Ken Leech, Western Asset Management’s longtime chief investment officer, resigned from his position amid investigations by the Department of Justice and the U.S. Securities and Exchange Commission (SEC) into whether some clients got preferential treatment over others within the distribution of profits and losses from derivatives transactions.
Leech, who manages among the largest bond strategies within the U.S., will probably be placed on leave immediately after Wells receives notice from the SEC, the corporate said in an announcement Wednesday. Federal prosecutors in New York are conducting a criminal investigation into the practice referred to as “cherry-picking,” during which successful trades are credited to favored accounts, people acquainted with the matter say.
“The firm has initiated an internal investigation into certain past trading allocations involving treasury derivatives in select accounts managed by Western Asset,” the firm said. “The firm is also cooperating with parallel government investigations.”
Western Asset said Wednesday it’s closing its $2 billion Macro Opportunities strategy and named Michael Buchanan sole CIO. Shares of parent company Franklin Resources Inc. fell 13% to $19.78, the most important drop since October 2020, extending its decline this yr to 34%.
Western Asset is one among California’s original bond giants, with assets of $381 billion and once rivaled Pacific Investment Management Co. and BlackRock Inc. in size. Its flagship funds have struggled in recent times amid rising rates of interest, resulting in outflows from its flagship strategy, which Leech co-managed.
Franklin, which has total assets of about $1.6 trillion, acquired Western as a part of its acquisition of Legg Mason in 2020. Leech has been with Western Asset for over 30 years, serving as CIO for many of that point.
A Wells Notice, which isn’t a proper allegation or finding of wrongdoing, provides a possibility to answer the agency and check out to dissuade it from filing a lawsuit.
Leech was a star for years. He co-managed the firm’s Core Plus fund when it outperformed its peers, even though it also stumbled in 2018 when the Fed raised rates of interest. Since 2021, he has suffered from speculation that the central bank will correct course.
The $19 billion mutual fund, up 2.4 percent this yr, has lagged greater than 90 percent of its peers over the past three and five years, and investors have been pulling money out.
The withdrawal from Western Asset’s fund contrasts with rival funds managed by firms comparable to Pimco, Capital Group Inc. and BlackRock Inc., which have raised money this yr because the U.S. Federal Reserve prepares to chop rates of interest.
“It’s a little problematic with Franklin because the whole reason for buying Legg Mason was to offset the loss of commission-based sales to boost capital flows,” said Greggory Warren, strategist at Morningstar, in a phone interview. “Buying Legg was seen as helping them get more exposure to fixed income and institutional clients and making them less exposed to fee pressure.”
Western had quietly appointed Buchanan as co-chief investment officer alongside Leech in August 2023. John Bellows, who co-managed Core Plus since 2018, abruptly left the firm in early May. A Western spokesperson previously said the firm thanked Bellows for his contributions.
Jim Hirschmann, Western’s president and CEO, said within the statement that Buchanan “has played an integral role in Western Asset’s strategy and growth and we look forward to having him lead the next chapter of our renowned investment team.”
