Legg Mason Inc., the money manager that has struggled with more than five years of net redemptions, posted a fiscal third-quarter profit after a loss a year earlier, as assets and fees tied to performance rose.
Net income was $81.7 million, or 67 cents a share, in the three months ended Dec. 31, compared with a loss of $453.9 million, or $3.45 a share, a year earlier, the Baltimore-based firm said today in a statement. Thirteen analysts surveyed by Bloomberg estimated earnings averaging 67 cents a share after the firm said Jan. 13 net income would be from 65 cents to 68 cents a diluted share.
Joseph A. Sullivan, who was named chief executive officer in February, has reorganized businesses to cut costs while vowing to stem withdrawals by focusing on Legg Mason’s product lineup and improving performance. The firm said it hired Wells Fargo & Co.’s Thomas Hoops in January to look for potential acquisitions and develop products. Assets rose 3.6 percent from the prior quarter to $679.5 billion as clients put cash into fixed income and money funds, while pulling out of stock vehicles.
“It’s going to take time for some of these initiatives to drive meaningfully a step up in flows and growth,” Michael Kim, an analyst with Sandler O’Neill & Partners LP in New York, said in a telephone interview. “It’s steady as she goes, but there’s still more work to do.”
Legg Mason fell 2.2 percent to close at $42.35 in New York. The stock increased 53 percent in the past 12 months, compared with the 23 percent gain in the Standard & Poor’s 20-member index of custody banks and asset managers. The shares have declined almost 70 percent from their peak of $136.40 in February 2006.
Investors put $700 million into the firm’s bond funds and $9.9 billion in money funds, while pulling $700 million from its stock vehicles. Deposits were driven by ClearBridge Investments and Brandywine Global Investment Management, and redemptions were from fixed-income unit Western Asset Management’s municipal bond funds and stock units Royce & Associates and Batterymarch Financial Management, Sullivan said during a conference call with analysts and investors today.
“But for the challenges at Royce, munis at Western and to some extent Batterymarch, if you net those three isolated pieces out, it tells a very different picture of how we’re growing,” Sullivan said in a telephone interview. “It’s not like we have broad-based problems, just isolated challenges we’ll just work through.”
Legg Mason said Jan. 13 it expected earnings in the quarter ended Dec. 31 to include about $48 million to $52 million in performance fees, earned for beating certain benchmarks, compared with $17 million in the prior quarter. The expected results for the quarter were announced in connection with a potential refinancing of all or a portion of a bank loan.
The firm said earnings would also include a higher-than-expected effective tax rate, increased severance and other operating expenses following consolidation and a $5 million expense related to the firm’s acquisition of fund-of-hedge-funds unit Fauchier Partners, according to the statement.
Legg Mason is considering adding to the team that sells products to institutional investors team to increase deposits at equity unit ClearBridge, Sullivan said in the interview. Across the firm, he said he’s seeking to fill in gaps on global equities, alternatives such as private equity, real estate and natural resources, and multiasset offerings.
Revenue increased 6.9 percent to $720.1 million compared with a year earlier as stock assets rose 25 percent to $182.5 billion in the year ended Dec. 31. Bond assets, managed mostly by Western Asset, fell 3.1 percent to $355.6 billion and money funds increased 3.7 percent to $141.4 billion.
Western Asset will pay more than $21 million to settle charges of defrauding clients, the Securities and Exchange Commission said Jan. 27. The bond unit concealed investor losses and engaged in cross trading of mortgage-backed securities that favored some clients over others, according to the SEC. Mary Athridge, a spokeswoman for Legg Mason, said the payment wouldn’t have a material impact on Western’s financial condition.
The SEC order on Western doesn’t include allegations of the intention to mislead and the majority of the fine is covered by insurance under the firm’s errors and omissions policy, Sullivan said in the interview.
Legg Mason suffered a loss in the three months ended Dec. 31, 2012, after client withdrawals and declining assets prompted the firm to write down the value of its holdings.