Oct. 29 (Bloomberg) -- Legg Mason Inc., burdened for a year with subpar returns and the cost of bailing out money funds, rose 30 percent in New York trading after reporting quarterly profit that exceeded analysts' estimates.

Profit in the fiscal second-quarter was 97 cents a share excluding certain costs, the Baltimore-based money manager said in a statement today. Legg Mason beat the 86-cent average of five analysts who issued comparable estimates. Assets declined by 8.8 percent in the quarter, less than at rivals such as BlackRock Inc. and AllianceBernstein Holding LP.

``It isn't the bottom yet, but at least you can see the bottom from here,'' Alan Rambaldini, an analyst at Morningstar Inc. in Chicago, said in an interview today. ``Assets weren't down so much and it doesn't seem like outflows are accelerating.''

Legg Mason rose $3.94 to $16.92 at 4:02 p.m. in New York Stock Exchange composite trading. Earlier, the stock surged as much as 45 percent, the most since it went public 25 years ago. Even with today's gain, Legg Mason has dropped 77 percent this year, more than any publicly traded U.S. asset manager.

Legg Mason's assets declined to $841.9 billion from $922.8 billion on June 30, including $60.9 billion from market depreciation. The drop was less than the 12 percent falloff at BlackRock and the 18 percent reduction in assets at AllianceBernstein.

Lower Redemptions

Customers pulled $21 billion from Legg Mason's stock and bond funds, $1 billion less than in the previous three months. Other fund companies have reported higher redemptions in the quarter. Across the industry, shareholders pulled a record $72 billion from equity and fixed-income funds in September, according to TrimTabs Investment Research in Sausalito, California.

Customers also deposited $1 billion into Legg Mason's money-market funds from July through September.

Hedge-fund unit Permal Group also had net inflows, though Legg Mason didn't disclose the amount. Permal, which manages $35 billion, has opened a fund that will buy hedge-fund interests from distressed investors who want to liquidate their positions, Legg Mason said.

Legg Mason had a net loss of $103.8 million, or 74 cents a share, in the quarter ended Sept. 30, compared with a profit of $177.5 million, or $1.23, a year earlier. It was the company's third consecutive quarterly loss.

Money Fund Support

Legg Mason has been forced to provide $2.78 billion in financing to its money-market funds since November to insulate clients from losses on mortgage-linked securities issued by structured investment vehicles, or SIVs. In the quarter, costs to support money-market funds cut earnings by $1.35 a share.

The company reduced its investment in debt issued by SIVs by $1 billion over the past quarter to $4.4 billion, Chief Executive Officer Mark Fetting said. Legg Mason has supported $4 billion of that debt, while the remaining $400 million is backed by banks and will mature in 30 days, Fetting said.

Fees for managing mutual funds fell 8.4 percent in the quarter as stock and bond managers including Bill Miller lost money in a declining market. The Standard & Poor's 500 Index fell 8.9 percent from July through September and the MSCI AC World Index of developed- and emerging-markets companies declined 17 percent.

Revenue, mostly linked to the level of assets managed, fell 18 percent from a year earlier to $966 million. Operating expenses dropped 17 percent to $745.9 million as the largest item -- compensation and benefits -- declined by 25 percent.

Cost-Cutting Options

Fetting said in an interview that the company has ``identified significant cost savings'' that could reduce expenses by as much as 20 percent by cutting technology and advertising spending and possibly jobs.

``Regrettably, all of the above are options,'' he said. ``There won't be an across-the-board headcount cut.'' Fetting declined to elaborate.

Janus Capital Group Inc. and AllianceBernstein said they plan to fire employees to reduce costs.

In May, Legg Mason reported its first quarterly net loss since going public in 1983 as the value of its SIV holdings tumbled. The company inherited the money-market funds in December 2005, when it completed the swap of its stock brokerage for New York-based Citigroup Inc.'s fund unit.

A worldwide stock-market selloff has wiped out $29 trillion in value in the past year, sending investors fleeing from stock and bond funds.

Value Trust

Miller's Legg Mason Value Trust, famed for beating the Standard & Poor's 500 Index for a record 15 years, has trailed the benchmark index since 2006. This year the fund is down 52 percent, compared with the S&P 500's decline of 37 percent.

Miller is reviewing his investment style and considering changes without losing his ``contrarian'' approach, Fetting said. Miller might include more stocks represented in market indexes and focus less on how cheap stocks are compared to financial yardsticks such as earnings.

Any strategy changes won't be sweeping because his fund will benefit when value stocks start doing better than momentum stocks, Fetting said. Momentum stocks are those that have had high returns and are expected to continue making gains.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: October 29, 2008 16:17 EDT