Legg Mason reverses years-long outflow of client cash

Legg Mason Inc. reported that clients added more than $8 billion in cash to accounts at the Baltimore money manager during its recently finished fiscal year, breaking a six-year streak of client cash flowing the wrong way — out.

Legg's net income more than doubled in the January-through-March period compared with a year earlier, boosted by the rising assets under management and lower costs. The company reported a $68.9 million profit for the three months, up from $29.2 million a year earlier — when the company took a multimillion-dollar expense hit while consolidating offices.


Earnings per share rose to 58 cents during the latest quarter, up from 23 cents a year earlier. Revenue during the quarter rose slightly, up 2 percent from a year earlier to $681.4 million.

The earnings lined up with Wall Street analysts' expectations, on average, but didn't thrill investors. Legg stock closed down 38 cents at $46.51 a share Thursday.


The quarter ending March 31 was the fourth of Legg's fiscal year. It capped a year of better results after losses in the 12 months ended March 2013.

"Nobody's doing an end-zone dance here and declaring victory," said Joseph A. Sullivan, Legg's president and CEO. "We're just declaring meaningful progress."

Legg reported an $8.3 billion increase in client cash flowing to funds and other accounts during the year ending March 31, the first time since 2007 that the company was on the positive side of that annual measurement.

The worst year was the 12 months ended in March 2009 — amid the global financial crisis — when Legg clients pulled nearly $160 billion out.

Mac Sykes, an analyst at Gabelli & Co. in Rye, N.Y., said the cash flows to Legg are a good change. But what strikes him as a more significant shift is the company's efforts to ramp up sales and grow through acquisition.

Gabelli owns more than 5 percent of Legg's shares.

"It's obviously a positive turning point for them, but the overall revenue mix doesn't really shift that much," Sykes said of the client cash flows. "So I think it's a psychological and incremental positive, but clearly raising the organic rate and improving the margins will be more dramatic for them in terms of the overall impact."

Legg agreed in March to buy QS Investors, a New York investment firm. Sullivan said Legg expects to make more acquisitions.


"I can't give you a time frame on it, but I can tell you, we do need to acquire more investment capability, especially in non-U.S. equities," he said. "That's my primary focus. I work on it every single day."

Legg has cut costs as it worked to right the ship over the past few years. Operating expenses last fiscal year were down 23 percent.

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"A lot of the streamlining and a lot of the things we've needed to do are done — not all of it but a lot of it is — so we're now really about focusing… our resources and attention on growth," said Sullivan, who was named CEO just over a year ago after leading the company on an interim basis for several months.

Legg announced this week that it is increasing its quarterly dividend from 13 cents a share to 16 cents, to be paid in July. The company slashed its per-share dividend from 24 cents to 3 cents in 2009, slowly raising it since then.

Legg also is repurchasing stock, including 2 million shares during its fourth quarter, a move companies use to help buoy their stock prices.

Meanwhile, the company's board of directors is shifting.


Carol A. "John" Davidson, who retired from Tyco International in 2012 after heading accounting cleanup efforts there, joined the board Thursday. Legg said Wednesday that three other directors — John T. Cahill, John E. Koerner III and Harold L. Adams — would not seek reelection at the annual meeting this year.