The board of Kern County Employees' Retirement Association, Bakersfield, Calif., on Sept. 11 approved the termination of Western Asset Management Co., which manages two of its fixed-income mandates: Western Asset Core Plus ($87 million in assets) and Western Asset High Yield ($172 million), confirmed Daryn Miller, CIO of KCERA.
Western Asset Core Plus is part of the $5.93 billion pension fund’s core fixed-income portfolio, while Western Asset High Yield is part of its high yield and specialty credit portfolio.
In explaining the reasons behind this termination, the pension fund’s investment staff (including Miller) said in the meeting agenda that it is “consistent with the structural changes” to the fixed-income portfolio that were approved by the board in August 2023. The proposed changes that are relevant to its current investments with Western Asset included a transition from “core plus” mandates to a “core” mandate and the replacement of “high yield” credit mandates with dedicated bank loan and securitized product exposures.
In addition, staff noted in the agenda, Western Asset has witnessed some recent organizational changes among its senior leadership — as such KCERA believes it is “prudent to terminate the manager in anticipation of the re-composition expected to take place (at Western) over the following quarters.”
Among other things, Western Asset has seen the departure of portfolio manager John Bellows and the leave of absence of Kenneth Leech, co-CIO, after receiving a Wells Notice from the SEC.
Western Asset parent company Franklin Templeton, in an Aug. 21 SEC filing, said the SEC recently issued a Wells Notice to Leech, identifying him as a target of an investigation focusing on “past trade allocations involving treasury derivatives."
The filing noted that with Leech stepping aside, Michael Buchanan — a 19-year Western veteran named co-CIO in 2023 — had been named as sole chief investment officer.
While the Western Asset team has a “deep bench of resources,” KCERA staff noted in the agenda that the senior leadership changes over the past year were “notable.”
KCERA will transfer funds from the core plus fund to the passive Mellon Aggregate Bond Index Fund, while the high-yield assets will be transitioned to bank loan investments following final board approvals, according to the agenda.
As of July 31, Western Asset Core Plus accounted for 1.5% of assets, while Western Asset High Yield accounted for 2.9% of assets.
KCERA has no other mandates managed by Western Asset, according to data in the agenda.
Western Asset declined to comment on the termination.
