Western Asset Management is facing mounting pressure as institutional investors continue to pull their funds in the wake of a federal fraud investigation involving a former executive. Public pension funds in California, Kansas, and London have recently joined the exodus, adding to the growing list of clients severing ties with the fixed-income manager, a subsidiary of Franklin Resources.
Institutional Outflows Accelerate
One of the latest and most significant withdrawals comes from the California State Teachers’ Retirement System (CalSTRS), the second-largest pension fund in the U.S. and the world’s largest educator-only pension fund. The firm managed $1.1 billion in fixed-income assets for CalSTRS as of June 30, 2024, but the pension fund confirmed its decision to redeem those assets.
According to CalSTRS spokeswoman Mindy Tirapelle, the move is part of “routine risk-and-return analysis for the fixed-income portfolio.” The decision comes at a precarious time for Western Asset, which has seen approximately $120 billion in client outflows since late August. That timeline coincides with the departure of former co-Chief Investment Officer Ken Leech, who took a leave of absence after receiving a Wells notice from the U.S. Securities and Exchange Commission (SEC).
On November 25, the SEC formally charged Leech with orchestrating a $600 million "cherry-picking" scheme, alleging that he disproportionately allocated better-performing trades to select portfolios while directing weaker trades elsewhere. The Department of Justice (DOJ) simultaneously filed criminal charges, to which Leech pleaded not guilty. Meanwhile, Western Asset remains under investigation by the SEC, the Commodity Futures Trading Commission (CFTC), and the DOJ.
Additional Clients Exit
Western Asset has faced a steady stream of client redemptions, including public pension funds and university endowments.
In January, the London Borough of Enfield Pension Fund decided to withdraw its £85.5 million ($107.5 million) allocation from Western Asset. According to Ravi Lakhani, the fund’s head of pension investments, the decision was driven by concerns over the ongoing U.S. regulatory investigations, internal controls, and governance practices. Lakhani noted that the fund had previously considered redeeming its investment for diversification reasons but initially opted against it due to transition costs. However, news of the regulatory scrutiny pushed the investment committee to act.
Similarly, the Southern Oregon University endowment redeemed approximately $723,000 from Western Asset in December. Meeting documents reveal that the endowment had already placed Western on a "watchlist" due to poor three- and five-year performance. However, the fraud charges against Leech led the university’s leadership to move forward with the redemption.
The Kansas Public Employees Retirement System (KPERS) also severed ties with Western Asset in November. Its board of trustees authorized the termination of Western as its fixed-income manager “as soon as practicable.” At the time, Western managed about $662.5 million for KPERS. A spokeswoman declined to comment on the specific rationale, stating that KPERS does not publicly discuss investment strategy or manager performance.
These moves follow a series of redemptions last fall, including a $750 million withdrawal by the Ohio Bureau of Workers’ Compensation in September. Public documents indicated that concerns about the SEC investigation and its potential impact on investments prompted the decision. The Chicago Teachers’ Pension Fund also voted to terminate a $568.5 million mandate with Western Asset around the same time, citing regulatory concerns.
Western Asset Responds
In an effort to stabilize operations and restore investor confidence, Franklin Resources has implemented leadership changes at Western Asset. In December, the firm named Thomas J. Gahan as its new president and CEO, replacing Leech. Michael Buchanan, who had been co-CIO alongside Leech, became sole CIO.
Western Asset spokesperson Jeaneen Terrio stated that the firm is undergoing a transformation aimed at strengthening operations and improving client outcomes.
“We have refreshed our leadership, elevated talent, and recalibrated our portfolio balance to be more tactical, all while maintaining our team-based approach to client service,” Terrio said.
Additionally, Western has started integrating certain back-office and support teams with Franklin Templeton. However, the firm emphasized that its investment management team will remain autonomous, with no expected changes to its investment philosophy or processes.
Market Sentiment and Performance Concerns
Despite these efforts, Western Asset continues to face scrutiny from industry analysts and investors. Morningstar analysts recently visited Western’s Pasadena headquarters to assess the firm’s response to the crisis.
Max Curtin, a Morningstar analyst, noted that while operations appear to be continuing as usual, performance remains a major concern, particularly for Western’s flagship broad-market bond strategies.
“They are focused on improving performance, but there are significant challenges,” Curtin said. “That said, we believe the firm is in good hands with Tom Gahan.”
Western executives have attributed the most significant client outflows to heightened news coverage surrounding Leech’s legal troubles. While the firm has seen redemption spikes during key regulatory developments—such as Leech’s departure and the SEC’s fraud charges—Western hopes to move past the controversy.
Curtin added that despite the asset outflows, Morningstar is not advising clients to make “wholesale changes” to their fixed-income allocations with Western Asset at this time.
Job Cuts at Parent Company
As Western attempts to steady its business, its parent company Franklin Resources has announced cost-cutting measures. Franklin plans to reduce its global workforce by 3%, impacting roughly 300 employees. While the firm confirmed these layoffs, it emphasized that investment professionals would not be affected.
“To continue investing in our long-term growth initiatives and evolve for the future, we needed to identify efficiencies,” Terrio said in a statement.
Morningstar’s Curtin also noted that Franklin does not intend to interfere with Western Asset’s investment teams at this stage. However, industry observers remain watchful of how the relationship between the two firms evolves.
“We will see what impacts Western employees face as Franklin fine-tunes its strategy,” Curtin said. “For now, we’re still waiting.”
Looking Ahead
With regulatory investigations ongoing and performance challenges persisting, Western Asset faces an uphill battle in regaining investor confidence. While new leadership and operational changes may help stabilize the firm, the damage from Leech’s legal troubles and subsequent client departures has been substantial.
For institutional investors and RIAs, the situation underscores the importance of manager due diligence and risk management, particularly when investing with firms undergoing regulatory scrutiny. Western Asset may yet turn the tide, but for now, the firm remains under intense industry scrutiny as it navigates one of the most turbulent periods in its history.
