Now that its chairman and chief executive, Mark Fetting, is on the way out, Legg Mason Inc. is headed for a shake-up that could result in the sale of one or more of its affiliates.
Legg Mason, which operates as a public holding company for nine asset managers and has a total of $636 billion in assets under management, said last week that Mr. Fetting will step down Oct. 1 — ending his futile efforts to stop massive mutual fund redemptions due to lackluster investment returns.
Among the firm's better-known affiliates are ClearBridge Advisors, Legg Mason Capital Management, Royce & Associates LLC and Western Asset Management Co.
In recent years, Mr. Fetting has been under pressure from activist investor Nelson Peltz to orchestrate a turnaround. On Nov. 30, Mr. Peltz's firm, Trian Fund Management LP, will be free to boost its 10.5% stake in Legg Mason, thereby increasing his ability to force big changes.
So far, Mr. Peltz, who is a founding partner of Trian and joined Legg Mason's board in 2009, has been mum about his intentions, but some observers believe that a sale or spinoff of one or more of Legg Mason's affiliates is likely.
“If you were going to do something or consider your options, now would be a logical time to do it,” said Jeffrey Hopson, an analyst at Stifel Nicolaus & Co. Inc.
Selling one or more affiliates to another asset management firm or letting an affiliate buy itself out likely would give the stock a boost, at least in the short term — Mr. Peltz's ultimate goal.
SIGNS OF STRAIN
Anne Tarbell, managing director at Trian, didn't return calls seeking comment.
Legg Mason, for its part, “re-mains committed to the affiliate model,” spokeswoman Mary Athridge said in a statement.
“Our affiliates operate with substantial autonomy in managing their investment pro-cesses and meeting the needs of their clients,” she said. “Neither their investment processes nor their service to clients will be affected by this change in leadership at Legg Mason.”
Although being part of the larger Legg Mason family allows the affiliates to benefit from economies of scale and distribution, the relationship between the parent company and the satellite firms is showing signs of strain.
Western Asset Management, a fixed-income shop that manages $446 billion, is taking steps to distance itself from the parent company. In June, it said that it was dropping the Legg name from its mutual funds, and in July, chief investment officer Steve Walsh said that Western had taken some retail-distribution responsibilities into its own hands.
In doing so, Western is following in the footsteps of small-cap specialist Royce & Associates, which runs the Royce Funds.
A turnaround resulting from a breakup is more likely than one that depends on a new top executive.
“The CEO doesn't have nearly as much impact [at Legg] as he would in a more centralized organization,” said Morningstar Inc. analyst Greggory Warren.
Mr. Fetting learned that the hard way. The core issue of poor mutual fund performance struck Legg years before he took over the top spot from founder Raymond “Chip” Mason.
It stretches as far back as 2006, when stock-picking stalwart Bill Miller's 15-year run of beating the S&P 500 came to an end. The next five years saw his Legg Mason Capital Management Value Trust Fund (LGVAX) lose 7.4% a year as the S&P 500 gained 2.19% annually, according to Morningstar.
Mr. Miller retired in April.
Stock performance woes might not have stung so badly if Legg's bond funds had been able to pick up the slack. After all, most actively managed stock funds have had outflows since the 2008 financial crisis.
Bond funds, on the other hand, doubled their assets to more than $2 trillion during the same period.
Unfortunately, Western couldn't have picked a worse time.
The firm's flagship Western Asset Core Bond Fund (WATFX) began to stumble in 2007, trailing the Barclays Aggregate Bond Index by 500 basis points. In 2008, it trailed the benchmark by a staggering 1,600 basis points.
Western retooled its risk management process in 2009 and has since seen its mutual fund performance rebound dramatically.
But solving the outflow problem will take more than performance.
“What gets people investing is consistency,” said Randy Warren, chief investment officer at Warren Financial Service.
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