Legg Mason Profit Rises 25% as Market Rally Offsets Client Redemptions

Legg Mason Inc. (LM), the Baltimore-based money manager seeking to reverse 15 straight quarters of redemptions, said fiscal first-quarter profit rose 25 percent driven by rising assets in its stock and bond funds.

Net income increased to $60 million, or 40 cents a share, in the three months ended June 30, from $47.9 million, or 30 cents a share, a year earlier, the firm said today in a statement. Legg Mason’s shares fell 4.1 percent as its stock funds had $5.8 billion in withdrawals during the quarter.

Chief Executive Officer Mark Fetting has restructured the firm and cut jobs to improve profitability and end the withdrawals, which started as investment returns lagged in 2007 and intensified because of losses stemming from the financial crisis. Investors pulled $3.7 billion from Legg Mason’s funds during the quarter, the lowest amount since withdrawals started in the fourth quarter of 2007. Fixed-income funds attracted $100 million, the first deposits in more than three years.

“The turnaround continues and there are still moving parts,” Jeff Hopson, an analyst with Stifel Nicolaus & Co. in St. Louis, said in an interview today. “I was expecting lower equity outflows and higher flows on the fixed-income side.”

Legg Mason fell $1.24 to $29.30 at 4:03 p.m. in New York Stock Exchange composite trading, extending yesterday’s 5 percent drop. The stock has lost 8.8 percent in the past two days, the biggest two-day loss in more than a year. It has fallen 19 percent this year, compared with the 9.9 percent decline for S&P’s index of asset managers and custodial banks.

Equity Assets Rise

Legg Mason’s cash funds attracted $2 billion. The company said it divested $19.4 billion in assets, including the transfer of $18.1 billion in liquid assets to Morgan Stanley Smith Barney LLC and the sale of its stake in the Barrett Associates Inc. unit, which manages $1.3 billion.

Fetting, who took over as CEO in January 2008, said in May that expenses tied to Legg Mason’s Western Asset Management bond unit will rise by $74 million this year, which will delay the firm’s goal of improving operating margins to 30 percent.

The costs disappointed the company’s board of directors, which includes activist investor Nelson Peltz and KKR & Co.’s Scott Nuttall, people with knowledge of the matter said in May. Peltz is the company’s largest shareholder. Nuttall is head of global capital at New York-based private-equity firm KKR.

Fetting rid Legg Mason’s money-market funds of bad debt at the height of the financial crisis, which prompted losses for five straight quarters in fiscal 2008 and 2009. Last year, he cut jobs, moved some technology functions to investment units and started to buy back shares after the firm returned to profitability.

Management Trimmed

In a conference call with analysts and investors today, Fetting said Legg Mason has overhauled its distribution in the U.S., adding sales staff and cutting management layers.

“The net expense impact is favorable,” Fetting said on the call.

Legg Mason’s stock funds, which get higher fees, have increased assets by 16 percent in the past year to about $181.5 billion, while assets in bond funds rose 2.1 percent to $365.4 billion. The bond funds, run by Western Asset in Pasadena, California, accounted for about 55 percent of money under management as of June 30, equity funds for about 27 percent, and money funds for about 17 percent.

Assets under management dropped 2.2 percent from the prior quarter to $662.5 billion as of June 30, driven by declines in assets in money funds and stock funds.

Revenue Increases

Revenue rose 6.4 percent to $717.1 million. Earnings included a 5 cent-per-share expense to open a $599 million closed-end fund during the quarter. Expenses climbed 8 percent to $616.7 million as compensation costs at Western Asset and other units rose with better performance.

Seven of Western Asset’s eight fund strategies beat their benchmarks over the past year, Legg Mason said. Six of the eight outperformed over the past three years, and four out of five beat peers over the past 10 years. At the firm’s Royce & Associates stock unit, nine of 25 funds outperformed in the past year; 14 out of 22 beat over three years, and all beat their benchmarks over the past 10 years.

“We’ve clearly reached an inflection point in fixed-income and we are taking share where we were previously giving share to others,” Fetting said today in an interview.

The performance at funds run by the Legg Mason Capital Management unit led by Bill Miller trailed all its benchmarks in the one, five and 10-year periods.

Value Trust

Miller’s $3.4 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, has lost 0.33 percent this year through yesterday, compared with a 4.9 percent return for the index, according to data compiled by Bloomberg.

“The markets have not rewarded valuation-driven managers,” Fetting said. “Their strategies are positioned for an eventual shift in sector leadership,” as health care, technology and financial stocks rebound, he said.

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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