Legg to drop many funds

Move is designed to streamline operations after Citigroup swap

July 13, 2006|By LAURA SMITHERMAN | LAURA SMITHERMAN,SUN REPORTER

Legg Mason Inc. announced yesterday that it would eliminate about one-third of its mutual funds to streamline operations and get rid of funds with poor track records acquired in a business swap with Citigroup Inc. last year.

With the proposed reorganization, Baltimore-based Legg Mason would whittle a stable of more than 165 mutual funds to 119 though mergers and the liquidation of eight funds.

In evaluating which funds to target, company officials said they considered a fund's performance and size, its ranking by tracking firms Morningstar Inc. and Lipper Inc., and whether it overlapped with other funds in the product lineup.

The changes would have to be approved by mutual fund investors at a series of shareholder meetings this fall.

Legg Mason, now the fifth-largest money manager in the world, doubled the assets it manages on behalf of investors to $868 billion by swapping its brokerage business for Citigroup's money management unit in a $3.7 billion deal that closed in December. Since then, Legg has been working to meld operations and upgrade its office technology.

"Our goal was to have fewer but better-performing funds," said Mark R. Fetting, a vice president and head of the Legg Mason division that includes mutual funds. "The integration continues to make very good progress, and this is a major turning point in getting that work accomplished."

The effort to eliminate some mutual funds was anticipated by analysts as part of Legg Mason's overall transformation. It also adds to a growing trend to do away with funds that aren't delivering good returns, said Rachel Barnard, an analyst at Morningstar.

With compliance costs rising after the Sarbanes-Oxley corporate accountability law, a fund needs $100 million in assets just to break even, Barnard said.

According to Lipper, the number of mutual fund share classes that disappeared through mergers or liquidations rose to about 1,230 last year, a 60 percent increase over 2004. Mutual funds often have several share classes with different fee structures.

Mutual funds used to be more intransigent because managers believed they could bounce back from a bad run, said Geoffrey H. Bobroff, a consultant to the industry. But when rating systems became popular as a way to select funds from a universe of more than 10,000, poor performers also had to overcome low scores.

With Morningstar, for example, earning an extra star in the five-star system can be difficult for funds that have been around longer, because long-term returns are factored in, Bobroff said.

Several of the funds being eliminated by Legg Mason had low ratings or were duplicate funds that Citigroup had created. Smith Barney brokers sold the funds with that brand name, but separate funds with nearly identical investment approaches were sold through outside brokers under the Salomon Brothers brand.

Most of the Smith Barney and Salomon Brothers funds will become Legg Mason Partners Funds. In general, the newly formed ClearBridge Advisors in New York will manage the stock funds, while Western Asset Management, another Legg subsidiary, will take on the bond funds.

Among the funds to be subsumed into other portfolios are Salomon Brothers' Mid-Cap Fund and Balanced Fund, and Legg Mason Partners' Technology Fund and Health Sciences Fund.

"There may have been some confusion in the marketplace, and this brings clarity about the product lineup," said Brian Posner, chief executive officer of ClearBridge.

In a separate announcement about personnel changes, Legg Mason said Posner will soon take over as manager of a $1.5 billion mutual fund, and Robert Gendelman was hired as a portfolio manager from Cobble Creek Partners LLC, a hedge fund based in Greenwich, Conn.

By forming bigger mutual funds and reducing the burden on managers running multiple funds, Legg Mason seeks to reduce expenses for investors. As for cost savings accrued to the company or the possibility of job reductions, Fetting did not comment.

Raymond A. "Chip" Mason, chairman and CEO of Legg Mason, has said it expects to achieve at least $80 million in cost savings throughout the combined company by December.

Legg Mason stock, which has dropped 20 percent this year, fell $1.55, or 1.6 percent, to $95.43 yesterday in trading on the New York Stock Exchange.

laura.smitherman@baltsun.com

A list of funds being consolidated is at www.leggmason.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.