Legg Mason Inc.'s fiscal third-quarter profit rose 37 percent, but the Baltimore money manager continued to struggle with investors pulling out billions of dollars from its mutual funds.
Net outflows widened to $16.7 billion during the three months ending Dec. 31, up from the previous quarter's $12.7 billion. The news disappointed analysts and Wall Street, which sent shares down 5.2 percent, or $1.86, to close at $33.75.
While Legg has strengthened its balance sheet, cut costs and returned to profitability over the past two years, client withdrawals have persisted despite improvements in fund performance.
Legg's chairman and chief executive, Mark Fetting, said the firm is focused on addressing "persistent outflows" at some of its money management subsidiaries. To that end, executives and money managers are meeting clients and fund sales partners.
A market rebound was not enough to offset the outflows in the latest quarter. Assets under management dipped to $671.8 billion, down from $673.5 billion in the previous quarter.
In the latest quarter, investors took out $500 million more from money-market funds than they put in. Net withdrawals equaled $3.3 billion from stock funds and $12.9 billion from fixed-income funds.
A bulk of the withdrawals came from two clients in lower-fee accounts, while investors also pulled money out of municipal bonds, an industry-wide trend spurred by rising interest rates and fears that states and municipalities would default.
"Flows are getting worse," Ticonderoga Securities analyst Douglas Sipkin wrote in a research note. "If the markets were not up as much as they were, this company would be struggling a lot more."
Net income was $61.6 million, or 41 cents per share, compared with $44.9 million, or 28 cents per share, in the year-ago period.
Revenue rose 4.5 percent on higher performance fees to $721.9 million in the firm's fiscal third quarter.
As part of efforts to boost profits, the company announced plans last year to cut 350 jobs, including 250 in Owings Mills and Baltimore. Those efforts, which began July 1, are expected to save $130 million to $150 million on an annual basis by March 2012, improving operating margins by 6 percent to 8 percent.