Some of Legg Mason Inc.'s flagship money managers including the famous stock picker Bill Miller continue to founder, but the company's hedge-fund operation has been red hot.
That diversified business model helped the Baltimore-based investment empire post net income yesterday of $191 million, or $1.32 per share, for the first fiscal quarter, which ended June 30. Those results were 22 percent higher than for the quarter a year ago.
"We continue to have a stable of some of the best-known managers in the U.S. and in the world, and you do hit pockets when they do not perform as well," Chairman and Chief Executive Officer Raymond A. "Chip" Mason said during a conference call. "Diversification helps us so we can stay balanced during those periods."
Mason has assembled an array of money management firms over the years.
Most recently, he expanded the company's investment reach with the December 2005 business swap of its brokerage business for Citigroup Inc.'s money management unit and a separate acquisition of the Permal Group, which invests in hedge funds on behalf of clients.
With those deals complete, Mason has been on the prowl for his latest acquisition. This time he aims to buy an international money manager, an area of investing that has become increasingly popular with globalization.
Mason said yesterday that finding such a deal remains the company's "No. 1 priority" and a task on which he spends a "disproportionate" amount of time.
While not disclosing names, Mason said executives have met with companies that he considers "among the best in the business."
Mason estimated that a deal would have to be worth at least $2 billion for it to be worthwhile for a company of Legg Mason's size.
The assets that Legg Mason manages on behalf of clients reached a record $992 billion in the latest quarter. Clients plowed $9 billion into money-market and bond investments but withdrew $7 billion from stock investments.
While Legg Mason's board recently authorized the company to repurchase up to 5 million shares, a move that can shore up a stock price, Chip Mason said yesterday that buybacks are a "second priority" to making an acquisition.
Legg Mason shares fell 3 percent, or $3.23, to $95.35 yesterday on the New York Stock Exchange.
Jeffrey Ptak, an analyst at Morningstar Inc., which tracks mutual funds, said Wall Street may be skeptical of Legg Mason's ability to maintain revenue growth if it depends on performance fees, which are paid to money managers based on how much an investment increases. Those fees at Legg Mason, primarily garnered by Permal, tripled from a year ago to $54 million during the quarter.
Permal's assets have roughly doubled since being acquired by Legg Mason to $35 billion. The firm, which had primarily catered to overseas investors, has been gaining momentum in the United States, Chip Mason said.
Ptak said investors also may be concerned about the outflow from stock investments, which tend to be more lucrative than fixed-income products.
Mason acknowledged that three money managers have seen client withdrawals: Legg Mason Capital Management, Bill Miller's shop; Private Capital Management; and ClearBridge Advisors.
Miller's Value Trust is famous for beating the Standard & Poor's 500 stock index for 15 years, a streak that ended last year. This year the fund is trailing the benchmark by more than 4 percentage points.
laura.smitherman@baltsun.com