(Bloomberg) -- A wave of investor redemptions slashed the size of Western Asset Management Co.’s flagship core plus bond fund below $15 billion, a decline of more than one-third so far this year, as clients pull back after a federal investigation of the firm’s veteran trader and co-chief investment officer Ken Leech.
Investors have yanked about $4.8 billion from the Western Asset Core Plus Bond Fund over the past three weeks, according to Morningstar Direct. That leaves $14.3 billion in the mutual bond fund as of Monday, a 36% decline so far this year.
Outflows picked up since the 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. A net $1.4 billion outflow from the fund on Monday was the largest since the firm said Leech was on leave, according to the data.
“We don’t comment on flows outside of the normal business reporting cycle,” said Jeaneen Terrio, a spokesperson for Wamco.
Wamco’s assets had been declining for years as its key bond strategies struggled in comparison to peers, leading clients to retreat. Investors have pulled cash out of the Core Plus fund for 33 straight months through August, according to Morningstar. It’s shrunk about two-thirds from August 2021, before the Federal Reserve started increasing interest rates.
The outflows have picked up since Leech received a Wells notice, which isn’t a formal allegation or finding of misconduct. 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.
Last month, pension advisory firm NEPC wrote in a note that client outflows are expected to continue and potentially accelerate. Leech is a “central and key figure in Western’s long term investment success” and his absence and uncertainty over his involvement is “a considerable concern and negative,” according to the firm.
Shares of Franklin Resources Inc., the parent of Wamco, have fallen about 15% since Leech’s leave was announced.
“If there’s change in who’s running the fund or if there’s a star manager or well-known manager who exits the strategy, that is often a cause for retail and institutional investors to revisit the allocation to the fund,” said Todd Rosenbluth, head of research at the indexing and analytics firm VettaFi.
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