Legg Mason Inc. (LM), the money manager with 19 straight quarters of redemptions, had its first quarterly loss since the start of 2009 because of costs to restructure debt.
Legg Mason posted a net loss of $9.5 million, or 7 cents per share, in the three months ended June 30, compared with a profit of $60 million, or 40 cents, a year earlier, the Baltimore-based firm said today. Results missed the average estimate of 14 analysts surveyed by Bloomberg for a profit of 3 cents a share.
Chief Executive Officer Mark Fetting has eliminated jobs and restructured debt to cut costs and boost profit as slumping markets and client withdrawals have cut fee-earning assets. While long-term redemptions slowed to the weakest pace in five years amid deposits into bond funds, clients continued to pull money from higher-fee stock funds, pushing investment advisory fees down 11 percent.
“The main disappointment was the lower fee rate,” Macrae Sykes, an analyst at Gabelli & Co. in Rye, New York, said in an interview. “Since they earn the most on equity assets, to the extent that their mix moves away from a higher percentage of equity, the average fee rate realized on assets will decline.”
Legg Mason fell 1.1 percent to close at $24.86 in New York. The stock has increased 3.4 percent this year, compared with a gain of 7.6 percent for the Standard & Poor’s 20-member index of custody banks and asset managers.
Legg Mason’s revenue dropped 12 percent to $630.7 million, as advisory fees and performance fees for beating benchmarks fell from a year earlier. Performance fees declined 54 percent to $8.6 million compared with a year earlier. Assets fell 4.6 percent from a year earlier to $631.8 billion.
Stock assets, which generally earn higher fees than bond funds, decreased 17 percent to $151.1 billion in the past 12 months. Bond assets, managed mostly by Western Asset, declined 1.3 percent to $360.6 billion and money funds increased 3.9 percent to $120.1 billion.
Earnings in the quarter were reduced by 43 cents per share on costs to refinance debt and expenses tied to opening two new investment vehicles. The firm last reported a net loss, of $325 million, in the three months ended March 31, 2009, because of costs to eliminate mortgage-linked debt investments from money funds.
“It’s a quarter of real progress,” Fetting said in an interview today on Bloomberg Television’s “Market Makers.” “The accounting charges are really a function of success on restructuring our debt, which was largely a non-cash charge, and two, we had two very successful closed-end fund raises.”
Legg Mason’s long-term withdrawals fell to the lowest level in five years as the firm added new products and performance at certain funds improved, Fetting said today on a conference call with analysts and investors.
Client withdrawals declined 47 percent from the previous quarter, when investors pulled $4.9 billion. Stock funds had withdrawals of $3.9 billion, while bond funds had deposits of $100 million during the quarter. Investors deposited $1.2 billion into Legg Mason’s money funds.
Legg Mason’s board members include activist investor Nelson Peltz, who took a stake in the firm in 2009. Peltz said last year that he expected Western Asset to lead the firm’s turnaround. The $9.7 billion Western Asset Core Plus Bond Fund has returned 6.4 percent this year, beating 91 percent of competing fixed-income funds, according to data compiled by Bloomberg.
Investors deposited $117.5 billion into taxable bond funds while pulling $42.6 billion from U.S.-registered domestic equity funds industrywide in the first half of this year, according to data compiled by Morningstar Inc. (MORN) in Chicago.
Fetting completed a plan in the quarter ended March 31 designed to save $130 million to $150 million a year through a combination of job cuts and moving certain technology functions to investment units. Legg Mason said last month that earnings would be affected by $23 million in expenses tied to two new investment vehicles and by about $69 million from repurchasing convertible senior notes from private-equity firm KKR & Co.
Money managers such as Legg Mason, which earn fees based on the assets that they manage for clients, traditionally benefit from rising stock markets and investor deposits into higher-fee active stock and bond funds. The MSCI ACWI Index (MXWD) of global stocks fell 6.4 percent in the second quarter and the U.S. benchmark S&P 500 Index declined 3.3 percent.
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