Legg Mason Profit Rises 43% as Gains Offset Fee Decline

Legg Mason Inc. (LM), the money manager searching for a new chief executive officer, said fiscal second- quarter profit increased 43 percent as gains from investments in its own funds offset declining fees for managing client money.

Net income in the three months ended Sept. 30 rose to $80.8 million, or 60 cents a share, from $56.7 million, or 39 cents, a year earlier, the Baltimore-based firm said today in a statement. Thirteen analysts surveyed by Bloomberg expected earnings averaging 53 cents a share. Net income was boosted by a gain in non-operating income of $17.8 million related to investments in its funds, compared with a loss of $51.1 million a year earlier.

Legg Mason had net deposits into its products for the first time in 20 quarters, driven by investors putting money in low- fee money funds. Clients pulled $9.5 billion from stock and bond funds. Joseph A. Sullivan, head of global distribution, is serving as interim CEO while the board looks for a permanent successor to Mark Fetting, who stepped down Oct. 1 amid pressure from activist investor Nelson Peltz to improve performance and reverse redemptions.

“We remain focused on achieving consistent long-term inflows to capitalize on the strong investment performance of our key affiliates,” Sullivan said in the statement. “We will continue to evolve our retail sales model to capture opportunities that we see in the U.S. and internationally.”

Legg Mason rose 1.7 percent to $25.13 at 9:33 a.m. in New York. The stock increased 2.7 percent this year through yesterday, compared with the 18 percent gain in the S&P’s 20- member index of custody banks and asset managers.

Revenue Falls

Revenue for the three months ended Sept. 30 decreased 4.4 percent to $640.3 million and operating income declined 25 percent to $79.7 million as fees from Legg Mason’s higher-fee funds declined.

Investors pulled $5.7 billion from stock funds and $3.8 billion from fixed-income funds during the quarter, while depositing $9.7 billion into money funds. Net deposits were $200 million.

Legg Mason’s assets increased 3 percent during the quarter and 6.4 percent during the past 12 months to $650.7 billion. Its stock funds, which generally earn higher fees, rose 1.5 percent to $153.4 billion. Bond fund assets, run mostly by Western Asset Management Co., rose 2.4 percent to $369.4 billion and money funds climbed 6.5 percent to $127.9 billion.

Industry Deposits

Industrywide, investors deposited $194.2 billion into taxable bond funds while pulling $82.6 billion from U.S.- registered domestic equity funds this year through September, according to data compiled by Morningstar Inc. (MORN) in Chicago.

Legg Mason posted its first quarterly loss since the start of 2009 in the three months ended June 30 because of costs to refinance debt and expenses tied to opening two new investment vehicles.

Fetting struggled to end client withdrawals and reverse a 65 percent decline in the company’s share price after he was named CEO in 2008. His departure came before the end of a standstill agreement with Peltz on Nov. 15. Since the 2009 investment in Legg Mason by Peltz, who is known for pushing companies to increase their value by reducing costs or splitting up, Fetting cut jobs, restructured expenses at investment units and bought back shares.

Peltz said last year that he expected Western Asset to lead the firm’s turnaround. The $10.1 billion Western Asset Core Plus Bond Fund returned 7.9 percent this year through Oct. 24, beating 86 percent of competing fixed-income funds, according to data compiled by Bloomberg.

To contact the reporter on this story: Alexis Leondis in New York at aleondis@bloomberg.net

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

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