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WAMCO working to regain status with institutions

James W. Hirschmann III
James W. Hirschmann III said despite good performance in 2010, consultants put the firm ‘in the penalty box.’

Western Asset Management Co. is attracting net new assets for the first time in eight years, rebounding from a combination of poor performance and net outflows that reduced the firm's assets under management by almost a quarter after the financial crisis.

The fixed-income manager finished its fiscal year on March 31 with $9 billion in net inflows in long-term strategies, the first time since 2007 that it did not report overall net outflows, its data show.

The Pasadena, Calif.-based company also has been receiving industry accolades: Morningstar Inc. named it fixed-income manager of the year in 2014.

“They kicked and scratched and crawled their way back,” said Joseph Sullivan, CEO of Baltimore-based Legg Mason (LM) Inc. (LM), the publicly traded company that owns WAMCO.

Mr. Sullivan said he believes WAMCO is poised to gain strong net inflows in the next few years and substantially increase its $446 billion in assets under management. “We haven't felt this good about Western since before the beginning of the financial crisis,” he said.

Of course, one big question for WAMCO is whether an environment of rising interest rates will affect its renewed vigor. Under such a scenario, the valuation of some of its fixed-income investments would decrease, said Erik Oja, an equity analyst with Standard & Poor's Capital IQ in New York.

But Mr. Sullivan said he believes any rise in interest rates will be gradual, lessening the impact. He also said Western could be in a position to gain more assets because its focus on credit issues could help it outperform government-backed securities.

New York-based analyst Michael Kim of Sandler O'Neill & Partners LP agrees things look promising for the money management firm. WAMCO's investment teams are producing strong investment returns across its fixed-income strategies, he said.

“The firm seems well-positioned to capture additional manager replacement dollars over time,” he said, referring largely to clients terminating Pacific Investment Management Co. since the departure last year of William H. Gross, that firm's co-founder and chief investment officer.

Gross aftermath

WAMCO CEO James W. Hirschmann III estimates the firm has taken in $10 billion in inflows from PIMCO since Mr. Gross left.

Some 93% of WAMCO's strategies outperformed their benchmarks in the three-year period ended March 31 and 82% did so in the five-year period, according to firm statistics.

WAMCO earned its nod from Morningstar for investment performance in its flagship core and core-plus fixed-income strategies, the very ones that did so poorly during the financial crisis.

The funds in 2014 each gained more than 7.5%, beating their benchmarks, the Barclay's Aggregate Bond index. Over a 10-year period, both funds were in the top decile of Morningstar's intermediate bond category.

That's a sharp reversal from the financial crisis, when WAMCO's strategy of avoiding government-guaranteed debt issues and investing in riskier corporate credit and non-guaranteed, non-agency mortgages caused sharp drops in performance in its core and core-plus strategies.

Many investors ran for the doors.

Performance was so poor in 2008 that the firm's core-plus bond strategy produced returns of -9.95% in the calendar year, a full 15.19 percentage points below the Barclay's index, according to data from eVestment LLC, Marietta, Ga. To a lesser extent, the strategy also underperformed the benchmark on a three- and five-year basis.

WAMCO's decline in assets under management came quickly during the financial crisis. Its $634.4 billion in AUM as of Dec. 31, 2007, had slipped to $482.2 billion just two years later, according to data from eVestment.

Even though performance had rebounded by 2010, outflows continued. Between March 31, 2010, and March 31, 2014, net outflows totaled more than $100 billion, WAMCO statistics showed.

“We were put in the penalty box by institutional consultants,” Mr. Hirschmann said. He said that was a major problem because 90% of WAMCO's assets are institutional.

Good news for Legg Mason

The upswing in performance at WAMCO can only be good news for Legg Mason (LM), which has had its own financial struggles over the past few years. Legg Mason's overall assets under management stand today at $707 billion. At the end of 2007, assets were hovering around the $1 trillion mark, but a year later they had dropped to $698 million and still have not recovered, Pensions & Investments data show.

Legg Mason's financial statement for the fiscal year ended March 31 shows the company had net income of $237.1 million in 2014, down more than 16% from the previous year.

Mr. Sullivan said WAMCO's success is essential to Legg Mason's overall success, given that it's the largest by assets of Legg's seven major investment affiliates. More than 60% of Legg Mason's assets under management comes from WAMCO. WAMCO also is the No. 1 contributor to Legg Mason's net income among the firm's investment affiliates.

Key to the turnaround at WAMCO has been persuading institutional investment consultants to again recommend the firm, Mr. Sullivan said. That's been an easier sell of late, he said.

He noted that in the last year, five major consultants upped their rating recommendations to a buy for WAMCO's strategies while other consultants changed their overall recommendation of the firm from neutral to positive.

Institutional investors that have hired Western in the past year include the School Employees' Retirement System of Ohio, Marvin Windows & Doors Inc. and the El Paso Firemen & Policemen Pension Fund, according to P&I data.

Investment management consultant Michael Rosen, principal of Angeles Investment Advisors, Santa Monica, Calif., said it's not surprising that WAMCO suffered severely during the financial crisis, given its orientation toward riskier assets. “Downside protection has not been a key part of their strategy,” he said.

But over the past three decades, WAMCO has outperformed longer periods than it has underperformed, Mr. Rosen said.

Mr. Hirschmann acknowledged that Western's investment style can cause strategies to underperform in down markets, but he said new risk management enhancements taken by the firm since the financial crisis, such as analyzing and adjusting sector concentration, should limit any potential investment losses.

He also said firm has added credit analysts and forged better coordination among portfolio managers, research analysts and risk management staff.

Secular shift

Mr. Hirschmann said the firm survived after the financial crisis by identifying a secular shift from broad market mandates like core and core-plus into specialized mandates such as high yield, emerging markets, bank loans and unconstrained. He said specialized mandates now make up 44% of WAMCO'S assets under management compared with 34% in 2010.

A bonus for WAMCO is that clients invested in the specialized mandates pay higher fees.

Greggory Warren, a Morningstar equity analyst, said WAMCO is definitely on the right track to attract inflows, noting its improved performance as well as the turmoil at PIMCO have set in motion the potential for money moving around in fixed-income investments.

“The point is they are a viable option now,” Mr. Warren said of WAMCO. “They had been written off by institutional investors. Once you lose your reputation, it's hard to get back it back.”


This article originally appeared in the June 29, 2015 print issue as, "WAMCO working to regain status with institutions".