Bloomberg News

Legg Mason’s Worst Loss Since 2008 Shows CEO’s Challenges

February 02, 2013

As Legg Mason Inc. (LM:US) gets ready to conclude a four-month search for a new chief executive officer, the challenges for the firm’s third leader in six years are only growing bigger.

The money manager yesterday announced its worst quarter (LM:US) since 2008, as five years of redemptions and shrinking assets forced the Baltimore-based firm to write down the value of some units. Client withdrawals accelerated in the last three months of 2012 and aren’t showing signs of abating even as rivals such as BlackRock Inc. (BLK:US)said (BLK:US) they’re seeing higher sales in January. The shares have slumped 80 percent from a 2006 peak and investment affiliates are pushing for greater control over fund sales.

“The pool of potential CEOs who can turn around and guide an institution like that is very, very limited,” said Michael Aronstein, co-founder of New York-based Marketfield Asset Management, which manages about $6 billion. “It’s not like running a consumer goods company where there’s a certain template.”

Attracting talent amid these setbacks won’t be easy for the firm, which hasn’t been led by an outsider since Raymond A. “Chip” Mason merged his company in 1970 with a regional brokerage to form Legg Mason. Mason was succeeded by Mark Fetting, who previously headed Legg Mason’s mutual fund and managed-accounts businesses, when he stepped down in 2008. Fetting announced his departure in September amid pressure from investor Nelson Peltz, after failing to reverse redemptions and revive the stock, which hit a record $136.40 in 2006.

Sullivan Considered

Joseph A. Sullivan, who was named interim CEO in October, is the only internal candidate among four people being considered for the role, according to a person familiar with the matter who asked not to be identified because the information isn’t public. A decision may be made in coming weeks, the person said. Sullivan said yesterday in a call discussing (LM:US) Legg Mason’s earnings that the firm is “nearing the completion” of its search, and that an announcement is expected soon.

Maria Rosati, a spokeswoman for Legg Mason, declined to comment.

“Anybody who comes on board can be putting their reputation and career on the line,” said Adam Shavulsky, a partner who heads the financial-services practice at executive search firm Canny, Bowen Inc. in New York. “Most CEOs and C- suite professionals are averse to boarding a sinking ship and the risks just might be too high for some of the best people out there.”

Legg Mason yesterday reported a loss of $453.9 million (LM:US), or $3.45 a share, in the three months ended Dec. 31, the biggest quarterly shortfall since it posted a $1.5 billion loss at the end of 2008. Earnings were hurt as redemptions and declining assets forced Legg Mason to write down assets tied to the 2005 takeover of Citigroup Inc.’s asset-management business and to the firm’s Permal hedge-fund unit.

Assets Fall

Legg Mason has seen assets fall from a peak of $1 trillion in 2007 to $649 billion at the end of December because of market losses and investor redemptions. Starting with the fourth quarter of 2007, the firm has had withdrawals in 20 of the last 21 quarters, most recently suffering redemptions of $7.5 billion in the quarter ended Dec. 31.

Unlike its competitors such as BlackRock and T. Rowe Price Group Inc. (TROW:US), Legg Mason hasn’t yet benefited from investors returning to stocks this year. U.S. stock mutual funds have attracted net investor deposits for three consecutive weeks, adding to evidence a rally in stock markets is prompting individuals to return to the asset class. Sullivan called January a “mixed month” on the earnings call yesterday with analysts and investors, and said a couple of institutional clients had pulled about $1 billion from global equity mandates.

BlackRock’s ETFs

In contrast, BlackRock CEO Laurence D. Fink said there will be more movement into equities and it’s started to show as clients pour money into the firm’s iShares equity exchange- traded funds. At T. Rowe Price, CEO James Kennedy said people moved back into equities in January.

Legg Mason is also struggling with some of the multiple investment units it owns. Its affiliates, such as Western Asset Management Co. and equity managers such as ClearBridge Investments and Royce & Associates, operate independently and have separate revenue-sharing agreements.

Western Asset, the bond manager that is Legg Mason’s biggest investment unit, is seeking more control of its fund sales by trying to negotiate a move away from the centralized distribution model in which sales of retail products go through Legg Mason, a person familiar with the matter said in November.

Western Rebranding

In May, Western said it was removing the Legg Mason name from its U.S. mutual funds as part of a rebranding to increase sales to individual investors. ClearBridge, which is Legg Mason’s largest stock-fund affiliate, said in October it was dropping the Legg Mason name from its mutual funds as part of a push to make its brand better known. In January, Legg Mason said it was folding Miller’s Legg Mason Capital Management division into ClearBridge as assets tumbled.

During the fourth quarter, Legg Mason completed restructuring agreements with its hedge-fund unit Permal, which include a management equity plan, a revised revenue share agreement and new multi-year employment contracts with key Permal employees. Sullivan said on yesterday’s call the equity plan was a good framework for creating stronger alignments with other affiliates.

“We believe it will be an important part of succession planning as both the current management team and the next generation of affiliate leaders, will have longer-term financial incentives to create and preserve value,” Sullivan said.

To contact the reporter on this story: Alexis Leondis in New York at aleondis@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • LM
    (Legg Mason Inc)
    • $50.3 USD
    • 0.32
    • 0.64%
  • BLK
    (BlackRock Inc)
    • $319.88 USD
    • 1.26
    • 0.39%
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