Bloomberg News

Legg Mason Profit Falls 25% as Assets Decline With Market

October 27, 2011

(Updates with closing share price in fifth paragraph.)

Oct. 27 (Bloomberg) -- Legg Mason Inc., the Baltimore-based money manager with 16 straight quarters of redemptions, said fiscal second-quarter profit fell 25 percent as assets declined in its stock and bond funds.

Net income dropped to $56.7 million, or 39 cents a share, in the three months ended Sept. 30, from $75.3 million, or 50 cents, a year earlier, the firm said today in a statement. Assets shrank 7.7 percent to $611.8 billion in the quarter as investors removed a net $17.6 billion and market losses erased $32.9 billion.

Chief Executive Officer Mark Fetting has cut jobs to increase profitability and improved performance at fund units to end redemptions that started after returns trailed peers in 2007 and 2008. Market swings and concern the economy is slowing prompted investors to move to the “sidelines” during the quarter, Fetting said in today’s statement. Withdrawals increased almost fivefold from $3.7 billion during the prior quarter as investors removed $8.8 billion from bonds, $5.7 billion from stocks and $3.1 billion from money funds.

“They’ve made progress, but the broader macro environment isn’t good,” Jeffrey Hopson, an analyst in St. Louis with Stifel, Nicolaus & Co., said in an interview before the results were announced. “In a better environment, they would have shown greater signs of progress.”

Shares Rise

Legg Mason rose 7.5 percent to close at $29 in New York trading as equities surged worldwide after European leaders agreed to extend a bailout fund to stem the region’s debt crisis. The company’s stock has lost 20 percent this year, compared with the 16 percent loss of the Standard & Poor’s index of asset managers and custody banks.

The MSCI AC Index of global stocks has declined 3.7 percent this year, while the Standard & Poor’s 500 Index has gained 2.1 percent. Investors have pulled about $75 billion from U.S.- registered equity funds this year, while depositing $91 billion into bond funds, according to the Investment Company Institute, a Washington-based trade association.

Assets at Legg Mason’s stock funds, which earn higher fees, plunged 20 percent in the quarter to $144.9 billion, while bond fund assets fell 2.7 percent to $355.5 billion.

Revenue declined 0.7 percent from a year earlier to $670 million, and expenses fell 4 percent to $563 million as Legg Mason implemented some of its cost-cutting measures.

Fixed-Income Redemptions

Bond and money funds run mostly by Western Asset accounted for 76 percent of Legg Mason’s assets as of Sept. 30. After lagging behind peers during the credit crisis triggered by the real estate slump, Western Asset’s performance has improved because of changes in the firm’s risk controls.

Legg Mason’s biggest shareholder, Nelson Peltz, said in an interview last week that the Western Asset Management bond unit will “lead the way” for a turnaround after fund performance rebounded.

On the fixed-income side, redemptions were driven mainly by clients reallocating their mix of stocks and bonds and investors moving to passive bond products, Fetting said today in a conference call. Western Asset is also seeing redemptions of about $1 billion a month from what it describes as a low-fee global sovereign assignment.

“Rebalancing is what you see in severe market moments where institutional clients by policy requirement have to rebalance into equities,” Fetting said. “We saw that most clearly in September and it’s eased up.”

Western’s Rebound

The $8.7 billion Western Asset Core Plus Bond Portfolio, the mutual-fund version of the firm’s biggest strategy, advanced an annual average of 15 percent in the three years ended Oct. 26, beating 99 percent of competing fixed-income funds, according to data compiled by Bloomberg.

Legg Mason’s other affiliates include Royce & Associates, which focuses on small-company stocks, and Legg Mason Capital Management, the value-oriented stock unit led by Bill Miller.

Miller’s $2.8 billion Legg Mason Capital Management Value Trust, best known for outperforming the Standard & Poor’s 500 Index for a record 15 consecutive years through 2005, has since trailed the index in four out of five years. The fund declined 4.9 percent this year through Oct. 26, trailing 58 percent of its peers, Bloomberg data show.

--Editors: Christian Baumgaertel, Steven Crabill

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at

To contact the editor responsible for this story: Christian Baumgaertel at

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