Legg Mason Declines Most in 10 Months on Bond Unit Expense

Legg Mason Inc. (LM) fell the most in 10 months in New York trading after Chief Executive Officer Mark Fetting said costs tied to its Western Asset Management bond unit will rise by $74 million this fiscal year.

Legg Mason declined 5.3 percent, the most since June 29, after Fetting told analysts on a conference call that Western Asset will keep a larger share of revenue to compensate managers. The unit previously paid a portion of quarterly revenues to its Baltimore-based parent company to cover costs from a bailout of money funds during the financial crisis.

“There is a step up in compensation expense that was unexpected, and the stock is weak on that,” Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said in a telephone interview.

Fetting is trying to reverse 14 straight quarters of withdrawals, which started as investment returns trailed rivals in 2007 and intensified because of losses stemming from the financial crisis. Money funds managed by Western Asset held as much as $10 billion in structured investment vehicles at the onset of the credit crisis, contributing to five straight quarters of losses.

In an interview today, Fetting said withdrawals are reversing, influencing the firm’s decision to reduce the reimbursements from Western Asset over the next year.

“The flows are an improving story,” Fetting said. “The decision is about how we can support Western and complete the turnaround.”

Profit Rises

Investors pulled $8.7 billion from Legg Mason’s stock, bond and money funds, the lowest amount since the third quarter of 2009. Western Asset had $6.7 billion in net redemptions, the stock funds lost $1.3 billion, and money funds saw $700 million in withdrawals in the three months ended March 31. Investors pulled $16.7 billion from Legg Mason in the prior quarter.

“Fund outflows continue to decelerate and the earnings power is accelerating,” Daniel Fannon, a San Francisco-based analyst at Jefferies & Co., wrote in a note to clients today.

Net income increased to $69 million, or 45 cents a share, in the three months ended March 31, from $63.6 million, or 39 cents a share, a year earlier, the Baltimore-based firm said today in a statement. Earnings matched the average estimate of 13 analysts surveyed by Bloomberg.

Legg Mason said savings from job cuts announced last year should help bring earnings in line with analysts’ estimates of between 55 cents and 65 cents a share by the fiscal fourth quarter, which ends March 31, 2012.

Job Cuts

Last year, Legg Mason cut jobs, moved some technology functions to investment units and started to buy back shares as the firm returned to profitability. Legg Mason’s results for the quarter include a $15.7 million cost, or 7 cents a share, related to cutting jobs. The cuts moves will translate into annual savings of $130 million to $150 million by the end of this fiscal year, Fetting said.

Legg Mason declined $1.97 to $35.15 at 4:15 p.m. in New York Stock Exchange composite trading.

The firm, which increased its dividend to 8 cents per share from 6 cents, intends to accelerate share buybacks to $400 million this year, Fetting said on the conference call.

Legg Mason’s board includes activist investor Nelson Peltz, who is the company’s largest shareholder, and Scott Nuttall from New York-based private-equity firm KKR & Co.

Assets under management dropped 1 percent from a year earlier to $678 billion as of March 31, the firm said earlier this month.

Bill Miller

Legg Mason’s bond funds, run by Western Asset in Pasadena, California, accounted for about 53 percent of money under management as of March 31, unchanged from a year ago, according to the company. The portion in equity funds rose to 28 percent from 25 percent, while the share in money funds dropped to 19 percent from 21 percent.

Bill Miller’s $4 billion Legg Mason Capital Management Value Trust (LMVTX), best known for outperforming the Standard & Poor’s 500 Index for a record 15 consecutive years through 2005, returned 3.4 percent in the first three months of 2011, compared with a 5.4 percent return for the index, according to data compiled by Bloomberg.

To contact the reporter on this story: Sree 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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