By Danielle Walker

Western Asset Management is struggling to slow a tide of institutional clients yanking their money from the firm after a former executive became the target of federal fraud charges.

In recent months, public pension funds in California, Kansas, and London have joined the ranks of clients exiting fixed-income investments overseen by Western, which is a unit of Franklin Resources.

One of the country's largest pension funds, the California State Teachers' Retirement System, has decided to withdraw fixed-income assets from Western Asset, Mindy Tirapelle, a spokeswoman for the pension fund confirmed. The market value of those assets stood at $1.1 billion as of June 30, 2024, but has "fluctuated over time," she said.

CalSTRS' decision was "part of routine risk-and-return analysis for the fixed-income portfolio," Tirapelle said.

CalSTRS, which manages $349.7 billion in assets, is the second-largest pension fund in the U.S. and the largest educator-only pension fund in the world.

Its withdrawal comes at a sobering time for Western, which has suffered $120 billion in client outflows since late August, when its former co-chief investment officer Ken Leech took a leave of absence from the firm after receiving a Wells notice from the U.S. Securities and Exchange Commission.

On Nov. 25, the SEC announced it was charging Leech with engaging in a $600 million "cherry-picking" scheme, in which he allegedly "disproportionately allocated better performing trades to certain favored portfolios, and worse performing trades to other portfolios." At the same time, the Department of Justice filed related criminal charges, to which Leech has pleaded not guilty.

Western Asset Management remains the subject of investigations by The Commodity Futures Trading Commission, the SEC, and the Department of Justice.

Other departures. In addition to CalSTRS, other public pensions and a university endowment have redeemed their investments with Western Asset Management in recent months.

In January, the London Borough of Enfield Pension Fund decided to exit its Western investment totaling 85.5 million pounds ($107.5 million), Ravi Lakhani, head of pension investments for the fund, said in an email.

The pension fund's investment committee decided on Jan. 22 to redeem its investment, "citing concerns about the money manager's regulatory investigation by U.S. regulators, internal controls and governance processes," Lakhani wrote.

Before learning of the investigation by U.S. regulators and Leech's leave, the investment committee had considered redeeming its investment with Western Asset for "diversification purposes, but the committee decided against this due to the transition costs that could be incurred from the loss of spreads," Lakhani added.

In December, the Southern Oregon University endowment redeemed around $723,000 in assets, which Western had managed since 2015, public meeting documents reveal.

Western was already on the endowment's "watchlist" for potential replacement due to poor performance over three- and five-year periods, but after the November announcement of fraud charges against Leech, university leadership approved the redemption, public meeting documents state.

On Nov. 22, the board of trustees for the Kansas Public Employees Retirement System authorized the termination of Western as its fixed-income manager "as soon as practicable," Emily Wilson, a spokeswoman for the pension said. At the time of the November board meeting, Western managed approximately $662.5 million for the Kansas pension, the spokeswoman said in an email, noting that "KPERS does not comment on investment strategy or manager performance."

These large clients join other institutional investors who dropped Western last fall, including the Ohio Bureau of Workers' Compensation, which decided in September to pull around $750 million in assets from the money manager. Public meeting documents revealed that the state agency had concerns about the SEC investigation at Western Asset and the negative impact it could have on its investment, Barron's reported at the time.

In September, the Chicago Teachers' Pension Fund also voted to terminate a $568.5 million mandate that was managed by Western Asset. In an announcement that month, Chicago Teachers said that regulators were investigating the money manager, but the pension fund didn't specify whether that was the reason they redeemed their investment with the firm.

Changes at Western. In an effort to stem outflows and reassure clients, Western's parent company Franklin Resources, has made a number of changes at the asset manager, including naming Thomas J. Gahan president and CEO of Western in December. (Michael Buchanan, who was co-CIO alongside Leech, became sole CIO upon Leech's exit.)

"As we look ahead, Western Asset continues to undertake organizational changes and enhancements that will strengthen the firm and deliver exceptional client outcomes," Jeaneen Terrio, a Western spokesperson, said.

"We have refreshed our leadership, elevated talent and recalibrated our portfolio balance to be more tactical, all while remaining laser focused on our team-based approach to client service," Terrio added.

"In terms of enhancements, Western has begun integrating certain back-office and support teams with Franklin Templeton. Western's investment management team remains autonomous with no expected changes to investment philosophy or process," Terrio said.

Morningstar is closely monitoring Western Asset due to a combination of concerns: the underperformance of its flagship bond funds in recent years and the headline risk the firm is experiencing in the wake of Leech's departure, plus regulatory scrutiny, analyst Max Curtin said.

Last Wednesday, Morningstar analysts visited Western's Pasadena offices and spoke with the firm's new CEO, Curtin noted.

"I think it really is still business as usual," at Western, he said. "But I'll qualify that by saying that performance continues to be extremely challenged on their flagship broad markets products. That's what they're focused on. And I think they are in good hands with the new CEO Tom Gahan," Curtin said.

"Western will tell you that the worst flows they've seen have been around those major news cycle events, like the charges (against Leech) in November and when Leech was served the Wells notice and took leave in August. We'll see how things progress and how things evolve with Western and regulators," Curtin said, adding that, "It's definitely in Western's interest to put this behind them sooner rather than later."

He added that, despite the outflows at the firm, Morningstar is "not calling for panic or calling for people to make wholesale changes to their allocations," with the money manager.

Job cuts. While Western aims to reassure clients of its investment process and leadership capabilities, parent company Franklin Resources is making job cuts that will affect 3% of Franklin's global workforce, or about 300 employees, Terrio confirmed. Bloomberg earlier reported on the layoffs.

"To continue to invest in our long-term growth initiatives and evolve for the future, we needed to find savings and remain focused on our effectiveness and efficiencies," Terrio said in an email to Barron's Advisor. She said that no investment professionals were impacted by the job cuts at Franklin.

Morningstar's Curtin also said that Franklin "has no plans to interfere with, or disrupt, any of the investment teams at Western, at this point."

"We will see what impacts Western employees face, when we learn more about the fine-tuning of that parent subsidiary relationship between Franklin and Western," Curtin said. "At this point, we're still waiting."

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 19, 2025 15:30 ET (20:30 GMT)

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