May 7 (Bloomberg) -- Legg Mason Inc. wrote down the value of Private Capital Management LP by $151 million after poor returns and investor outflows cut assets in half since 2004 at the money- management unit run by Bruce Sherman.

The write-off contributed to Legg Mason's fiscal fourth- quarter loss of $255 million, the Baltimore-based company said yesterday. It was the first quarterly deficit in 25 years as a public company, and Legg Mason fell 10 percent, the most in 19 months, in New York trading.

Legg Mason acquired Sherman's firm in 2001, agreeing to pay as much as $1.38 billion to add $8 billion in assets managed for wealthy investors. Assets overseen by the Naples, Florida-based division rose almost fourfold to $31 billion by 2004, before falling in the past three years on bets on newspaper companies and Bear Stearns Cos. Private Capital managed $15.7 billion at the end of 2007, according to Morningstar Inc.

``They've been continuously beaten up for some time,'' Andrew Richards, an analyst with Chicago-based Morningstar, said in an interview.

Richards said Private Capital was part of a ``trio of underperformance'' at Legg Mason that also includes Bill Miller's Value Trust and Clearbridge Advisors, the fund unit acquired from Citigroup Inc. in 2005. Miller's $12.2 billion Value Trust fell 20 percent in the first quarter.

Sherman didn't return phone calls seeking comment.

Knight Ridder

Private Capital returned an annual average of 14 percent to investors in the decade through March 31, according to data compiled by Morningstar. In the past three years, that plunged to an average 0.43 percent.

Sherman held 5.5 million shares in Bear Stearns, then the fifth-largest U.S. investment bank, as of Dec. 31, a stake worth $485.4 million. The same number of shares today is valued at $59.1 million, an 88 percent drop. Bear Stearns agreed to be taken over in March by JPMorgan Chase & Co., the third-biggest U.S. bank, in an emergency deal brokered by the U.S. Federal Reserve.

Sherman made a $3.5 billion investment in Knight Ridder Inc. beginning in 2000, when the company traded at an average of $51.68. He pressured Miami-based Knight Ridder to sell itself in 2006, when it fetched $40 a share from Sacramento, California- based McClatchy Co.

He sold off newspaper investments including New York Times Co., Belo Corp. and Journal Register Co. by the end 2007 after they fell in price.

Remaining True

A graduate of the University of Rhode Island, Sherman founded PCM in 1986 with Miles Collier.

His $763 million North American Value Fund, registered in Luxembourg, has declined 16 percent this year, while the Standard & Poor's 500 Index has fallen 2.8 percent. The fund invests in companies Sherman believes are undervalued when measured against current profits or revenue.

``Bruce Sherman and his team have remained true to their process, and we believe that this will ultimately serve their clients well,'' Legg Mason spokeswoman Mary Athridge said in an e-mailed statement.

Legg Mason paid $682 million for Private Capital and agreed to make two additional payments totaling as much as $700 million based on the firm's growth in assets after three and five years. Athridge would not say how much Legg Mason has paid.

Legg Mason fell $6.46 to $56.30 in New York Stock Exchange composite trading yesterday. It has dropped 23 percent this year, while the 15-company Standard & Poor's Supercomposite Asset Management & Custody Banks Index has declined 7.3 percent.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

Last Updated: May 7, 2008 00:42 EDT