Legg star system twinkles less

November 04, 2007|By JAY HANCOCK

Legg Mason has long bet on its fund managers the way its fund managers bet on stocks: Do your homework and put big stakes on a few promising ponies. It worked beautifully for years, but now Legg's dependence on high-profile talent such as Bill Miller may be backfiring.

The firm's recent, mediocre money management has gotten extra attention because it's being delivered by former stars. No, the headline effect isn't wholly responsible for the billions withdrawn from Legg funds last quarter; poor performance can repel money all by itself. But it's probably not helping.

On average, Legg's public mutual funds have trailed 60 percent of their rivals in the same investment categories so far this year, according to Morningstar. Bill Miller's Value Trust fund, which was famous for beating the S&P 500 index for 15 years in a row until last year, trailed 90 percent of the "large blend" funds tracked by Morningstar for the year through September, returning less than 3 percent.

Richard Freeman's Aggressive Growth fund, well known for delivering a 16 percent annual return for the last five years and 11 percent a year over the past decade, also has had a challenging year.

The former Smith Barney fund, taken over by Legg after its huge deal with Citigroup two years ago, gained 4 percent for the year through September and also trailed 90 percent of its peers for that period.

Bruce Sherman became famous for investing in newspaper companies a couple of years ago. His Private Capital Management once delivered annual returns of 20 percent for a decade. But he doesn't seem to be having a great year, either, though Legg won't disclose results. Sherman, who runs money for private clients, joined Legg when it bought his firm in 2001.

(There are exceptions. Legg Mason Growth Trust, run by Robert Hagstrom, returned 20 percent this year through September and is beating more than 95 percent of its peers over the past year, five years and 10 years.

So Legg's having an off year. Who doesn't? The firm's long-term record is still exceptional. It has the same talent, and beating the market for the long haul often requires making bets that are unpopular for months or years. But restless investors yanked almost $10 billion out of Legg Mason's public and private stock pools last quarter, including Sherman's, Miller's and Freeman's.

"We have had disappointing, continuing equity outflows, which you and we are both very aware of and we are spending a lot of time on," Legg Chairman Raymond A. "Chip" Mason told Wall Street analysts two weeks ago.

Part of Legg's problem is that one of the hottest sectors has been international funds, in which it isn't much of a player. Big money pulled out of Legg's U.S. stock funds is probably getting plowed into international funds at Fidelity and elsewhere.

The company also is still rehabbing poorly performing Smith Barney funds and figuring out how to sell money-management expertise without a retail sales force. (It gave all its brokers to Citi.)

My assertion that Legg runs on a star system is "an oversimplification," says spokeswoman Mary Athridge. The firm has numerous fund managers, she says, and Bill Miller runs only 7 percent of the portfolio. Legg's bond manager, Western Asset Management, operates wholly on a team system, she says.

But stars are as stars do. Kiplinger's Personal Finance, The Street.com, USA Today and Fortune have all called Miller a "superstar." You don't hear people saying that about the managers at Legg's cross-town rival, T. Rowe Price, even though Price can go head-to-head with Legg in fund performance. Over the past decade Price's funds have beat 70 percent of their category peers, on average, versus 50 percent for Legg, according to Morningstar.

In fact, Price's TV ads appear to be taking advantage of Legg's problems. A guy breaks away from the pack in the uphill portion of a bicycle race only to tire, slow down and eat everybody's dust after the pack passes him.

"Disciplined investing. It isn't about star fund managers," intones the voiceover. "At T. Rowe Price, it's about experienced investment teams that stay the course."

I'm not suggesting that Legg try to imitate Price. That would probably be a disaster. The current setup has brought Chip Mason an incredibly long way - from a little brokerage in Virginia to managing $1 trillion.

But when stars stumble, the adulation can quickly turn ugly. Just ask Britney.


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