Legg Mason Inc. (LM:US), the money manager with 19 straight quarters of redemptions, had its first quarterly loss since the start of 2009 because of costs to restructure debt.
Legg Mason posted a net loss of $9.5 million, or 7 cents per share, in the three months ended June 30, compared with a profit of $60 million, or 40 cents, a year earlier, the Baltimore-based firm said today. Results missed the average estimate of 14 analysts surveyed by Bloomberg for a profit of 3 cents a share.
Chief Executive Officer Mark Fetting has eliminated jobs and restructured debt to cut costs and boost profit as slumping markets and client withdrawals have cut fee-earning assets. While long-term redemptions slowed to the weakest pace in five years amid deposits into bond funds, clients continued to pull money from higher-fee stock funds, pushing investment advisory fees down 11 percent.
“The main disappointment was the lower fee rate,” Macrae Sykes, an analyst at Gabelli & Co. in Rye, New York, said in an interview. “Since they earn the most on equity assets, to the extent that their mix moves away from a higher percentage of equity, the average fee rate realized on assets will decline.”
Legg Mason fell 1.1 percent to close at $24.86 in New York. The stock (LM:US) has increased 3.4 percent this year, compared with a gain of 7.6 percent for the Standard & Poor’s 20-member index of custody banks and asset managers.
Legg Mason’s revenue dropped 12 percent to $630.7 million, as advisory fees and performance fees for beating benchmarks fell from a year earlier. Performance fees declined 54 percent to $8.6 million compared with a year earlier. Assets fell 4.6 percent from a year earlier to $631.8 billion.
Stock assets, which generally earn higher fees than bond funds, decreased 17 percent to $151.1 billion in the past 12 months. Bond assets, managed mostly by Western Asset, declined 1.3 percent to $360.6 billion and money funds increased 3.9 percent to $120.1 billion.
Earnings in the quarter were reduced by 43 cents per share on costs to refinance debt and expenses tied to opening two new investment vehicles. The firm last reported a net loss, of $325 million, in the three months ended March 31, 2009, because of costs to eliminate mortgage-linked debt investments from money funds.
“It’s a quarter of real progress,” Fetting said in an interview today on Bloomberg Television’s “Market Makers.” “The accounting charges are really a function of success on restructuring our debt, which was largely a non-cash charge, and two, we had two very successful closed-end fund raises.”
Legg Mason’s long-term withdrawals fell to the lowest level in five years as the firm added new products and performance at certain funds improved, Fetting said today on a conference call with analysts and investors.
Client withdrawals declined 47 percent from the previous quarter, when investors pulled $4.9 billion. Stock funds had withdrawals of $3.9 billion, while bond funds had deposits of $100 million during the quarter. Investors deposited $1.2 billion into Legg Mason’s money funds.
Legg Mason’s board members include activist investor Nelson Peltz, who took a stake in the firm in 2009. Peltz said last year that he expected Western Asset to lead the firm’s turnaround. The $9.7 billion Western Asset Core Plus Bond Fund has returned 6.4 percent this year, beating 91 percent of competing fixed-income funds, according to data compiled by Bloomberg.
Investors deposited $117.5 billion into taxable bond funds while pulling $42.6 billion from U.S.-registered domestic equity funds industrywide in the first half of this year, according to data compiled by Morningstar Inc. (MORN:US) in Chicago.
Fetting completed a plan in the quarter ended March 31 designed to save $130 million to $150 million a year through a combination of job cuts and moving certain technology functions to investment units. Legg Mason said last month that earnings would be affected by $23 million in expenses tied to two new investment vehicles and by about $69 million from repurchasing convertible senior notes from private-equity firm KKR & Co.
Money managers such as Legg Mason, which earn fees based on the assets that they manage for clients, traditionally benefit from rising stock markets and investor deposits into higher-fee active stock and bond funds. The MSCI ACWI Index (MXWD) of global stocks fell 6.4 percent in the second quarter and the U.S. benchmark S&P 500 Index declined 3.3 percent.
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