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Investors fell for Legg Mason's past glory

Posted by: Aaron Pressman on October 11, 2006

Last night’s pre-announced earnings miss by Baltimore-based asset manager Legg Mason (Symbol: LM) has knocked the stock down 17% today and almost 40% from its all-time peak of $140 just 8 months ago. Back then, investors were euphoric about Legg’s $4 billion deal to takeover Citicorp’s iffy money management business. After all, who better to turn around the over $400 billion mess at Citi than Chip Mason, Legg’s longtime CEO and the architect of some of the fund industry’s most successful acquisitions, including Western Asset Management, Royce & Associates and Private Capital Management.

But investors missed the big picture by ignoring just how Mason had turned those deals into successes. The prior acquisitions were all small to medium success stories that Mason built on with improved distribution and sales efforts. The Citi deal departed from those deals in two critical ways. First, Mason swapped his 1,400 strong brokerage force to Citi, thus ceding a powerful sales boost. And, no one could call Citi’s money management record anything better than mixed. Much of the money was in lackluster funds probably dating from the days when brokers got huge hidden incentives to steer money to internal products.

The most recent miss was due to huge outflows from Legg funds, perhaps as much as $8 billion according to Wachovia analyst Douglas Sipkin. Sipkin had to take a hatchet to his earnings per share estimates for the next two years but at least he had rated the stock “market perform.” Guy Moszkowski, Merrill Lynch’s analyst and perhaps the most influential person covering the industry, had to cut his rating on the stock to “sell” from “buy.” Oops.

It can’t be helping matters that Mason’s main man, fund manager Bill Miller, is having an awful year. The Legg Mason Value Trust Fund (LMVTX) Miller oversees is trailing the S%P 500 by about 10 percentage points. Obviously, Miller’s 15-year streak of beating the S&P is in big trouble.

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