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Long Live The New King Of Bonds


At a recent conference for investors at the swanky New York Palace Hotel, Bill Miller, the top-performing stock fund manager at Legg Mason Capital Management, bestowed a new honor on his colleague, Ken Leech, chief investment officer of Western Asset Management Co. (Wamco). Miller proclaimed him the "King of Bonds" and joked that "Bill Gross had to step aside," referring to the legendary bond-fund manager at Pacific Investment Management Co. (Pimco). "Ken is now the king, the KOB."

Miller wasn't crowning Leech based on performance, although Morningstar Inc. (MORN) named Leech its Fixed-Income Manager of the Year in 2004. Rather, Miller was marveling at Wamco's assets under management, which had just surpassed Pimco's. On Dec. 1, Wamco's corporate parent, Legg Mason Inc. (LM), acquired Citigroup's (C) money management business and gave a $280 billion chunk to Wamco. That boosted Wamco's assets to $521 billion, a shade over Pimco's $514 billion, according to consulting firm Wilshire Associates. New York-based BlackRock Inc. (BLK) is now third, at $428 billion.

Skeptics might say Wamco's ascendancy is merely a result of growth by acquisition. It's a fair point, considering that Wamco's assets effectively doubled after the Citi deal. But Wamco has posted impressive numbers over the years, wooing huge money flows into its funds. Since 1999, the firm's assets under management have increased at a 27% annualized rate. Its core funds have beaten the benchmark Lehman Brothers Aggregate Bond Index over the past one-, two-, and three-year periods, according to data collected by Mercer Investment Consulting. Over the past five years, Wamco has returned 7.7% annually, much better than the index' 6.6% performance. "They're exactly what we're looking for in a fixed-income manager," says William Atwood, executive director of the Illinois State Board of Investment. "They make us a little money and don't cause us any problems."

Leech, a Wharton MBA who joined Wamco from CS First Boston in 1990 and became chief investment officer in 1998, wears the KOB crown uneasily. Shy and reserved despite his commanding frame, he shuns the limelight and rarely gives interviews. Investors, analysts, and pension-fund consultants say the key to Wamco's success has been its steadfast focus on large institutional bond clients. Wamco refuses to court individual investors for retail funds, a side of the business that can tempt firms to chase short-term results.

Although Wamco manages about $5.5 billion in 11 mutual funds that are available to wealthy individual investors, that part of its business pales in comparison with Pimco's, which has $90 billion in its flagship Total Return fund alone. Wamco's institutional focus isn't likely to change, says Raymond A. "Chip" Mason, Legg Mason's chairman and chief executive: "When you have somebody who does something well, don't mess with them."

Whereas Pimco is famous for its big-picture views on things like interest rates and economic growth, Wamco is best known for its nuts-and-bolts analysis of individual companies and credits. "It's more of a bottom-up approach," says Bruce Perelman, a member of the investment board of the $33 billion Los Angeles County Employees Retirement Assn., which has money with both firms.

ENRON EFFECT

Leech's bets haven't always panned out, of course. When corporate bonds began to slide in the wake of the Enron and WorldCom bankruptcies, Wamco's results suffered. Leech decided to hold on to his corporate bonds rather than bail out, and finished 2002 below the Lehman index, notes Michael Rosen, a pension consultant at Angeles Investment Advisors in Santa Monica, Calif.

More recently, however, Leech bet that longer-term bond prices wouldn't fall as dramatically as the federal funds rate was rising. Good call: His core funds are up about 3.3% in the past 12 months, vs. 2.8% for the index and similar Pimco funds, according to fund tracker InvestorForce.

Gross declined to comment on Wamco's rapid growth. A spokesman said Pimco would likely regain its top-dog status when $70 billion in European assets that it manages for its parent company, Allianz Group (AZ), are included in its total as part of a long-planned corporate consolidation this month. Still, says Morningstar analyst Paul Herbert, a nagging concern for Pimco investors is that Gross, 60, could retire in the near future.

Pimco lost a likely heir apparent in Mohamed A. El-Erian, who has agreed to take over Harvard University's endowment this year. "With Wamco, succession is not an issue," Herbert says, noting that Leech is 10 years younger than Gross. "I think he's got plenty of gas left in the tank." He'll need it to hold on to the King of Bonds title.

By Christopher Palmeri, with Aaron Pressman in New York


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