Ex-'King of Bonds' makes big bid to regain crown

Jul 29, 2012 @ 12:01 am

By Jason Kephart

Western Asset Management Co. has re-branded itself and for the first time is reaching out to retail investors — all in a bid to reclaim its place as the top fixed-income manager.

Last month, Western Asset, the fixed-income subsidiary of Legg Mason Inc., said that it will drop its parent company from the name of its mutual funds. In March, the company, which had previously offered its shares only to institutions, launched retail shares.

“The branding was long overdue,” said Steve Walsh, chief investment officer.

“The Western Asset franchise is much better known in fixed income than Legg Mason. The Legg Mason brand was associated with being very positive thanks to Bill Miller,” Mr. Walsh said.

That positive has faded in light of Mr. Miller's highly publicized performance struggles, however.

“It's going to let them build their own identity,” Geoffrey Bobroff, a mutual fund industry consultant, said of the re-branding. “Their biggest challenge is going to be to use it to gain more visibility in the adviser community.”

To reach out to advisers, Western has launched retail share classes of its funds, which had been available only to institutions and carried a hefty $1 million minimum purchase. The share classes have much lower minimums, starting at $1,000.

Western may have missed a big opportunity by not targeting advisers and individual investors sooner, Mr. Walsh conceded.

“The strange distribution model we have is that Legg is responsible for our domestic distribution,” he said. “We could debate all day long if it's the right model or not, but I won't get into that.”

Western was actually poised to enter the retail market in 2006, when it was on top of the fixed-income world. With $521 billion in fixed-income assets under management, it had surpassed Pacific Investment Management Co. LLC, at $514 billion, as the largest bond manager in the world, prompting BusinessWeek magazine to call it the “King of Bonds.”

But then the wheels came off. Western had underestimated the risks heading into the financial crisis, and performance suffered.

In 2007, the flagship Western Asset Core Bond Fund (WATFX) trailed the Barclays Aggregate Bond Index by 500 basis points, and in 2008, it trailed by 1,600 basis points.

So instead of rushing into the retail market, Western retooled the way it looks at risk. It hired a new head of credit and established a second risk committee.

The moves have paid off. Since 2009, the flagship fund has rebounded dramatically.

TROUNCING PIMCO FUND

In fact, it has trounced not only its benchmark but also Bill Gross' Pimco Total Return Fund (PTTAX). A $10,000 investment in Western's Core Bond Fund at the start of 2009 would be worth about $15,753 today, while the same investment in Pimco's flagship fund would be worth $13,876.

Its other funds have had similar turnarounds.

“The performance has really stabilized,” said Michelle Canavan, fund analyst at Morningstar Inc.

The struggles of 2008 did make Western largely miss out on investors' rush to bond funds. Western's assets have fallen from that 2006 peak to $446 billion.

By contrast, Pimco's assets have jumped to more than $1.77 trillion.

Mr. Walsh is looking to turn Pimco's dominance into an advantage for Western. The firm is targeting platforms that he said could be suffering from “Pimco fatigue.”

That may be, but Western has its work cut out for it to unseat Pimco.

After a forgettable 2011, Mr. Gross has rediscovered his mojo.

Pimco Total Return has outperformed the Barclays index by more than 300 basis points this year, and the actively managed exchange-traded-fund version has done even better. The Pimco Total Return ETF (BOND) has beaten the index by more than 500 basis points.

Meanwhile, the current “King of Bonds,” Jeffrey Gundlach, shows no sign of slowing down. His DoubleLine Total Return Bond Fund (DBLTX) led all funds last month with $2.1 billion of inflows.

Over the 12-month period through June, the fund's $18.1 billion of inflows led all mutual funds as well.

“It's definitely a challenge for any fixed-income manager right now,” Ms. Canavan said of the stranglehold that Pimco and Mr. Gundlach have on fixed income. “But if Western can keep performing up there with Pimco, they could get some advisers looking their way.”

jkephart@investmentnews.com Twitter: @jasonkephart

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