Legg Mason Earnings Drop 4.2% as Declining Assets Reduce Fees From Funds

Legg Mason Inc. said fiscal first- quarter earnings fell 4.2 percent as declining assets reduced fees at the Baltimore-based money manager.

Net income decreased to $47.9 million, or 30 cents a share, in the period ended June 30, from $50.1 million, or 35 cents, a year earlier, the company said today in a statement. Legg Mason customers pulled $9.4 billion from bonds and $14.4 billion from money funds, while stock funds gathered $700 million, the first quarter of positive flows in more than four years.

Legg Mason, under Chief Executive Officer Mark Fetting, is buying back shares, improving fund performance and cutting jobs after the firm suffered the biggest losses among publicly traded money managers during the credit crisis of 2008. Investor withdrawals and equity-market declines pushed the firm’s assets down 6% from the prior quarter to $645.4 billion.

“Things are gradually turning, but they’re not yet at break-even on the flows,” Jeffrey Hopson, an analyst with Stifel Nicolaus & Co. in St. Louis, said in a telephone interview before the results were announced.

Excluding some items, Hopson expected Legg Mason to earn 34 cents a share, compared with the 31-cent estimate of 15 analysts surveyed by Bloomberg News. Legg Mason reported income excluding certain costs of $96.3 million, or 60 cents a share, while estimates ranged from 22 cents to 37 cents a share. Costs to raise a $1.3 billion closed-end fund reduced earnings during the quarter by 7 cents a share.

Cost Cutting

The company said on May 10 that reducing 350 jobs and moving certain technology functions to its investment affiliates will help save $130 million to $150 million by the end of fiscal 2012. The firm said the measures will add 6 percent to 8 percent to its operating margin, which was 23 percent in the quarter.

Legg Mason had about $82 billion in net withdrawals in the 12 months through March after stock and bond funds, including those managed by Bill Miller and the firm’s Western Asset Management unit, lagged behind peers in 2008. Withdrawals slowed to about $10.9 billion in the quarter ended March 31 from $32.7 billion in the previous three months, as performance rebounded starting last year.

Legg Mason’s bond funds accounted for about 55 percent of the firm’s assets under management as of June 30, according to the company. Equity funds made up about 24 percent, while money funds represented the rest.

Peltz Investment

Cash invested in structured investment vehicles contributed to a streak of five quarterly losses that ended in March 2009, after the firm eliminated the mortgage-linked debt from its money-market funds. Activist investor Nelson Peltz last year raised his stake to become the largest shareholder in the company, and he was named a director in October.

Returns improved in 2009, after being dragged down in 2008 by Miller’s investments in financial companies. Miller’s Capital Management Opportunity Trust fund soared 83 percent in 2009, while his Capital Management Value Trust climbed 41 percent, beating the 26 percent gain in the Standard & Poor’s 500 Index of large U.S. stocks, including dividends. The $1.8 billion Opportunity Trust fell 0.4 percent this year through July 22, while the $4.1 billion Value Trust declined 5.8 percent.

Legg Mason reported results after the close of regular U.S. trading. The company is almost unchanged this year, similar to the S&P 500.

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

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