Western Asset clients yank $4.9B after co-CIO's sudden leave

Investors pulled a net $4.9 billion from two of Western Asset Management Co.’s flagship mutual funds since the fixed-income firm disclosed that its veteran trader and co-chief investment officer Ken Leech is under federal investigation.

The withdrawals from the firm’s Core Bond and Core Plus Bond mutual funds underscore mounting challenges for Wamco since Aug. 21, when the company said Leech was taking immediate leave after he received a notice from the US Securities and Exchange Commission that it may recommend enforcement action.

Redemptions include about $3.1 billion from Core Bond mutual fund and about $1.8 billion from Core Plus, according to Morningstar Direct. Clients pulled about $2 billion from the Core fund alone on Tuesday and Wednesday — the vast majority of which was from the institutional share class, the Morningstar data show.

“It’s not our practice to confirm flows outside of our normal reporting,” Wamco spokesperson Jeaneen Terrio said. 

The SEC and US Department of Justice are investigating whether Wamco cherry-picked lucrative trades for favored clients at the expense of others who received less-profitable trades. The SEC sent Leech a Wells notice, which isn’t a formal allegation or finding of misconduct. 

Wamco had about $381 billion of assets under management as of June 30.

Core Bond had about $9.6 billion of assets on Wednesday, about 25% less than it did on Aug. 20, according to Morningstar. Meanwhile, the Core Plus fund’s assets declined by roughly 10% in the same period to about $17.1 billion.

Pasadena, California-based Wamco, which is owned by Franklin Resources Inc., elevated Michael Buchanan to sole CIO. The firm manages money in a variety of investment products and accounts, so the mutual fund data don’t reflect all flows of money since the announcement.

The Chicago Teachers’ Pension Fund said on Aug. 27 that it’s preparing to terminate its Core Plus mandate with Wamco, which had about $550 million under management for the pension fund as of the end of the second quarter. The next meeting of Chicago Teachers’ board of trustees is scheduled for Sept. 19, the earliest date for it to take action.

Shares of Franklin Resources have tumbled 14% since the company announced Leech’s leave of absence, as of Thursday’s close.