses ........................................................... 108
PrivacyPolicy .................................................................. 111
InvestmentManagementandAdvisoryAgreementDisclosure........................... 114
ProxyVotingGuidelinesandAvailabilityofQuarterlyPortfolioSchedule ................... 119
TaxInformationNotice .......................................................... 120
DirectorsandOfficers ........................................................... 121
The Letter to Shareholders and/or Management Discussions contained in this
AnnualReportaretheopinionsofeachFund’sportfoliomanagersandarenot
the opinions of TCW Funds, Inc. or its Board of Directors. Various matters
discussed in the Letter to Shareholders and/or Management Discussions
constitute forward-looking statements within the meaning of the federal
securities laws. Actual results and the timing of certain events could differ
materially from those projected or contemplated by these forward-looking
statementsduetoanumberoffactors,includinggeneraleconomicconditions,
overallavailabilityofsecuritiesforinvestmentbyaFund,thelevelofvolatilityin
the securities markets and in the share price of a Fund, and other risk factors
discussed in the SEC filings of TCW Funds, Inc. The data presented in the
Letter to Shareholders and/or Management Discussions represents past
performanceandcannotbeusedtopredictfutureresults.
To Our Valued Shareholders
DavidS.DeVito
President,ChiefExecutiveOfficerandDirector
DearValuedInvestors,
It is my pleasure to present the 2017 annual report for the would be a mistake to hold off on raising interest rates
TCW Funds, Inc. covering the twelve months ended while waiting for inflation to reach a 2% threshold, did
October 31, 2017. I would like to express our appreciation littletodampentheequitymarketrally.Infact,thespikein
for your continued investment in the TCW Funds as well the yield on the U.S. 10 Year Treasury Note from its
as welcome new shareholders to our fund family. As of calendar YTD 2017 low of 2.04% in early September to
October 31, 2017, the TCW Funds held total net assets of 2.38% by the end of October coincided with the “risk-on”
approximately$16.8billion. rally and the view of many equity investors that a
normalization of Fed policy might be indicative of an
This report contains information and portfolio improvedeconomicoutlook.
management discussions of our TCW Equity Funds and
TCWAllocationFund. LookingAhead
Looking forward, stock market fundamentals appear
TheU.S.StockMarket
reasonably encouraging given that corporate earnings
U.S.stockssurged23.6%(S&P500TotalReturnIndex)to have been on the upswing for the past few quartersasthe
successive recordhighsduringtheone-yearperiodending economy has gained some strength and the U.S. dollar
10/31/17, posting a positive total return every month. has weakened. Congressional passage of the Trump
Equity prices were fueled by strong corporate earnings administration’s proposed tax reform legislation would
results that more than compensated for volatility leading prove a powerful catalyst to corporate earnings, as one
up to the U.S. presidential election and the subsequent sell-side firm estimates that it would equate to roughly a
lack of progress in achieving meaningful fiscal reforms. 6-9% boost to S&P Operating EPS growth (Wolfe
After six quarters of negative year-over-year earnings Research, 11/3/17). Yet, we note that the Fed under the
growth through the first half of calendar year 2016, leadership of both Janet Yellen and, shortly, Fed Chair-
corporate profits posted a string of quarterly gains, designee Jerome Powell, is likely to push forward with its
boosted by the rebound in energy prices as well as the goalofnormalizingmonetarypolicyviainterestratehikes,
weakening of the U.S. dollar. Although the equity market with the Fed futures curve pointing to a likely hike at the
experienced periodic, short-lived bouts of volatility related FOMC’s December meeting. As such, at some point the
to concerns about the North Korean missile crisis, easy liquidity tailwind to risk assets may shift to a
generally positive macroeconomic data releases, coupled tightening liquidity headwind, and the market’s
with renewed hopes for tax reform, fueled a rally in risk complacency may well be tested (the VIX index volatility
assets, including stocks. Despite the impact of two measure slipped to 9.19 in October, surpassing its record
hurricanes, the U.S. economy grew at a solid 3.0% annual closing low of 9.31 set nearly 24 years ago). With stock
pacein3Q17aftergrowing3.1%inthepriorquarter—the market valuations remaining elevated relative to the
best back-to-back quarters in three years. At the same averagelevelofthelastseveraldecades(forwardP/Eratio
time, the labor market continued to show improvement is presently about 18.2 versus an average of 15.7), we
with weekly jobless claims hitting their lowest level (222k) would sound a note of caution on the near-term outlook
in 44 years and the unemployment rate in October (4.1%) for stocks, even if the medium-to-long term prospects
dipping to a 16-year low. Even a late-September speech by remaincompelling.
Fed Chairwoman Yellen, in which she effectively said it
1
Letter to Shareholders (Continued)
AnUpdateontheTCWFundsEquityFunds Weknowthatyouhavemanychoiceswhenitcomestothe
management of your financial assets. On behalf of
There was an update to our fund family over the past
everyone at TCW, I would like to thank you for makingthe
twelvemonthsthatwewouldliketonoteforourinvestors:
TCW Funds part of your long-term investment plan. We
• EffectiveAugust31,2017,TCWlaunchedtheTCWArtifi- truly value our relationship with you. If you have any
cial Intelligence Equity Fund (TGFTX/TGJNX). Artificial questions or require further information, I invite you to
intelligence refers to the development or use by a busi-
visit our website at www.tcw.com, or call our shareholder
nessofcomputersystemsthatperformtaskspreviously
servicesdepartmentat800-386-3829.
requiring human intelligence such as decision-making
oraudioorvisualidentificationorperception.TheFund Iwishyouallthebestinthecomingyearandlookforward
invests primarily in issuers that are characterized as to further correspondence with you through our semi-
“growthcompanies”accordingtocriteriaestablishedby annualreportin2018.
the portfolio managers, which may include attributes
such as an expected growth cycle, accelerating earnings Sincerely,
or cash flow, and general growth of a business sector.
Bottom-up fundamental research that focuses on the
individual attributes of a company, such as its financial
characteristics,isusedtoidentifythesecompanies.The DavidS.DeVito
Fund is managed by Jeffrey Lin, CFA, Senior Vice Presi- President,ChiefExecutiveOfficerandDirector
dentandThomasLee,SeniorVicePresident.
2
TCW Artificial Intelligence Equity Fund
Management Discussions
For the period August 31, 2017 (inception) to October 31, 2017, the TCW Artificial Intelligence Equity Fund
(the “Fund”) was up 6.40% for each of the Fund’s two share classes. The Russell 3000 Growth Index,the
Fund’sbenchmark,increasedby5.37%overthesametimeperiod.
TheFundoutperformedtheIndexduetohigherexposuretotheInformationTechnology(IT)sectorrelative
to the Index. Within the Index, the IT sector was up 8.2%. Within the IT sector, the Fund strongly
outperformed in the Semiconductors subsector, which contained many of the Fund’s top contributors
including Micron Technology, Intel, NVIDIA, ON Semiconductor, Silicon Laboratories, Cypress
Semiconductor,andTeradyne.OthernotableperformerswereTwitter(InternetSoftware),AristaNetworks
(CommunicationsEquipment),andTake-TwoInteractive(Software).PartiallyoffsettingsomeoftheFund’s
outperformance were disappointing performance results from investments in Nokia, Tesla, Trivago,
Nuance Communications, and Cerner. Additionally, the Fund had greater exposure to the Real Estate
Investment Trusts (REIT) sector than the Index. Names in the REIT sector such as American Tower,
CoreSiteRealty,CrownCastle,CyrusOne,andEquinixunderperformedduringtheperiod.
We believe artificial intelligence (AI) will be the foundational technology of the information age. The leap
from computing built on the foundation of humans telling computers how to act, to computing built on
thefoundationofcomputerslearninghowtoacthassignificantimplicationsforeveryindustry.
Inourview,therearemanystructuraldriversthatareacceleratingtheneedforAI.Theseinclude:
• Trendindemographicstowardsanagingglobalpopulation
• Needforgreaterenergyefficiency
• Driveforgreaterurbanizationasdemandforconvenienceincreases
• Effortstoincreasehumancapitalproductivity
ThebroadapplicabilityofAIalsoleadsustobelievethatitisaparadigm-shiftingtechnologyfortheglobal
economy and a driver behind improving productivity. AI very well could end the period of stagnant
productivity growth in the U.S. We believe that AI technology driven improvements to productivity could,
similar to the 1990s, drive corporations to invest in more capital and labor intensive projects, accelerating
growth,improvingprofitability,andexpandingequityvaluations.
Finally, we continuously survey the artificial intelligence investment landscape by drawing upon our deep
technical knowledge and fundamental research efforts. Our research effort seeks the most attractive
opportunitiesintheAIecosystem.
4
TCW Artificial Intelligence Equity Fund
Management Discussions (Continued)
Cumulative
Return
Since
Inception(1)
TCWArtificialIntelligenceEquityFund
ClassI(Inception:8/31/2017) 6.40%
ClassN(Inception:8/31/2017) 6.40%
Russell3000GrowthIndex 5.37%
$20,000
I Class
$15,000
0
0
0
10, $10,640
F $ $10,000 $10,537
O
E
U
L
A
V
$5,000
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
$0
INCEPTION SEP 17 OCT 17
8/31/17
FUND INDEX
$20,000
N Class
$15,000
0
0
0
10, $10,640
F $ $10,000 $10,537
O
E
U
L
A
V
$5,000
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
$0
INCEPTION SEP 17 OCT 17
8/31/17
FUND INDEX
(1) Thetotalreturnsdonotreflecttaxesthatashareholderwouldpayonfunddistributionorontheredemptionoffundshares.
5
TCW Conservative Allocation Fund
Management Discussions
For the year ended October 31,2017,the TCWConservativeAllocationFund(the“Fund”)postedagainof
7.28% for the I Class and 6.74% for the N Class shares. The performance of the Fund’s classes varies
becauseofdifferingexpenses.TheFund’sblendedbenchmarkof40%S&P500Indexand60%Bloomberg
BarclayCapitalAggregateBondIndexreturned9.53%overthesameperiod.
The Fund posted positive returns over the past year with a positive contribution coming from both U.S.
equitiesandU.S.fixedincome.ThestrongestreturnscamefromTCWNewAmericaPremierEquitiesFund
(9.2% allocation) and TCW Select Equities Fund (5.5% allocation). Both funds were up over 16% over the
past year. At the asset allocation level, the decision to overweight large cap U.S. equities helped relative
performance.
As of October, the allocation for the Fund was 39% equities, 56% fixed income, 3% cash and 2% in gold.
This gives the Fund slight underweight to fixed income and almost equal weight to equities relative to its
blended index. Over the past twelve months, the Fund has gradually increased its allocation to the
Metropolitan West Unconstrained Bond Fund for its lower duration and higher credit quality profile, and
shiftingequityallocationtolessvolatileanddefensiveequities.
FortheFund’sequityexposure,theallocationtotheTCW/GargoyleDynamic500FundandtheTCWNew
America Premier Equities Fund were increased. For the Fund’s fixed income exposure, the Fund remain
concentrated within high-grade debt favoring mortgage-backed securities. The Fund had small allocations
to both high yield and emerging market debt over the past year. Within its fixed income allocation, the
Fundhasrecentlydecreasedthedurationoffixedincomeholdingsasweanticipatehigherinterestratesin
thenearterm.
Over the past year, U.S. equity markets continued to climb, reaching all-time highs. The key drivers for
thesehigherreturnshavebeenstrongerthanexpectedeconomicdataalongwithstrongcorporateearnings
growth.Inaddition,centralbanksgloballymaintainedaccommodativemonetarypolicieswhichkeptglobal
interest rates low. With the employment landscape improving, the housing sector continuing to show
strength,consumerconfidencerebounding,lowinterestratesglobally,andexpandingGDPgrowth,wefeel
confidenttherecoverywillcontinuetoexpandandleadtoafavorablebackdropfortheequitymarkets.The
fixed income markets continue to benefit from the globally low interest rate environment and easy
monetary policies worldwide. Even though the Federal Reserve increased interest rates just once over the
pastmonths,weanticipatefurtherinterestrateincreasesinthenearterm.
6
TCW Conservative Allocation Fund
Management Discussions (Continued)
AnnualizedReturn(1)
1Yr 3Yr 5Yr 10Yr Since
Return Return Return Return Inception
TCWConservativeAllocationFund
ClassI(Inception:11/16/2006) 7.28% 3.95% 5.56% 5.02% 5.23%
ClassN(Inception:11/16/2006) 6.74% 3.42% 5.04% 4.75% 4.97%
40%S&P500Index/60%BloombergBarclaysU.S.AggregateBondIndex 9.53% 5.82% 7.24% 5.81% 6.06%
$20,000
I Class
$17,590
$16,327
$15,000
0
0
0
0,
1
$
F $10,000
O
E
U
L
A
V
$5,000
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
$0
OCT 07 OCT 08 OCT 09 OCT 10 OCT 11 OCT 12 OCT 13 OCT 14 OCT 15 OCT 16 OCT 17
FUND INDEX
$20,000
N Class
$17,590
$15,902
$15,000
0
0
0
0,
1
$
F $10,000
O
E
U
L
A
V
$5,000
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
$0
OCT 07 OCT 08 OCT 09 OCT 10 OCT 11 OCT 12 OCT 13 OCT 14 OCT 15 OCT 16 OCT 17
FUND INDEX
(1) Thetotalreturnsdonotreflecttaxesthatashareholderwouldpayonfunddistributionorontheredemptionoffundshares.
7
TCW Focused Equities Fund
Management Discussions
For the year ended October 31, 2017, the TCW Focused Equities Fund (the “Fund”) increased 15.91% and
15.98% for its I Class and N Class, respectively. The performance of the Fund’s classes varies because of
differingexpenses.Duringthesameperiod,theRussell1000ValueIndexrose17.78%.
During the year, sector allocation was positive but stock selection was negative. Ironically, however, the
largestindividualnegativeattributionfortheyearcameasaresultofourunderweightinfinancials.Forthe
year ended October 31, 2017, financials returned 36.1% which was the highest return of any sector during
theyear.Morethanhalfofthereturnofthefinancialssectorcameinthetwomonthsfollowingtheelection
throughyearend.ThereasonfinancialsdidsowellwasduetotheperceptionofPresidentTrump’spolicies
being pro-growth for the economy as well as the perception of lessening of the regulatory environment
which overly burdened the sector during the prior administration. The higher beta banks and brokerage
companiesledtheway.Wewereunderweightthehigherbetafinancialsfortheyear.
From a stock selection perspective, our worst stock selection came in the materials sector. The materials
sector for the year was up 30.8%. Air Products and Chemicals and Ecolab outperformed the market but
slightly underperformed the sector. But the real culprits came from both Sealed Air which was down 3.3%
while we owned the stock along with Potash Corporation of Saskatchewan which wasup only3.9% on the
year — both far below the benchmark return. The underperformance of Sealed Air was a continuation of
the previous year when they consistently reduced earnings and cash flow guidance throughout 2017. We
have since sold the stock. Potash has struggled this year as they are wrapping up their $8 billion potash
expansionbutmuchofthisexpansionissittingidleintheshorttomediumtermuntildemandcatchesup
with supply. With the supply/demand imbalance, prices have stayed lower for longer than expected. The
goodnewsislowerprices,asisthecasewithallcommodities,willleadtolowersupplyandatsomepoint
demand and supply will come into balance and prices will tend upward. With the new expansion Potash
willbethemainbeneficiarywhenthathappens.
The worst stock over the past year was Advanced Auto Parts. The company merged with Raleigh-based
General Parts in 2014 and was a good performer at the outset. But in 2017, their progress on their
productivity initiatives stalled and the company missed targets badly this year as a result of the synergies
surrounding the merger. We think those synergies are not lost and expect better results in 2018. The best
stockoverthepastyearwasAdobeSystems.AdobeSystemsisthebest-in-classleadingproviderofcreative
designsoftware.Thesuccessofthestockin2017wasadirectresultofthecompanybeatingestimateseach
quarter, continuing to raise the bar even higher and then beating those raised estimates again. There are
notmany$90billionmarketcapcompaniesthatcangrowthetoplineby18%peryearoverthenextthree
years;wesuspectthatwillprovetobeaconservativeestimate.
Theportfolioownshighqualitystocksandwebelieveitisprudenttobepatient.Theobjectiveistocreatea
portfoliothathasagoodrisk/rewardprofileandtoremainbalancedinordertobepoisedtodowellinboth
up markets as well as down markets. We remain confident that investing in attractively valued companies
withstrongmanagementteamsthatareexpectedtoincreasetheirreturnoninvestedcapitalandfreecash
flowgenerationhaveastrongpotentialtoyieldfavorablelongtermresults.
8