Legg Mason’s Net Income Falls 62% as Withdrawals Continue

Legg Mason Inc., the Baltimore-based money manager that appointed a new chief executive officer in February, said fiscal fourth-quarter profit fell 62 percent as the firm entered its sixth year of client defections and on costs to cut office space.

Net income declined to $29.2 million, or 23 cents a share, in the three months ended March 31 from $76.1 million, or 54 cents, a year earlier, the firm said today in a statement. Legg Mason’s earnings included a loss of $52.8 million, or 27 cents per share, related to reducing office space. Fifteen analysts in a Bloomberg survey had expected earnings per share of 20 cents.

The company named Joseph A. Sullivan as CEO in February, ending a five-month search for a leader to reverse client redemptions and calm restive fund affiliates. Legg Mason, whose assets peaked at $1 trillion in 2007 as investors flocked to funds run by top-ranked managers such as Bill Miller, oversaw $665 billion at the end of March. Clients pulled a net $3 billion from stock and bond funds in the quarter, the lowest level since 2007, Sullivan said today during a conference call with investors and analysts.

“Long-term flow trends showed modest improvement during the quarter,” Daniel Fannon, a San Francisco-based analyst at Jefferies & Co., wrote today in a note to clients.

Miller’s Unit

Legg Mason shares rose 1.5 percent to close at $31.86 in New York. The stock increased 24 percent this year, compared with the 19 percent gain in the Standard & Poor’s 20-member index of custody banks and asset managers. Legg Mason has fallen 77 percent since reaching a peak of $136.40 in February 2006.

In January, the firm said it was folding Miller’s Legg Mason Capital Management division into its ClearBridge Investments equity unit as assets tumbled to $7 billion from about $70 billion in 2007. Chief Financial Officer Peter Nachtwey said last month the firm may close some of its 32 offices and reduce the 400 funds it offers.

Earlier this month, Legg Mason said it would book an $8.5 million expense in the quarter for separation agreements for Ron Dewhurst, the former head of global investment managers, and Thomas Lemke, general counsel and head of governance. Legg Mason said in February it would take a charge of $45 million to $55 million in the quarter related to reducing its office space, which will eventually result in annual savings of $10 million. Sullivan said during a telephone interview today the firm probably wouldn’t have any additional big downsizing of office space.

Revenue, Expenses

Performance fees helped Legg Mason’s revenue increase 3 percent to $668 million. Total operating expenses increased 8.4 percent compared with a year earlier to $625 million on the severance and real-estate costs.

The firm’s assets increased 3.3 percent from a year earlier to $664.6 billion, which includes about $5 billion from its March acquisition of fund-of-hedge-funds unit Fauchier Partners. Stock assets, which generally earn higher fees than fixed-income funds, fell 1 percent to $161.8 billion in the year ended March 31. Bond assets, managed mostly by Western Asset Management Co., rose 2.5 percent to $365.1 billion and money funds climbed 11 percent to $137.7 billion.

Investors deposited $1.2 billion into Legg Mason’s money funds, while withdrawing $2.6 billion from its stock funds and $400 million from its bond funds.

Industry Deposits

Industrywide, investors deposited $21.5 billion into U.S.- registered equity mutual funds that buy U.S. stocks in the first quarter, while putting $69.1 billion into taxable bond funds, according to data from research firm Morningstar Inc.

Legg Mason raised its quarterly dividend last week by 18 percent to 13 cents a share. During the quarter, the firm completed additional open market purchases of 3.7 million shares and as of March 31 its cash position was $933 million.

Sullivan, who led the firm on an interim basis after CEO Mark Fetting stepped down on Oct. 1, faces a push for greater independence by some of Legg Mason’s eight investment affiliates. Sullivan has indicated he’s more open to working with the units, which include fixed-income manager Western Asset and equity managers such as ClearBridge Investments and Royce & Associates. Legg Mason’s affiliates operate independently with separate revenue-sharing agreements.

“On the strategic front, we remain fully committed to the affiliate model as the best way to attract top money managers,” Sullivan said in today’s statement. “We will invest in organic growth and strategic acquisitions while focusing on distributing our products in the broadest and most effective way possible.”

Consultant Evaluation

Legg Mason is using a third-party consultant to evaluate the efficiency of the parent company that may result in savings or a reallocation of resources, Sullivan said during the telephone interview. The review should conclude in the second half of the year, he said.

Sullivan also said in today’s conference call that the firm is accelerating efforts to make acquisitions and that Legg Mason has had “interesting conversations” about potential transactions. The firm is interested in buying a non-U.S. equity unit to expand Legg Mason’s share of investors’ wallets, he said.

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