Legg, Price profit by own advice

Strong showing expected of companies this year

Mutual funds

January 12, 2003|By William Patalon III | William Patalon III,SUN STAFF

By following the same advice they give to their mutual fund clients - be diversified - the mutual fund businesses of Baltimore-based Legg Mason Inc. and T. Rowe Price Inc. should perform strongly in 2003, experts say.

A little help from the stock market wouldn't hurt, either, these same experts say.

"With some positive advances in the market ... we expect Legg Mason to do pretty well with its fund sales moving into 2003," said Bruce R. Brewington, an analyst and director with Putnam Lovell NBF Securities in San Francisco.

"Similar to Legg Mason, T. Rowe Price should see an expansion of mutual fund sales, especially because of their spectrum of growth, value and fixed-income" mutual fund offerings.

Investors should follow the lead of Legg Mason and T. Rowe Price: In a year that promises substantial economic uncertainty, mutual fund investors should protect themselves by constructing a well-diversified portfolio that doesn't make risky bets on this year's winning sectors, or specific fund categories, said M. David Testa, chief investment officer for T. Rowe Price.

"Balance is the key," Testa said.

Market declines in 2000, 2001 and 2002 prompted many investors to throw in the towel on stock funds: Through October, the most recent figures available, investors had pulled $26.5 billion more out of stock funds than they invested in them last year, according to the Investment Company Institute, the trade group for the fund industry.

The last time that happened for an entire year was 1988, the year after the October 1987 stock market crash, said John Collins, a spokesman for the institute.

Stock fund assets totaled $2.77 trillion at the end of October, the most recent figures available. That's down about 39 percent from the high-water mark of $4.572 trillion, reached in August 2000, according to the ICI.

Outflows from stock funds peaked at $52.65 billion in July of last year, though they had turned negative in June and then remained that way through the end of October.

During this period of uncertainty, Legg Mason and T. Rowe Price have seen their mutual fund businesses grow. Their diverse stables of strong-performing funds and reputations for risk-averse investing were an immense help in 2002 and should continue to boost growth this year, experts said.

"Companies such as T. Rowe Price, which have been very disciplined," are the type of mutual fund firm investors are most comfortable with right now, said Brewington of Putnam Lovell.

Having a diverse menu of funds will be crucial this year, experts said.

T. Rowe Price, in addition to fixed-income funds, offers stock funds in both the growth- and value-investing disciplines, and funds that focus on the small- , mid- and large-company categories. And, in addition to funds that focus solely on U.S. stocks, T. Rowe Price has funds that invest money abroad.

"We've got a pretty diversified fund business," said Steve Norwitz, a T. Rowe Price spokesman.

Legg Mason has more than 80 mutual funds: Its October 2001 acquisition of the New York-based Royce & Associates Inc., gave Legg an entree into the small-company stock arena, which has been a hot investment category. If the economy does turn around, small companies will be huge beneficiaries, experts say.

Performance is key, said Brewington. At T. Rowe Price, more than 80 percent of the firm's actively managed funds outperformed their Lipper median peer group for the most recent one- and three-year periods.

And Legg Mason's Bill Miller, manager of the firm's vaunted Value Trust mutual fund, in 2002 beat the benchmark Standard & Poor's 500 index for the 12th consecutive year. Though Miller's fund lost money, it lost less than the S&P.

T. Rowe Price has seen its fund sales accelerate. Through the first nine months of 2002, investors injected a net $1.7 billion more in T. Rowe Price funds. The fourth quarter is expected to be even better, possibly boosting inflows for the year to $4 billion.

Increased inflows mean increased revenue and profit, since higher assets mean higher fee income. For the first nine months of last year, mutual funds generated $397.4 million, or 73 percent, of the $547 million worth of investment advisory fees generated by T. Rowe Price, the company said.

Percentage-wise, that mirrored 2001, when mutual fund fees accounted for $562.6 million, or 73 percent, of T. Rowe Price's $775 million in overall advisory fees.

Total 2001 corporate revenue was $1.028 billion. Total revenue for the first nine months of 2002 was $698.5 million.

Mutual funds will remain an important component of Legg Mason's overall business this year as the company continues its transition from regional brokerage house to international asset manager, the company said.

As of Sept. 30, halfway through the company's fiscal year, $32 billion of the company's overall $177 billion in assets under management was held in mutual funds, Legg Mason said.

In the first half of the year, mutual funds accounted for about $104 million, or 14 percent, of the firm's $764 million in total revenue. And that 14 percent of revenue accounted for more than 20 percent of Legg's pre-tax profits during the fiscal year's first half.

With all the factors favoring their funds, Legg Mason and T. Rowe Price will likely soon step up the marketing of their funds, said Brewington, the Putnam Lovell analyst.

And while the fund industry faces another tough year in 2003, Brewington said the two Baltimore-based companies will see growth in their mutual fund businesses. "If the equity market moves forward in 2003, I think both these companies are very well-positioned," he said.

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