Legg Mason shares fall most in three months as revenue misses forecast

The money manager has struggled with more than five years of net redemptions

May 1, 2014 @ 12:28 pm

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Legg Mason Inc., the money manager that has struggled with more than five years of net redemptions, fell by the most in three months after revenue missed analysts estimates.

Legg Mason's fiscal fourth-quarter operating revenue of $681.4 million missed the $694.5 million estimate of 11 analysts surveyed by Bloomberg.

Joseph A. Sullivan, who was named chief executive officer of the Baltimore-based firm in 2013, has reorganized businesses to cut costs while vowing to stem withdrawals by improving performance and focusing on the company's product lineup. The firm is struggling to reverse redemptions from its bond unit as investors have turned away from fixed income in anticipation of rising interest rates.

“Legg Mason is a work in progress,” Michael Kim, an analyst with Sandler O'Neill & Partners, said in a telephone interview before results were released. “They are moving in the right direction, but at a measured pace.”

Legg Mason's net income rose to $68.9 million, or 58 cents a share, in the three months ended March 31, compared with $29.2 million, or 23 cents, a year earlier, when profits were reduced by a one-time expense for cutting office space, the firm said Thursday in a statement.

Legg Mason, whose investment affiliates include bond manager Western Asset Management Co. and stock investor ClearBridge Advisors, managed $701.8 billion as of March 31, up 5.6% from a year earlier. Assets rose 3.3% during the quarter as long-term redemptions of $300 million were offset by market appreciation and foreign-exchange movements.

The company's equity business attracted $500 million in deposits during the quarter, and short-term products such as money-market funds drew $8.6 billion. Investors pulled $800 million from fixed-income accounts in the quarter.

On the equity side, ClearBridge Investments attracted $2.2 billion while Royce & Associates, which specializes in small-cap stocks, experienced redemptions. The $6.9 billion Royce Premier Fund trailed 82% of peers over the past five years, according to data compiled by Bloomberg. In 2014 the fund is beating 98% of rivals.

Redemptions from Western Asset were driven by a low-fee global sovereign account, Legg Mason said. Excluding the $1.4 billion withdrawal from that account, the fixed income funds attracted net new business in the quarter, according to the firm.

CLEARBRIDGE PLAN

Mr. Sullivan said Legg Mason entered into a profit-sharing arrangement with ClearBridge, its largest equity unit, which will result in an annual expense of less than $2 million. Legg Mason previously signed a similar agreement with its Permal business, which sells alternative investments, and Mr. Sullivan said on a conference call that comparable deals could be signed with other units.

In March, Mr. Sullivan said 2014 would be a year of growth for the firm as it seeks to add new investment units. Legg Mason that same month agreed to spend as much as $41 million to buy QS Investors, a global quantitative equity firm that split from Deutsche Bank AG in 2010. The ultimate cost of the deal is tied to QS meeting certain revenue targets. QS had $4.1 billion in funds under management and $100 billion in advisory assets, Legg Mason said at the time.

“Our number one priority in terms of acquisitions is to add a manager that specializes in non-U.S. equities,” Mr. Sullivan said in a telephone interview Thursday.

Some of Legg Mason's funds have had strong performance. The $2.1 billion Legg Mason Opportunity Trust, run by Bill Miller, beat 95% of rivals over the past five years, according to data compiled by Bloomberg. The $10.3 billion ClearBridge Aggressive Growth Fund topped 99% of peers and the $10 billion Western Asset Core Plus Bond Fund did better than 92% of similar funds over the same five-year stretch.

Mr. Sullivan has said he wants to fill gaps in global equities, multi-asset offerings and alternative investments such as private equity, real estate and natural resources. Legg Mason hired Wells Fargo & Co.'s Thomas Hoops in January to look for potential acquisitions and develop products.

(Bloomberg News)

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