Legg Mason continues growth after years of withdrawals

Fixed-income a mainstay for now, despite growing interest in alternative investments

July 31, 2014|By Michael Bodley, The Baltimore Sun

Legg Mason Inc. reported Thursday its quarterly profit grew 51 percent, thanks to a strategy that has diversified the money manager's investment portfolio.

The Baltimore-based company said it earned $72.2 million, or 61 cents per share, in the three months ended June 30, compared with $47.8 million, or 38 cents per share, a year earlier. Revenue for the quarter rose 4 percent to $693.9 million.

While Legg Mason announced in May it had reversed a six-year outflow of client money, the recent quarter brought a net outflow of $8.2 billion, nearly all from liquid investments such as money market funds.

Assets under management continued to rise during the recent quarter to $704.3 billion as of June 30. That's 9.3 percent higher than a year earlier but less than 1 percent higher than assets under management as of March 31, despite significant market gains and the acquisition of QS Investors, a New York-based investment firm, which added $5 billion in assets under management.

The slow growth might be dissuading would-be investors, according to Mac Sykes, an analyst at Gabelli & Co. in Rye, N.Y, who said the scant quarterly gains aren't indicative of Legg Mason's overall performance but could give potential buyers pause.

Legg Mason stock closed down 6 percent at $47.45 a share amid a marketwide swoon Thursday.

"I thought that it was a pretty decent quarter, but it's a tough reaction with the market," said Sykes, adding that Legg's results were in line with his expectations. "Given the fact that it was one of the highest-performing stocks this year, there was a lot of downfall from profit slowing."

Joseph A. Sullivan, Legg Mason's president and CEO, said investors shouldn't expect much more in terms of new acquisitions any time soon. After the recent purchase of QS Investors and the deal announced last week to buy Martin Currie, an international equity manager based in Scotland, the company is confident in its investment portfolio, he said.

"With virtually all of our affiliate repositioning behind us, we see significant opportunity to grow our market share globally in the near term and in the years ahead," Sullivan said in a conference call with investors.

Syles called the purchase of Martin Currie the right fit for the money manager. Slowing the purchase of affiliates makes management sense for Legg Mason, Sykes added, even though subsidiaries such as Martin Currie and QS make up a small share of the company's overall assets.

"There certainly comes challenges in integrating new affiliates and putting it all together," he said. "In terms of their corporate energy, that is a little challenging."

The Baltimore money manager also saw an increase in fixed-income investments at a time when some analysts project interest rates will rise soon, with investors adding $2.5 billion during the first quarter. Sources of fixed income, such as bonds, fall in value when interest rates rise. Fixed-income investments now represent 52 percent of total assets.

Sullivan doesn't expect interest rates to rise as quickly as others, saying in an interview rates will "ultimately rise, but it's not going to be quick."

Legg Mason is looking at alternative investments such as real estate and energy to diversify its portfolio, but Sullivan said such interest does not reflect short-term market concerns.

"These things are going to ebb and flow," said Sullivan, adding that investors are concerned about the volatility of rising rates but still seek the security of fixed income. "If we're always chasing where flows are going … we'll never get to where we need to be."

Sullivan expects Legg Mason's fixed-income investments — from subsidiaries such as Brandywine Global Investment Management and Western Asset — to stake a larger share of the company's total assets moving forward. But the money manager "would love," Sullivan said, to see business boom for U.S. and non-U.S. alternatives — such as the overseas addition of Martin Currie — to further diversify Legg Mason's investment portfolio.

"Those are products that are in demand now, and in a rising rate environment, they would be desirable," Sykes said of Legg Mason's alternative investments. "They're reacting to where the ball is moving."



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