Legg Mason's Net Income Misses Expectations as Markets Slump

  • Assets fell as global stock markets lost ground in quarter
  • Core bond funds attracted investors as they outperfomed peers

Legg Mason Inc. reported a fiscal second-quarter profit that fell short of analysts’ estimates as the stock market slump eroded assets and fees for overseeing them.

Net income rose to $64.3 million, or 58 cents a share, from $5 million, or 4 cents, a year earlier, when earnings included a debt-refinancing charge of 59 cents a share, the Baltimore-based firm said in a statement on Friday. Legg Mason was expected to earn per-share profit of 66 cents for the quarter ended Sept. 30, according to the average of 12 estimates compiled by Bloomberg.

Joseph A. Sullivan, who was named chief executive officer in 2013, is guiding Legg Mason’s growth through acquisitions and diversifying offerings to individual, institutional and professional investors. Global stock markets fell almost 10 percent last quarter, crimping assets and profits at several of the biggest money managers. Net inflows of $3.1 billion during the quarter helped offset some of the market impact.

“Legg Mason generated solid operating results for the quarter against a backdrop of market volatility and declines that negatively impacted revenues and non-operating expenses,” Sullivan said in the statement.

Revenue dropped about 4.4 percent to $673.1 million compared with a year earlier. Operating expenses fell about 5.8 percent to $540.1 million, improving the company’s margins, according to the statement.

Performance Fees

Performance fees were $7.9 million for the quarter, down from $14 million a year earlier.

“We estimate that next quarter’s performance fees could be in the range of $10 to $20 million,” Chief Financial Officer Pete Nachtwey said during the earnings call.

The firm on Oct. 21 completed its acquisition of a majority interest in Rare Infrastructure Ltd., a Sydney-based investment manager with about $6.8 billion in assets. Included in this quarter’s results was an $11.1 million loss on an Australian dollar hedge related to the Rare acquisition.

Legg Mason filed a preliminary prospectus on Sept. 4 for four smart beta exchange-traded funds subadvised by QS Investors, the company’s quant-fund division.

Assets Fall

Analysts including Macrae Sykes of Gabelli & Co trimmed their earnings estimates this month after Legg Mason reported a drop in assets under management.

“We have revised our performance fees down for 3Q to reflect lower expected absolute performance for the year,” Sykes wrote in an Oct. 12 report. “We continue to recommend purchase and believe the company has made fundamental progress this year.”

Legg Mason’s assets fell to $672.1 billion from $699.2 billion at the end of June and $707.8 billion a year earlier, the firm said earlier this month.

Legg Mason said clients added a net $3 billion to its fixed income funds and around $100 million to its stock funds during the quarter. The company’s Western Asset Core Bond Fund and Western Asset Core Plus Bond Fund ranked in the 97th percentile among peers in returns this year, according to data compiled by Bloomberg. Legg Mason’s fixed-income holdings fell 1 percent to $368.4 billion from June 30 while equity holdings shrank 10 percent to $177.6 billion.

Legg Mason fell almost 1 percent to $44.75 in New York trading. The shares are down 16 percent this year, compared with a 7.7 percent drop for the 19-member Standard & Poor’s Index of asset banks and custody managers.

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