"I would not categorize 2010 as a good year for their equity franchises," said Dan Fannon, a research analyst with Jefferies & Co.
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Hopson said it is hard to win back investors once they have taken their money elsewhere because competition is greater than ever. "Once you lose your spot on the retail space, even if you have a great performance, it takes a lot to get back on those shelves," he said.
Legg executives have attributed some of the withdrawals to clients pulling money out of municipal bonds, an industrywide trend spurred by rising interest rates and fear that cash-strapped states and municipalities would default.
Fetting also pointed to a broader market shift in which some larger institutional investors moved away from fixed-income funds to more specialized, high-yield, global and emerging market products. So, while clients have withdrawn money from Western Asset's flagship funds, it has picked up new, higher-fee business on the specialized asset class, Fetting said.
Small-cap specialist Royce & Associates and Permal Group, which invests in hedge funds on behalf of clients, are other bright spots, having generated net deposits in the most recent quarter.
Fetting has been talking about a turnaround since he became chief executive in January 2008 during one of the company's most difficult periods. That year, the firm posted its first quarterly loss since becoming a public company in 1983. And fund withdrawals began accelerating while Legg continued to bail out some of its money market funds invested in toxic securities.
Since then, Legg has cleaned up its balance sheet and returned to profitability in 2009 after five consecutive quarters of losses. Last year, Legg initiated a major cost-cutting program to boost profit margins by eliminating 350 back-office jobs, including 250 in the Baltimore area. A total of $140 million in savings from that move is expected to fully materialize by March 2012.
With those changes in place, Fetting said the firm is ready to tackle persistent client withdrawals.
Corporate executives, including Fetting, and the firm's various affiliate fund managers have been meeting with clients, prospective investors and sales partners around the world. Fetting planned to head this weekend to the Middle East to meet with large sovereign clients, while Western Asset's executives went to Europe and Asia in early January.
Fetting said the company is positioning itself to grab opportunities in the market. On the equity side, managers are trying to attract new investments with positions in blue-chip, dividend-paying companies. Western Asset managers are talking to U.S. pension clients about global funds.
To finish writing Legg's turnaround story, the company must continue to land new business, Fetting said.
"Are we keen on completing the final chapter? Absolutely," he said. "Are we confident that we will conclude the final chapter? Absolutely."