Legg Mason's Net Income Rises 64% as Market Rally Lifts Assets

Legg Mason Inc.’s fiscal second- quarter earnings rose 64 percent on an increase in fee revenue even as clients withdrew money for the 12th straight quarter.

Net income in the three months ended Sept. 30 climbed to $75.3 million, or 50 cents a share, from $45.8 million, or 30 cents, a year earlier, the Baltimore-based company said today. Revenue rose 2.3 percent to $674.8 million.

Clients pulled $12.7 billion from fixed-income, equity and money-market funds, extending a streak of withdrawals that began in late 2007 as the performance of the firm’s stock and bond funds faltered. Withdrawals have abated from a peak of $77 billion in the final quarter of 2008 as returns have rebounded. Chief Executive Officer Mark Fetting is buying back shares and cutting costs to boost shareholder returns.

“They did well from an operating standpoint,” Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said in an interview. “The flows were a bit disappointing, and it looks like some outflows will persist for a few more quarters.”

Legg Mason fell 52 cents, or 1.7 percent, to $30.58 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have advanced 1.4 percent this year, while the Standard & Poor’s asset manager and custody bank index is little changed.

The increase in revenue was helped by a 2.9 percent gain in fees for managing funds and a doubling of fees earned for beating return benchmarks. Earnings included a U.K. tax benefit, which increased profit by $8.9 million, or 6 cents a share.

Assets Decline

Excluding certain one-time items, analysts had expected earnings of 39 cents a share, according to the average of 17 estimates in a Bloomberg survey.

Assets at Legg Mason were $673.5 billion in the three months ended Sept. 30, down 4.2 percent from a year earlier. Legg Mason’s bond funds accounted for about 55 percent of the firm’s assets under management. Equity funds made up about 25 percent, and money funds represented the rest.

Investors pulled $8 billion from Legg Mason’s bond funds during the quarter, $4.4 billion from stock funds and $300 million from money funds. Market appreciation added $40.8 billion to assets.

Western Unit

The withdrawals from Legg Mason’s Western Asset Management unit were mainly from one global sovereign strategy and one assignment that the firm worked on as a sub-adviser, Fetting said today in a conference call with investors. Investors put money into bond mutual funds, which earn higher fees than institutional accounts, he said.

“The story of Western’s progress is not measured by flows alone,” Fetting said.

One the stock-fund side, the investors pulled money from the ClearBridge Advisors unit and Legg Mason Capital Management, the unit run by fund manager Bill Miller, according to Fetting. The firm’s Royce & Associates, which specializes in small- company stocks, had withdrawals in the quarter after drawing money earlier in the year, as some investors removed money from small-cap equities.

Board members at Legg Mason include activist investor Nelson Peltz and Scott Nuttall from private-equity firm Kohlberg, Kravis, Roberts & Co. Legg Mason on May 10 said 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.

Legg Mason increased its quarterly dividend to 6 cents a share from 4 cents. Legg Mason had cut its dividend last year from 24 cents as it dealt with losses.

Bill Miller

Miller is the stock-fund manager best known for guiding his Legg Mason Capital Management Value Trust to better returns than the Standard & Poor’s 500 Index for 15 straight years, a record that ended in 2006. Miller’s fund, which fell 55 percent in 2008, rose 41 percent last year. It has advanced 2.9 percent this year, compared with the 8 percent gain in the S&P 500 Index. Miller’s Opportunity Trust fund has advanced 10 percent this year, beating 75 percent of rival funds, according to data compiled by Bloomberg.

Western Asset Core Bond Portfolio run by Legg Mason’s bond unit has advanced 13 percent this year, beating 95 percent of peers, according to Bloomberg data. The fund had declined 12 percent in 2008.

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

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

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net.

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