Professional investment advisers wear handcuffs when they manage clients' money - but you don't
Sentiment toward closed-end bond funds was hit especially hard when the Fed, under Jerome Powell, raised interest rates to rein in inflation.
Professional investment advisers have to wear handcuffs when they manage clients' money.
They are restricted in the moves they can make and the risks they can take. That's not just because of regulations, either. It's also about litigation risk and, most of all, reputation risk. They are terrified of looking bad to clients.
But this isn't a problem for self-directed individual investors. You're managing your own money, not someone else's. You don't have to explain anything to anyone who doesn't understand the trade.
This can create interesting opportunities, when an investment is available to you that a fiduciary might find hard to buy for clients.
Ken Leech, the former chief investment officer of bond-fund company Western Asset Management, just pleaded guilty in a criminal court in New York to a charge of obstructing justice for giving false and misleading testimony. This is part of a continuing investigation into how Leech, now 72, acted in his job between 2021 and 2023 and whether he favored some clients over others.
Leech was put on leave by Western Asset Management, generally known as Wamco, in August 2024 and permanently left in the summer of 2025. He was indicted in November 2024. Franklin Resources $(BEN)$, which owns Wamco, could not be reached for comment.
I don't know what else Leech was guilty of, if anything. Nor do I care. What matters here is that this case is putting Wamco in the news for all the wrong reasons. The company's assets under management have fallen about 40% since the scandal broke, Reuters reported recently. Clients have fled. The company paid a $100 million penalty related to the affair, without admitting any wrongdoing.
But any fiduciary putting your money, or your mom's and your grandma's money, into a Western Asset Management bond fund risks awkward questions or embarrassment, if nothing worse.
Fiduciaries have to look after their own interests as well as their clients'. There is no real upside for them here.
Not all mutual funds are created equal. Most, including traditional and exchange-traded funds, are what's called open-ended. That means when someone invests money, the fund company generates new shares or units. There is theoretically no limit to the number of shares or units they can generate. Each one is sold to the new investor at the current net asset value - meaning you get $1 in investment for each $1 you put in.
But some funds are closed-ended. They don't issue new shares. Instead, they first issue a limited number of shares and these then trade on the stock market. If you want to invest in the fund, you need to buy shares off a current investor who wants to sell. It's like buying stock in, say, Coca-Cola $(KO)$ or SpaceX $(SPCX)$.
Thanks to this unusual feature, when you invest in a closed-ended fund you don't always get $1 in investment for each $1 you put in. Sometimes you only get, say, 90 cents' worth of the investment for each dollar you invest, because you bought the shares at a "premium" to the investment or net asset value. But other times you get a deal: You get $1 of investment value for only 90 cents, because you were able to buy the shares below the net asset value. Not all of these "discounts" are a bargain, because not all closed-ended funds are any good. But sometimes they are.
Western Asset Management has 13 - unlucky for some - closed-end funds currently trading on the stock market. All of them are currently selling at discounts to their net asset value of at least 5%, meaning you are getting $1 for 95 cents or less. Some of the discounts are near 10%.
Michael Clausen, fund analyst at Morningstar, says that by his data the overall average discount for Wamco closed-end funds doesn't seem remarkably high by the standards of the last five years. But it has more than doubled in the past year from around 3.5% on average to 6.4%, he says.
Furthermore, the last five years may not be the best comparison, because many closed-end funds plunged to enormous discounts during the bond-market rout of 2022-23, when the Federal Reserve, under then-chairman Jerome Powell, belatedly raised rates to regain control of inflation.
This means Wamco funds are worth a second look right now. One intriguing opportunity is Western Asset Management Inflation-Linked Opportunities and Income WIW, in which Bill Gates has long been a significant investor. This fund mainly invests in inflation-protected bonds such as TIPS and sells for around 11% below net assets - meaning you're buying $1 in investments for 89 cents. Another is Western Asset Premier Bond Fund WEA, which invests in investment-grade corporate bonds and is about 7% below NAV. I ran the numbers using FactSet, and, even allowing for the widening discount on its price, WEA has outperformed the iShares iBoxx Investment Grade Corporate bond-index fund LQD over 10-, five-, three- and one-year spans.
All of this comes with the usual guarantee about future performance: namely, none.
Most of the closed-end bond funds, including these two, use leverage, meaning they borrow money at short-term interest rates and use that money to buy more bonds. This can make the funds' returns more volatile, but so long as longer-term bond yields are higher than short-term interest rates, which they usually are, it should increase returns.
Investment managers and closed-end experts I spoke with said the widening discounts weren't restricted to Western Asset Management either.
"The big message" is that NAV performance "has generally been better than market-price performance quarter-to-date, so discounts have widened," says John Cole Scott, president of specialist investment firm CEF Advisors, citing his firm's proprietary closed-end-fund data.
"I use closed-end bond funds in client portfolios, and right now the discount environment is one of the more interesting setups I've seen in years," says Jeff Judge, a financial planner at Chesapeake Financial Advisors in Forest Hill, Md. "Closed-end bond funds have been trading at wide discounts to NAV for most of the past two years," he says. Judge blames bond-market turmoil and rising interest rates, which hit leveraged bond funds and drove away many private investors. Judge says he's been buying some closed-end funds for clients lately, including for those in retirement who need income.
Scott, at CEF Advisors, observes that Wamco funds have indeed faced an additional problem in the form of fallout from the Leech scandal. "Western Asset may be facing some added discount pressure [due to] sponsor-specific trust issues tied to the Ken Leech case and the firm's later settlement," Scott says.
Judge remains wary of the firm's funds, though. "I've reviewed the major Western Asset closed-end offerings," he says. "The discounts widened sharply after the Leech news broke, which you'd expect. But I'm not rushing in."
"I want to see how the firm responds and whether the SEC investigation turns up systemic problems before I'd add exposure for a client," he says. "Discounts alone don't justify the reputational and legal tail risk right now."
Stay tuned.
-Brett Arends
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June 26, 2026 12:46 ET (16:46 GMT)
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