What Scott Bessent’s Appointment Means for Institutional Investors

The fund manager and former Soros CIO, set to be nominated as secretary of the treasury, has stated his intent to spur growth through deregulation and energy production.

Scott Bessent’s designation this week as President-elect Donald Trump’s nominee for secretary of the treasury has so far gained the favor of investors, following lengthy deliberations over who could be nominated to the role that will be influential for markets and the economy.

Bessent, a former partner in and CIO of Soros Fund Management and the founder of hedge fund Key Square Group LP, has signaled that he sees growth coming through deregulation and increased energy production, while also aiming to cut the national deficit to 3% of GDP. He has also noted that tariffs are a good negotiating tactic, one Trump seems to be employing already, having said this week he will impose tariffs on Canada, China and Mexico.

Bessent’s presumed nomination got market cheers on Monday after the announcement, broadly driving up the stock market.

“Bessent has been dubbed a ‘fiscal hawk’ as someone who can navigate a broad cross-section of global asset classes and the implications of the crosscurrents underpinning them,” Quincy Krosby, chief global strategist for LPL Financial, said in a statement. “Moreover, markets are surmising that Bessent will help steer the incoming administration’s policies towards a pro-growth posture, but without the ramifications of inflationary consequences.”

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Meanwhile, top hedge fund and asset managers chimed in with support.

Bessent, who cannot be nominated or approved by the Senate until Trump takes office on January 20, will be tasked with working through Trump’s tariff plans, even as the Federal Reserve has just this year started to tame inflation. Meanwhile, he will probably be seeking to make deficit cuts, as Trump’s administration and a Republican-led Congress are likely to try and maintain tax cuts currently scheduled to sunset in 2025.

3-3-3

Bessent, for his part, has proposed a “3-3-3” plan: cutting the deficit to 3% of the GDP by 2028, achieving 3% GDP growth and increasing oil output to 3 million barrels per day. Bessent sees that GDP growth as being driven by deregulation and tax cuts.

“Scott will support my policies that will drive U.S. competitiveness, and stop unfair trade imbalances, work to create an economy that places growth at the forefront, especially through our coming world energy dominance,” Trump posted on social media on November 22 in announcing Bessent as his presumptive nominee.

In an earlier interview with CNBC on November 6, Bessent said getting energy prices down and deregulation would both be disinflationary; lowering inflation would be a key part of Bessent’s 3-3-3 plan.

“These policies blend fiscal conservatism with growth-oriented measures,” says Drayton D’Silva, CEO and CIO of Tower Hills Capital. “Institutional investors must monitor how spending cuts or tax changes impact their investments in sectors like healthcare and infrastructure that rely heavily on government funding.”

Tariffs and Trade

The incoming administration has been clear about its intent to use tariffs, primarily to draw concessions from some of the U.S.’s largest trade partners. On Monday, Trump proposed a 25% tariff on products coming in from Mexico and Canada, a tariff that would remain in effect until those countries no longer allow “drugs, in particular fentanyl, and all illegal aliens” into the U.S.

Trump also proposed an additional 10% tariff on all products from China. The S&P 500 and other indices sold off shortly after Trump’s comments but recovered in Tuesday’s pre-market. Investors and analysts have noted that Trump’s threat of tariffs is a negotiation tool to gain concessions from other countries. In the past, Trump had proposed a 60% tariff on China and a 10% global tariff.

In a September press briefing, Meghan Robson, head of U.S. credit strategy at BNP Paribas, said that investors and clients note that Trump sees stock market performance as a barometer for success and would likely implement less “extreme” policies if markets did not approve of tariff policy; the bank had modeled, in a “worse-case scenario,” a 4% increase in inflation within a one-year period of a 10% global tariff and a 60% China tariff being implemented.

Bessent has said he believes tariffs can be used in a way that will mute their impact on inflation. In a recent CNBC interview, Bessent said he would like to see tariffs implemented gradually, noting that “the price adjustment would be over a period of time” and that a gradual tariff implemented with other disinflationary policies would keep inflation below the 2% target.

“Bessent’s nuanced use of tariffs as negotiating tools will reshape global trade relationships,” D’Silva says. “His advocacy for a ‘fair-trade bloc’ among allies will create opportunities for investors in these allies’ economies such as Japan, Australia and India, while increasing risks for emerging markets reliant on U.S. exports and for countries with lopsided trade flows or non-reciprocal trade agreements, because the U.S. wants to rebalance global trade relationships in its favor.”

What Bessent’s Appointment Means for Allocators

For asset owners, D’Silva says the key strategic allocation under Bessent should be increased exposure to U.S.-focused investments, while hedging against risks from global trade disputes and currency volatility.

“Scott Bessent’s appointment has reassured markets that fiscal discipline and pragmatic policymaking will prevail,” he says. “The rally in U.S. Treasurys following his nomination underscores investor confidence in his ability to manage deficits responsibly.”

Meanwhile, D’Silva notes that the combination of trade agreements—the carrot—and targeted tariffs—the stick—will create opportunities for sectors including manufacturing, energy and technology, while accelerating re-shoring and near-shoring trends in supply chains.

“Asset allocators should prepare for significant shifts in trade flows, particularly involving China,” he says.

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Tags: Drayton D’Silva, Quincy Krosby, Scott Bessent, Secretary of the Treasury

Former Western Asset Management Co. LLC Stephen Kenneth Leech has been charged in a $600 million fraud case for allegedly profiting from the allocation of favorable trades to certain clients at the cost of other clients.
The charges were levied by the Securities and Exchange Commission in U.S. District Court for the Southern District of New York on Monday. If convicted, Leech faces a maximum sentence of 20 years in prison, along with the permanent ban from the industry.

The move comes after the SEC said earlier this year it was initiating a probe of the potential scheme, known as cherry-picking, leading to Leech taking a leave of absence in August, with Michael Buchanan taking over as CIO.

WAMCO, owned by Franklin Templeton, is a fixed-income manager overseeing over $381.1 billion in client assets.

The SEC’s complaint alleges that from at least January 2021 through October 2023, Leech placed trades with brokers and then waited to allocate the trades among client portfolios. According to the charges, that delay allowed him to observe price movements and allocate wins to some client portfolios, also profiting himself, and losses to other clients.

The gains to favored clients amounted to some $600 million, with that same amount going to disfavored clients, according to the claims.

“The scale and duration of Leech’s allegedly fraudulent conduct amounts to a shocking betrayal of his fiduciary obligations to his clients, who paid dearly for his transgressions,” Sanjay Wadhwa, the acting director of the SEC’s Division of Enforcement, said in a statement. “Investment advisers are at all times obliged to perform their functions, including trade allocations, in a manner that puts their clients’ interests first. As alleged, Leech abdicated that all-important duty for years.”

According to the U.S. attorney general’s office, the cherry-picking harmed institutional and retail investors who “trusted Leech to manage their savings and pension plans.”

Multiple pension funds, including the Illinois Municipal Retirement Fund ($56.4 billion AUM), the Chicago Teachers’ Pension Fund ($12.5 billion), the Kern County (California) Employees’ Retirement Association ($5.93 billion), and the Employees’ Retirement Fund of the City of Dallas ($3.7 billion) had already terminated WAMCO as a manager.

As CIO, Leech was acting as a fiduciary for any investors in WAMCO’s Macro Opportunities fund and its Core and Core Plus funds, according to the attorney general. Despite that duty, he allegedly engaged in a scheme to bolster the Macro Opportunities fund at the expense of the Core funds.

“This was contrary to WAMCO’s compliance trainings, which emphasized that LEECH should allocate trades promptly, and against WAMCO’s policies, which prohibited allocating trades on the basis of first-day performance to make up for losses,” the attorney general’s office wrote.

The office also alleged that neither Leech nor WAMCO disclosed to clients the nature of the trading or that there was favoritism of the Macro Opportunities strategy.

“In all, between 2021 and October 2023, the U.S. Treasury futures and options trades LEECH allocated specifically to Macro Opps had net first-day gains of over $600 million,” the office stated. “By contrast, the U.S. Treasury futures and options trades LEECH allocated specifically to the Core Strategies had net first-day losses of over $600 million.”

An attorney representing Leech has disputed the charges in a statement and said Leech will defend himself in the case.

“Ken Leech has an unblemished record over nearly 50 years as a trader and portfolio manager,” Jonathan Sack, of Morvillo Abramowitz, said in a statement. “These unfounded allegations ignore key facts, including the fundamental differences between distinct fixed-income strategies and the irrelevance of first-day performance to managing these strategies. Mr. Leech received no benefit from the alleged misconduct.”

The investigation has seen clients pulls tens of billions of dollars from WAMCO bond funds, according to data from Bloomberg LP.

Parent company Franklin Templeton did not immediately respond to a request for comment.

The U.S. attorney’s office charged Leech with securities fraud, investment adviser fraud, commodity trading adviser fraud, commodities fraud and making false statements.

Tags: Asset Management, Ken Leech, SEC Charges, WAMCO, Western Asset Management Co.