Oct. 26 (Bloomberg) -- Legg Mason Inc., the Baltimore-based fund manager that’s had eight straight quarters of investor withdrawals, said billionaire Nelson Peltz was named a director after he doubled his stake in the company.

Peltz, an activist investor who played a role in Cadbury Plc’s spinoff of Dr Pepper Snapple Group Inc. last year, held about 4.3 percent of Legg Mason in his New-York based Trian hedge funds, Legg Mason said today in a statement. That’s up from 2.1 percent at the end of June, according to regulatory filings with the U.S. Securities and Exchange Commission.

“It certainly brings a kind of soft pressure on management,” Doug Sipkin, an analyst with Pali Capital Inc. in New York, said in an interview. “If you’re an investor, it’s good to know there’s someone on the board with a history of trying to extract value.”

Peltz, 67, is known for pushing companies to increase their value by cutting costs or merging with rivals. He pressed for changes at fast-food chain Wendy’s International Inc., which Arby’s bought to form Wendy’s/Arby’s Group Inc., and at H.J. Heinz Co., the world’s biggest ketchup maker. His net worth is estimated at $1.1 billion by Forbes magazine.

Peltz’s addition to the board implies some “hidden value” in the company and “adds uncertainty to management and the future of LM’s affiliates,” Pali’s Sipkin said today in a note to clients. “We can’t imagine that management is completely comfortable bringing an activist investor to the board.”

Fund Withdrawals

Legg Mason fell 18 cents, or 0.6 percent, to $31.72 at 4:01 p.m. in New York Stock Exchange composite trading. The shares have almost tripled since touching their March low.

Investors have pulled money out of Legg Mason’s stock and bond funds since 2007, as returns from funds including those managed by Bill Miller’s Legg Mason Capital Management unit and the Western Asset Management bond division lagged behind peers. Fund performance improved this year, with more than 81 percent of Legg Mason’s fund assets beating rivals over a 10-year period, the firm said, citing research-company Lipper.

The firm last week reported third-quarter net income of $45.8 million, the second straight quarterly profit, as investor outflows abated and the market rally boosted assets. Clients withdrew $8 billion during the quarter, down from $30 billion during the previous three months. Assets rose 7 percent in the quarter to $703 billion, boosted by the market rally that sent the Standard & Poor’s 500 Index up 15 percent.

Welcoming Peltz

“We welcome Nelson, whose firm is a significant investor in Legg Mason,” said Legg Mason Chief Executive Officer Mark Fetting. “We look forward to benefiting from his insights and experiences as we work together.”

The appointment of Peltz brings the number of directors on Legg Mason’s board to 14. Peltz agreed not to raise his stake above 9.9 percent during the “standstill period” that could extend up to 2012, and to refrain from “certain other specified actions” after joining the board, Legg Mason said today in a filing. Peltz’s firm will vote in favor of the candidates recommended by the company’s board and will not solicit proxies from other shareholders, according to the agreement.

Legg Mason reported its first quarterly profit since December 2007 in the three months ended June 30, after curtailing losses related to its money-market funds.

To contact the reporters on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net. Christopher Condon in Boston at ccondon4@bloomberg.net

Last Updated: October 26, 2009 16:18 EDT