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This Bond Manager Isn't a Household Name, But Beats 98% of Peers

Ken Leech bests rivals with spot-on forecasts, camera-shy ways

By Charles Stein and John Gittelsohn

(Bloomberg) --Kenneth Leech isn’t as well known as star bond managers like Jeffrey Gundlach and  Bill Gross. Based on his performance, maybe he should be.

Leech, chief investment officer of Western Asset Management, has twice been part of a team that won Morningstar’s fixed-income manager of the year award. This year, he and his colleagues are beating virtually all of their peers in the intermediate-term bond category thanks to savvy bets on interest rates, corporate debt and currencies.

“Ken doesn’t emit the great man vibe that some bond managers do,” Bill Miller, the legendary stock picker and a long-time colleague of Leech’s, said in a telephone interview. “He is more interested in generating returns than in generating publicity.”

The upshot: the $21.9 billion Western Asset Core Plus Bond Fund, Leech’s biggest, beat 98 percent of intermediate bond funds in 2017, and 98 percent over the past three years and five years, according to Morningstar. Along the way it outperformed intermediate-term competitors at Pacific Investment Management Co., TCW Group, BlackRock Inc. and Fidelity Investments.

The fund did well in 2017 because Leech and his team made several spot-on forecasts. They include correctly predicting that short-term interest rates would rise while long rates would move very little, that corporate bonds would make decent gains and that local currency debt in Mexico and Brazil was poised for a rebound. 

“You’ve got better global growth and extremely subdued core inflation around the world,” Leech, 63, in a telephone interview from his Pasadena, California, office. That backdrop, he said, proved ideal for investing in everything from mortgages, to corporate bonds to emerging market debt.

Leech shares management duties on 61 funds with about $100 billion of Western’s $435 billion in assets. He joined Western in 1991 and rose to chief investment officer in 1998. In 2007 he was named to the Fixed-Income Analysts’ Hall of Fame.

Leech is a Life Master at bridge, whose strong suit is playing the hands, which requires identifying and weighing multiple possible outcomes and risks, much like investing, according to Dexter Senft, his bridge partner for 40 years.

“He knows how to play those cards like nobody I’ve ever seen,” Senft, a retired fixed-income manager, said in a phone interview.

Leech rarely appears on television or radio, by design, say colleagues.

“There are only so many hours in the day and Ken wants to spend them evaluating investment ideas,” said Western’s deputy chief investment officer Michael Buchanan. Leech’s boss, Joseph Sullivan, chief executive officer of Legg Mason Inc., said if Leech’s profile was higher, it would probably help the firm attract more assets.

While the Core Plus fund attracted $2.6 billion in the first 10 months of the year, many other bond funds, most of which didn’t perform as well, gathered more money, Morningstar data show. “The flows are nice, but we could always use more,” Leech admitted.

In his quarterly commentaries Leech has emphasized what he calls the “two-steps forward-one step back” nature of the economic recovery and the persistence of low-inflation. That observation led to a bet that the yield curve would flatten -- that short-term rates would rise while longer-term rates would not. Yields on two-year Treasuries have climbed to about 1.88 percent from 1.2 percent in January. The yield on the 10-year, about 2.5 percent, is not far from where it was at the start of the year.

Leech is sticking with his long-held forecast that the U.S economy will grow at a moderate rate and that the Federal Reserve will push up rates gradually. Not everyone agrees.

Bob Michele, who oversees about $476 billion at J.P. Morgan Asset Management said in a recent Bloomberg interview, that the Fed could hike rates four times in 2018, more than the market is anticipating. Leech is expecting three rate increases.

“If rates really do go up in 2018 that will be a definite drag on the Western fund,” said Morningstar analyst Maciej Kowara, who gives the fund his top rating.

Leech benefited this year from a January prediction that emerging market bonds from Mexico and Brazil would have a strong year. Local currency bonds from Mexico gained 14 percent and Brazilian debt returned 15 percent. Leech still favors emerging-market bonds on the theory that a better global economy will drive yields lower and prices higher.

A document Western produced for the first nine months of 2017 illustrates how good a year the Core Plus fund had. It shows positive contributions from about 10 different sources -- virtually the entire spectrum of potential bond investments.

Leech, who has been in the bond business for more than 40 years, knows how unusual that is. In September he was asked who has having a better year: his fund or the local baseball team, the first place Los Angeles Dodgers.

“It was a close call,” he said, until the Dodgers lost 16 of 17 games late in the season. “Fortunately that hasn’t happened to us.”

To contact the reporters on this story: Charles Stein in Boston at [email protected] ;John Gittelsohn in Los Angeles at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] Josh Friedman, Vincent Bielski


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