Franklin Sees $53 Billion in Wamco Investor Exodus Amid Probes

(Bloomberg) — A surge of investor redemptions has slashed the amount of cash managed by Franklin Resources Inc.’s bond unit, Western Asset Management Co., by more than $53 billion since the disclosure of a federal probe of the firm’s veteran trader and Co-Chief Investment Officer Ken Leech.
About $18 billion of those outflows came in October alone, Matthew Nicholls, Franklin’s chief financial officer, said in a call with analysts after a quarterly earnings release on Monday. That — along with the disclosure that the Commodity Futures Trading Commission has started looking into trades by Wamco — pushed shares in Franklin to close at the lowest in more than a week. 
The CFTC investigation comes as the US Securities and Exchange Commission and Department of Justice carry out their own inquiries into potential cherry-picking trading practices under Leech. The Pasadena, California-based company said in August that Leech was going on leave after receiving a notice from the SEC, which could recommend enforcement action. 
The outflows leave less than $10 billion in Wamco’s flagship core plus bond mutual fund as of Nov. 1, from $22.3 billion to start 2024 — representing a decline of more than half this year, according to data compiled by Bloomberg.
There’s “no way to sugar coat or diminish the adverse impact Western is and will continue to have on” Franklin, analysts led by Glenn Schorr at Evercore ISI wrote in a note. “But we can point to multiple positive trends that should lead to growth and a more diversified Franklin in the end.”
Franklin assumed control of Wamco and agreed to allow it to operate with a great deal of independence for five years as part of its purchase of Legg Mason in 2020. Chief Executive Officer Jenny Johnson said that arrangement is now under review. 
“Franklin Resources is working with Western’s management team to explore ways to assist Western Asset, including adjustments to economic arrangements, operational and revenue synergies,” she said. “This may entail changes that are similar to what we have successfully implemented with our other public market specialist investment managers while maintaining investment process independence.” 
Franklin reported adjusted earnings per share for the fourth quarter that missed the average analyst estimate. Shares in the company have fallen about 30% so far this year. They slid 3.3% on Monday to $20.16.
Among some of the bigger investors that have said they are leaving Wamco are the Ohio Bureau of Workers’ Compensation, which decided to pull roughly $750 million. The Chicago Teachers’ Pension Fund, which had roughly $550 million with the firm, is also ending its relationship. 
An exodus of cash has been especially visible in the Western Asset Core Plus Bond Fund, which recorded a net outflow of $8.18 billion in the third quarter, bringing its year-to-date decline in assets to $11.1 billion, according to Morningstar Direct. Wamco’s Core Bond mutual fund, meantime, saw a net outflow in the three months ending in September of $6 billion.
As the pace of the outflows from Core Plus accelerated, the fund has been selling existing holdings. The fund has also severely lagged peers, ranking in the bottom rungs over the last three- and five-year periods as well as so far this year, the data show.
Wamco has been hammered by consistent outflows for its flagship fund over nearly three years after a recent peak around $42.3 billion in August 2021. Under the leadership of Leech, the firm’s bond strategies reflected a view that Federal Reserve rate hikes from 2022 would be measured and not drive Treasury bond yields to last year’s peaks of 5%. 
(Updates throughout.)
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