Western Asset's flagship bond fund sinks below $10B amid investor panic

A surge of investor redemptions has slashed the size of Western Asset Management Co.’s flagship core plus bond mutual fund below $10 billion, with the bulk of the outflows coming amid a federal investigation of the firm’s veteran trader and Co-Chief Investment Officer Ken Leech.

Clients have been yanking their cash since the Pasadena, California-based company said on Aug. 21 that Leech was going on leave after he received a notice from the US Securities and Exchange Commission that it may recommend enforcement action. The core plus fund’s assets have shrunk to $9.96 billion as of Nov. 1, from $22.3 billion to start 2024 — representing a decline of more than half this year, according to data compiled by Bloomberg.

Franklin Resources Inc., which owns Wamco, on Monday reported adjusted earnings per share for the fourth quarter that missed the average analyst estimate. 

Wamco said investors redeemed $27.9 billion from the firm overall in September, according to an Oct. 9 filing. Wamco’s assets under management fell to $353.3 billion as of Sept. 30 compared with $376.8 billion a month earlier. The three-month period ending Sept. 30 was the worst period of redemptions on record for Franklin, according to data since 2007 that was compiled by Bloomberg.

A spokesperson declined to comment. The Justice Department is investigating whether Leech parceled out winning trades to favored clients at the expense of others — a practice known as cherry-picking. 

Among some of the bigger investors that have said they are leaving Western Asset are the Ohio Bureau of Workers’ Compensation, which decided to pull roughly $750 million. The Chicago Teachers’ Pension Fund, which had roughly $550 million with the firm, is ending its relationship. 

The outflows have been especially visible in the Western Asset Core Plus Bond Fund, which recorded a net outflow of $8.18 billion in the third quarter, bringing its year-to-date decline in assets to $11.1 billion, according to Morningstar Direct. Wamco’s Core Bond mutual fund, meantime, saw a net outflow in the three months ending in September of $6 billion.

As the pace of the outflows from Core Plus accelerated, the fund has been selling existing holdings. The fund has also severely lagged peers, ranking in the bottom rungs over the last three- and five-year periods as well as so far this year, the data show.

Wamco has been hammered by consistent outflows for its flagship fund over nearly three years after a recent peak around $42.3 billion in August 2021. Under the leadership of Leech, the firm’s bond strategies reflected a view that Federal Reserve rate hikes from 2022 would be measured and not drive Treasury bond yields to last year’s peaks of 5%.