Former 'King of Bonds' makes bid to regain crown

Western Asset Management Co. has rebranded itself and is reaching out to investors who aren't institutions for the first time — all in a bid to reclaim its place as the top fixed-income manager. Last month, Western Asset, the fixed-income subsidiary of Legg Mason Inc., announced it will drop its parent company from the name of its mutual funds. In March, the company launched retail share classes of its mutual funds for the first time. “The branding was long overdue,” said Steve Walsh, chief investment officer. “The Western Asset franchise is much better known in fixed-income than Legg Mason. The Legg Mason brand was associated with being very positive thanks to Bill Miller,” he said. That positive, however, has faded in light of Mr. Miller's much publicized performance struggles. “It's going to let them build their own identity,” Geoffrey Bobroff, a mutual fund industry consultant, said of the rebranding. “Their biggest challenge is going to be to use it to gain more visibility in the adviser community. “ To reach out to the adviser community, Western has launched retail share classes of its funds, which had been available only to institutions and carried a hefty $1 million minimum purchase as a result. The new retail share classes have much lower minimums, starting at $1,000. Mr. Walsh admits Western may have missed a big opportunity by not targeting advisers and individual investors sooner. “We've always felt we could be more aggressive reaching out to retail,” Mr. Walsh said. “The strange distribution model we have is that Legg is responsible for our domestic distribution. Their responsibility is to distribute to the retail sector. We could debate all day long if it's the right model or not, but I won't get into that.” Western was actually poised to enter the retail market in 2006. That year, it was on top of the fixed-income world. With $521 billion in fixed-income assets under management, it had surpassed Pacific Investment Management Co. LLC, at $514 billion, as the largest fixed-income manager in the world, prompting BusinessWeek magazine to call it the new “King of Bonds.” “We were prepared to make a run for it,” Mr. Walsh said. But then the wheels came off. Western had underestimated the risks heading into the financial crisis and performance suffered. In 2007, the flagship Western Asset Core Bond Fund Ticker:(WATFX) trailed the Barclays Aggregate Bond Index by 500 basis points and in 2008 it trailed by an eye-opening 1,600 basis points. “It certainly hurt the franchise,” he said. So instead of rushing out into the retail market, Western turned its gaze inward and retooled the way it looks at risk. It hired a new head of credit and established a second risk committee. The results have paid off. Since 2009, the flagship fund has rebounded dramatically. In fact, it has not only trounced its benchmark, but Bill Gross' Pimco Total Return Fund Ticker:(PTTAX). A $10,000 investment in Western's Core Bond Fund at the start of 2009 would be worth approximately $15,753 today, while the same investment in Pimco's flagship fund would be worth $13,876. Its other funds have had similar turnarounds in performance. “The performance has really stabilized,” said Michelle Canavan, mutual fund analyst at Morningstar Inc. The struggles of 2008 did cause Western to largely miss out on investors' rush to bond funds. Western's assets have fallen from that 2006 peak to $446 billion today. In contrast, Pimco has seen its assets skyrocket to more than $1.77 trillion. Mr. Walsh is looking to turn Pimco's dominance into an advantage for Western. The firm is targeting platforms which he said could be suffering from “Pimco fatigue.” “A lot of platforms are disproportionately weighted to Pimco,” he said. That may be. But Western still has its work cut out for it to unseat Pimco. After a forgettable 2011, Mr. Gross has rediscovered his mojo. Pimco Total Return has outperformed the Barclays index by more than 300 basis points this year and the actively managed exchange-traded fund version has done even better. The Pimco Total Return ETF Ticker:(BOND) has beaten the index by more than 500 basis points. Meanwhile, the current “King of Bonds,” Jeffrey Gundlach, has shown no signs of slowing down. His DoubleLine Total Return Bond Fund Ticker:(DBLTX) led all funds in June with $2.1 billion of inflows, which surprised absolutely no one. Over the 12- month period ended in June, the fund's $18.1 billion of inflows led all mutual funds as well. "It's definitely a challenge for any fixed-income manager right now," Ms. Canavan said of the stranglehold Pimco and Mr. Gundlach have on fixed-income today. "But if Western can keep performing up there with Pimco, they could get some advisers looking their way."