Legg Mason Net Income Rises 51% as Rally Helps Boost Assets

Jul 31, 2014 6:06 pm ET

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July 31 (Bloomberg) -- Legg Mason Inc., the money manager seeking to turn around performance after more than five straight years of investor withdrawals, reported a 51 percent increase in first-quarter profit as assets rose.

Net income in the three months ended June 30 increased to $72.2, or 61 cents a share, from $47.8 million, or 38 cents, a year earlier, the Baltimore-based firm said today in a statement. The shares, the best performer in Standard & Poor’s 18-member asset manager index this year, fell as the broader stock market had its biggest loss in almost four months.

Joseph A. Sullivan, who was named chief executive officer of the Baltimore-based firm in 2013, said in March that this year will be one of growth for the money manager. He’s expanded Legg Mason’s offerings through two acquisitions this year, including the purchase announced last week of global stock manager Martin Currie. Legg Mason, whose equity and bond funds suffered withdrawals after slumping in 2007 and 2008, is also luring investors back into its fixed-income products as performance improves.

“Net flows were as expected, and we are encouraged” on momentum for operating and money flows, Citigroup Inc. analyst William Katz wrote in a note today, reiterating his “buy” recommendation on the stock.

Best Performance

Legg Mason fell 6 percent to $47.45 in New York. The shares returned 48 percent in the 12 months ended July 30, the most among the 18 companies in the Standard & Poor’s index of asset managers and custody banks, with below-average volatility, giving it the best risk-adjusted gain in the group, according to the BLOOMBERG RISKLESS RETURN RANKING.

“It’s been one of the outliers of the group this year and it’s probably just getting punished because of it,” said Macrae Sykes, an analyst at Gabelli & Co. in Rye, New York. “They had a solid quarter and I think their outlook’s positive, so absent a pretty big move today, I’d expect the stock to outperform going forward.”

Global stocks sank the most in almost six months today amid disappointing earnings and concern credit markets will deteriorate after Argentina defaulted and a Portuguese bank was ordered to raise capital. The MSCI All-Country World Index slid 1.5 percent as of 4 p.m. in New York for its worst decline since February. The Standard & Poor’s 500 Index lost 2 percent, its biggest drop since April 10.

Client Redemptions

Investors added $2.5 billion into Legg Mason’s fixed-income business in the quarter, while pulling $1.8 billion from equities and $8.9 billion from liquidity products such as money funds, the company said in the statement. Fixed-income represents 52 percent of total assets.

Two corporate clients redeemed $5.5 billion from fixed- income in what should be classified as a cash-management choice, Sullivan said today during an earnings conference call.

The firm has restructured businesses following a review to make the company more efficient, including closing its emerging- markets equity unit Esemplia Emerging Markets and transitioning the client-services business in Canada to the firm’s affiliates.

In 2009, activist investor Nelson Peltz, known for pushing companies to improve their share price, took a stake in Legg Mason and gained a board seat. The firm cut costs and boosted profit, yet redemptions continued. In October 2012, Mark R. Fetting stepped down as CEO amid pressure from Peltz, and five months later Sullivan took over.

Cutting Costs

Sullivan improved the cost structure and performance, and added new investment units. Legg Mason agreed in March to spend as much as $41 million to buy QS Investors, a global quantitative equity firm that split from Deutsche Bank AG in 2010. QS had $4.1 billion in funds under management and $100 billion in advisory assets.

Legg Mason agreed on July 24 to buy Edinburgh-based Martin Currie to expand into active international stock funds. Terms weren’t disclosed. Martin Currie, founded in 1881 as an accountancy partnership, will add $9.8 billion in assets.

That acquisition is a potential “game-changer” for the firm, addressing a gap the company had been seeking to fill for years, Sullivan said on the call.

Legg Mason, whose affiliates include stock investor ClearBridge Investments, managed $704 billion as of June 30, up 9.3 percent from a year earlier. While that’s still below the $1 trillion peak in 2007, it’s a rebound from a low of $612 billion in September 2011.