West Coast bond houses have long honored an unofficial pact that they would avoid aggressively poaching staff from one another. But when it comes to pursuing clients, all bets are off.
Managers at Pacific Investment Management Co., DoubleLine Capital and Capital Group are scooping up mandates worth billions of dollars from pension funds that have yanked money from Western Asset Management Co., which is grappling with the fallout of a U.S. Securities and Exchange Commission investigation into its star trader, Ken Leech.
They’re competing for at least 10 mandates ranging from $50 million to more than $500 million, and other significant client funds have already been secured, according to people familiar with the matter. Some sent requests for proposals to the managers via consultants and others have reached out directly, the people said.
Firms including Loomis Sayles and Dodge & Cox have also been pitching some of WAMCO’s key clients in recent months in a bid to capture tens of billions of dollars of assets and grab a slice of the industry’s shrinking pie. Dodge & Cox has already had some inflows, some of the people said. All of the firms declined to comment.
Fixed-income managers haven’t had an opportunity like it since at least 2014, when bond king Bill Gross abruptly resigned from PIMCO, the firm he created two decades earlier. Many of the assets that left PIMCO during that period of turmoil ended up at WAMCO.
And for traditional money managers that have been consistently battling with billions of dollars of outflows — on a quarterly basis in some cases — the pool of cash up for grabs couldn’t come at a more convenient time.
Active asset managers have gone through a rough patch over the past decade, unable to fight the structural shift of clients toward cheaper passive products. That has made fresh cash a much rarer thing in the industry. By mid-October, passive investment funds held 52.3% of all fund assets in the U.S., up from about 30% a decade ago, according to data compiled by Bloomberg.
In September alone, about a month after WAMCO announced that Leech was taking an immediate leave of absence amid the SEC probe, investors yanked $27.9 billion.
Pension funds move money
The $12.5 billion Chicago Public School Teachers’ Pension & Retirement Fund and Russell Strategic Bond Fund are among the institutions that said they’re unwinding their exposures to the firm. Leech’s flagship Core Plus Bond fund now manages less than $10 billion, down from $19 billion in August.
Some of that money has been placed in temporary funds while investors assign longer-term managers to oversee the capital, the people said, adding that there was a sense of urgency building among WAMCO clients to reallocate quickly.
Moving the money to new asset managers can take several months as institutions have longer processes to follow than retail investors. The key conversations taking place are about the stability of flows and fund managers at each of the firms, one of the people said.
WAMCO, a unit of Franklin Resources, was left reeling after disclosing that the SEC is investigating three years of trading by Leech. Some clients have publicly fled and quickly cut their ties with the manager to avoid public scrutiny, people familiar with the matter said.
The $22 billion Ohio Bureau of Workers’ Compensation, Columbus, which had more than $750 million with WAMCO, is transitioning to PIMCO, Conning & Co. and Prudential Financial’s PGIM.
WAMCO had been struggling for several years before the SEC probe, as the underperformance of its funds spurred the exit of employees and assets.
In late 2021, Leech predicted the Federal Reserve would take its time raising rates, suggesting that there may not even be any hikes in 2022. Instead, the Fed ratcheted up rates seven times that year. The Core Plus fund, which he helped run, lost about 18% that year.
Now, in addition to bleeding assets, WAMCO risks losing more talent as its fund managers seek refuge at rival West Coast bond houses, including PIMCO and TCW Group. A few months before the SEC probe was announced, WAMCO lost several senior staffers to Los Angeles-based TCW, including Drew Bowden, Penny Morgan, Powell Thurston and Keith Luna.