Corporate accounting woes weigh on firm's bond pool. (Wall Street West).

IT'S been a challenging year for Western Asset Management, the Pasadena bond manager that has quietly assembled a $100 billion bond portfolio over the past three decades.

Last year, Western Asset's strategy of investing in either mortgage-backed securities or corporate bonds -- even BBB-rated bonds -- which yield more than U.S. Treasury bills, helped it outperform the broader bond market. Its Western Asset Core portfolio returned 10.1 percent in 2001, outperforming the Lehman Brothers Aggregate Bond Index by 1.6 percentage points.

Institutional investors took notice, as they are ever keen to add even one percentage point to annual returns on bond portfolios.

Western Asset manages money for at least two large local pension funds, the $150 billion California Public Employees Retirement System and the $28 billion Los Angeles County Employee Retirement Association.

This year hasn't been so good. An unusually blunt assessment of the accounting profession -- and Western Asset's performance -- can be read in a summary of the markets posted on the firm's Web site this month.

"The recent collapse of WorldCom amid allegations of widespread fraud has brought a dispiriting end to an already difficult quarter. Western Asset's investment in WorldCom now looks beyond meaningful recovery, and the firm's (and other investors') reliance on audited financials now appears foolish," concludes a report penned by Western Asset Chief Investment Officer Kenneth Leech.

Leech goes on to note that investors are questioning whether any bond issuer's books can withstand scrutiny. "As a result, the challenge to Western's primary investment theme of overweighting corporate bonds and focusing particularly on BBB securities has caused the firm to significantly underperform (the market)."

During the second quarter of 2002, the Lehman Brothers Aggregate Bond Index returned 3.695 percent.

Western Asset, with a focus on large institutional clients, keeps a low profile, despite its stature as the biggest bond house in town, with 300 employees. It was founded in 1971 inside of First Interstate Bank. Baltimore-based Legg Mason acquired Western Asset in 1986, but left it more or less independent.

Its chief executive, James W. Hirschmann, declined a request for an interview. "We have a policy of not talking to the media," he said.

But with commentary like Leech's making the rounds on Wall Street, it is perhaps not surprising that Congress has legislated serious reforms for Wall Street.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [e-mail].