Legg Mason Has Profit of $47.8 Million on Market Rally

(Corrects amount of net deposits into bond funds in third paragraph.)

Legg Mason Inc. (LM), the money manager seeking to reverse more than five years of net redemptions, posted a profit as rising equity markets lifted assets from a year earlier and clients deposited money into bond funds.

Net income was $47.8 million, or 38 cents a share, in the quarter ended June 30, compared with a loss of $9.5 million, or 7 cents a share, a year earlier, the Baltimore-based firm said today in a statement. Earnings included a cost of $26 million related to opening a closed-end fund. Legg Mason beat the 35 cent-a-share average estimate of nine analysts in a Bloomberg survey.

The company ended a five-month search for a leader when it named Joseph A. Sullivan as chief executive officer in February. Sullivan, 55, has said he will focus on acquisitions related to non-U.S. equities and alternative investments to spur growth. Clients deposited a net $900 million into the firm’s bond funds in the quarter, the first since the second quarter of 2012. They pulled $700 million from equities and $8.7 billion from money-market funds during the quarter.

“They’ve made some progress in terms of performance and continuing to look at the affiliates in terms of the mix of products, distribution and marketing,” Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said in an interview before the results were announced. “I do think you’re going to see ongoing improvements in flows in equities and fixed income.”

Client Deposits

Legg Mason, whose assets peaked at $1 trillion in 2007 as investors flocked to funds managed by top-ranked managers such as Bill Miller, oversaw $644.5 billion at the end of June, a 2 percent increase from a year earlier and a 3 percent decrease from the previous quarter.

The company reported results before the start of regular U.S. trading. The stock increased 32 percent this year through yesterday, compared with the 29 percent gain in the Standard & Poor’s 20-member index of custody banks and asset managers. Legg Mason reached a two-year high of $36.13 in May. The shares have fallen 75 percent from their peak of $136.40 in February 2006.

The firm’s stock assets rose 8.8 percent to $164.4 billion in the year ended June 30. Bond assets, managed mostly by Western Asset Management Co., fell 2.7 percent to $351 billion and money funds increased 7.5 percent to $129.1 billion.

Bond Funds

Money managers, which earn fees based on the assets that they manage for clients, traditionally benefit from rising stock markets and investor deposits into higher-fee equity funds. The U.S. benchmark Standard & Poor’s 500 Index increased 2.4 percent in the second quarter while the MSCI All Country World Index of global stocks fell 1.2 percent. In the second quarter of 2012, the S&P 500 Index dropped 3.3 percent and the MSCI Index declined 6.4 percent.

Stock and bond markets worldwide slumped in June amid concern that the Federal Reserve may reduce its bond purchases. Investors pulled about $60 billion from U.S. bond funds, the biggest monthly redemptions in records going back to 1961, according to estimates from the Investment Company Institute. Equity funds industrywide gathered about a net $260 million, according to ICI estimates.

“Fixed-income skew represents formidable near-term headwind” with more than half of Legg Mason’s assets under management in bonds, Morgan Stanley analysts led by Matthew Kelley wrote in a July 8 research note. In the longer term, the firm will benefit from improved performance and the migration to providing more specialized fixed-income strategies to institutional clients, the analysts wrote.

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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