Legg Mason wins right to expand fund sales

September 19, 2007|By Laura Smitherman | Laura Smitherman,SUN REPORTER

With sales of some mutual funds slumping along with performance, Legg Mason Inc. has renegotiated an agreement to expand the sale of its funds outside of Citigroup Inc.'s Smith Barney brokerage.

An agreement giving Smith Barney the exclusive rights to sell Legg Mason Capital Management funds dates to a landmark deal between the companies two years ago, in which Baltimore's Legg Mason swapped its brokers for Citi's asset management unit in New York.

The swap made Legg Mason one of the world's largest investment managers. It now has about $1 trillion under management at several subsidiaries.

The sales pact with Smith Barney gave Legg Mason Capital Management, the shop run by star fund manager Bill Miller, access to wider distribution through a bigger broker network. In return, Smith Barney brokers got access to the top-rated Legg funds.

But some Legg Mason funds have declined and client flows into the funds have been lower than was expected, Chairman and CEO Raymond A. "Chip" Mason has acknowledged.

Most notably, Miller's Value Trust was behind the benchmark S&P 500 stock index by more than 6 percentage points yesterday. And clients withdrew $7 billion from stock funds across all of Legg Mason in the most recent quarter.

Under the modified agreement, Smith Barney will continue to have the exclusive rights to distribute primary shares of Legg Mason funds.

But Legg gains the right to distribute other share classes, such as institutional shares, to a broader market. Legg already had such an arrangement with some other companies, including Wachovia Corp.

"We remain committed to working together to make LMCM's world-class investment products available to individual and institutional investors around the world and to help our clients achieve their investment goals," wrote Mark R. Fetting, a Legg Mason senior vice president, in an internal memo on the new deal.

Miller is one of the most closely watched fund managers because his Value Trust did better than the S&P 500 for 15 consecutive years, an unprecedented feat. But the streak came to an end last year. This year his fund is up 2 percent as of yesterday, though it's still trailing the benchmark, according to Morningstar Inc.

The fund has been dragged down in part by investments in housing-related stocks such as Countrywide Financial Corp., the troubled mortgage lender, and homebuilder Pulte Homes Inc.

"We were clearly too early in buying these stocks in late 2005 and 2006 - and if you are early enough, that is indistinguishable from being wrong," Miller recently wrote. He added that "the market looks forward," and the stocks will likely be "a lot higher" in the future.

Meanwhile, Miller's Opportunity fund is up 9 percent this year and was beating the S&P as of yesterday.

"I don't think anyone can argue that they are some of the best managers on the Street and we are happy to continue this exclusive relationship," Citigroup spokesman Alexander I. Samuelson said.

laura.smitherman@baltsun.com

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