'Bitter' 3Q loss for Legg

Withdrawals, $2.3 billion in charges further depress shares

January 29, 2009|By Hanah Cho | Hanah Cho,hanah.cho@baltsun.com

Baltimore money manager Legg Mason Inc. has suffered its largest quarterly loss as a public company after taking $2.3 billion in charges and seeing investors pull billions of dollars out of its funds amid a deepening recession.

The company reported yesterday a higher-than-expected net loss of $1.49 billion, or $10.55 per diluted share, in the fiscal third quarter that ended Dec. 31. That's compared with a net income of $154.6 million, or $1.07 a share, during the corresponding period a year ago. Ten analysts surveyed by Bloomberg News expected an average loss of $4.01 a share.

Legg shares fell $1.42, or 7.3 percent, to close at $18.02 yesterday. The stock lost almost 70 percent last year.

Legg Chairman and Chief Executive Officer Mark R. Fetting described the quarter as "bitter" and said the company still had work to do to improve.

With yesterday's earnings, Legg recorded its fourth consecutive quarterly loss. It reflects continuing challenges for Legg, which has been hurt by poor performance of its flagship mutual funds and costs to shore up money market funds.

Assets under management dropped 17 percent to $698.2 billion, from $841.9 billion in September, due to market declines and client withdrawals. Revenue plunged 39 percent to $720 million, from $1.2 billion in the year-ago fiscal third quarter.

Investors took out $77 billion from Legg investments in the quarter: $17 billion from stock funds; $42 billion from bond funds and $18 billion from liquidity funds, primarily due to a partial redemption by a sovereign wealth fund.

Last year, clients pulled nearly $135 billion from Legg funds.

Though the mutual fund industry saw losses in assets and client investments in the volatile quarter, analysts were surprised by Legg's steep withdrawals, which widened in the most recent quarter and were generally higher than its competitors.

Analyst Roger Smith of Fox-Pitt Kelton said in a report he's concerned with the acceleration of bond fund withdrawals by customers because it suggests institutional investors are starting to give up on the "credit-biased strategy" of Legg's fixed-income subsidiary, Western Asset Management.

"Everyone knew it was a tough environment. Even under that context, things were still pretty bad," added J. Jeffrey Hopson at Stifel Nicolaus.

Legg took a $1.2 billion impairment charge to reflect the reduced value of its wealth management division, which includes Permal Group and Private Capital Management. Permal, which invests in hedge funds on behalf of clients, saw a surge in client redemptions last quarter.

And Private Capital Management's assets under management have fallen to $3 billion, from about $9 billion early last year. Money manager Bruce Sherman stepped down as chief executive officer to focus solely on investments, while President Gregg Powers takes over the CEO role, Legg said yesterday.

Other charges included almost $1.1 billion for costs related to reducing its exposure to toxic securities in some of its money market funds.

"Our asset and revenue levels continue to reflect a substantial franchise in a great business going through very turbulent times," Fetting told analysts in a conference call yesterday. "I describe our operating results as bitter, reflecting necessary actions to move us forward. ... you could also almost call them bittersweet."

Fetting said in an interview that the company "turned the corner" on some issues, including wiping out a significant portion of its money market fund exposure to so-called structured investment vehicles.

"The fundamental issue of performance and flows, we still have work to do," he said.

Last month, Legg sold its largest holdings in SIVs, which have plummeted in value amid the credit turmoil. But the sale incurred a loss of $842.1 million in the quarter. The company also provided additional support for seven money market funds.

The company's SIV exposure in its money market funds is now $1.4 billion, down from $10 billion on Oct. 31, 2007.

In response to deteriorating market conditions and poor performance, Fetting said he has been working closely with fund managers, while implementing annual cost-cutting measures of $120 million at the corporate level, including job cuts.

Legg said it now expects to hit $135 million in reductions by March 31.

Besides layoffs at the corporate level, job cuts also affected several subsidiaries, including Private Capital Management and Legg Mason Capital Management, a unit run by famed stock picker Bill Miller. In total, about 243 jobs were cut, the company said.

Legg is also overhauling its mutual fund lineup, a process that is expected to reduce its 142 fund offerings by 20 percent, Fetting said.

"Clearly, they've got a lot of wood to chop," said Robert Lee, an analyst at Keefe, Bruyette & Woods. "When are we going to start to see some improvements? That's the $64,000 question."

Legg performance

Legg's financial performance during the past year:

Quarter ....... Net customer

................................. withdrawals .......... Net loss

FY 4Q* .......... $19.2 billion .... $255.5 million

FY 1Q ............ $18.4 billion ..... $31.3 million

FY 2Q ............... $20 billion ... $103.8 million

FY 3Q ............... $77 billion ..... $1.49 billion

Source: Legg Mason

*Fiscal year ends March 31

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