Wamco's Woes: Losing Clients and Subadvisory Roles Amid Regulatory Scrutiny

Western Asset Management Co. (Wamco), a prominent investment management firm, has found itself in a precarious position as it grapples with an investor exodus and the loss of its role as a subadviser to a Russell Investment Management fund. The company's troubles stem from the disclosure that its star trader, Ken Leech, faces a federal investigation, leading to a wave of client redemptions and a growing sense of uncertainty surrounding the firm's future.

Wamco's Downward Spiral: Losing Clients and Subadvisory Roles

Russell Investment Management Terminates Wamco's Subadvisory Role

The $2.2 billion Russell Strategic Bond Fund is winding down its allocation to Wamco, reducing the firm's role to "zero" by the end of the year, pending board approval. This decision comes as a blow to Wamco, which has been struggling to retain clients for years. The move by Russell Investment Management is a direct response to the disclosure that Leech, Wamco's co-chief investment officer, faces possible enforcement action by the U.S. Securities and Exchange Commission (SEC).The uncertainty surrounding Leech's status has become a "considerable concern" for pension consultant NEPC, further exacerbating Wamco's challenges. The firm's spokesperson declined to comment on Russell's decision, underscoring the delicate nature of the situation.

SEI Investments Management Group Removes Wamco as Subadviser

In a related development, SEI Investments Management Group also announced that it is removing Wamco as the subadviser for six of its mutual funds, including SIIT Core Fixed Income, SIMT Core Fixed Income, New Covenant Income, Catholic Values Fixed Income, Short Duration Municipal, and SEI Multi-Asset Income. The assets previously managed by Wamco will be allocated to other existing subadvisers.Russell Investment Management's decision to terminate Wamco's subadvisory role and SEI Investments Management Group's move to remove the firm as a subadviser highlight the growing concerns surrounding Wamco's ability to effectively manage client assets in the face of regulatory scrutiny and investor unease.

Wamco's Struggles and the Russell Strategic Bond Fund's Performance

The Russell Strategic Bond Fund, which had allocated a portion of its assets to Wamco, has also struggled in recent years. The fund has recorded an average annual loss of approximately 0.5% over the past five years, ranking it near the bottom among rival funds with a comparable investment strategy. The fund's total assets have shrunk by almost half during this period.In 2022, the fund's performance was further impacted by Wamco's wagers on lower-quality bonds and the direction of interest rates. The fund realized a significant loss on Treasury futures that year, a trend also observed in Leech's Western Macro Opportunities Fund, which is now being shuttered.

Wamco's Firmwide Challenges: Outflows and Shrinking Assets

The challenges facing Wamco extend beyond the Russell Strategic Bond Fund and its subadvisory roles. The firm's Macro Opportunities strategy incurred net outflows of $900 million last month, reducing its assets to $1.1 billion. Redemptions have also left Wamco's flagship Core Plus fund with less than $15 billion in assets.Firmwide, Wamco managed $377 billion at the end of last month, a slight increase from July. However, this modest growth was primarily driven by market gains and inflows to cash-management products, such as money-market funds, rather than long-term net inflows. In fact, Wamco experienced $7.7 billion in long-term net outflows during this period, further exacerbating the firm's challenges.The combination of investor redemptions, the loss of subadvisory roles, and the regulatory scrutiny surrounding Leech has created a perfect storm for Wamco, casting doubt on the firm's ability to navigate the turbulent waters ahead. As the industry closely watches Wamco's next moves, the firm's future remains uncertain, with the potential for further client defections and strategic shifts looming on the horizon.