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Mutual funds called job 1

The Baltimore Sun

Legg Mason Inc.'s new chief executive Mark R. Fetting outlined his priorities yesterday to move the Baltimore money manager past its recent struggles, saying a key focus is improving the company's slumping mutual funds and providing better service to clients, some of whom are pulling their investments.

In his first earnings conference call with analysts since being named to the job Monday, Fetting did not promise major changes but said management would also focus on improving marketing and accelerating global expansion. Some analysts don't believe the company's problems can be turned around quickly, though they viewed Fetting's appointment positively. Fetting characterized his vision for the company as "accelerated evolution not revolution."

"What we want to do is hit the deck running on [these] fronts within that framing," he said in an interview yesterday.

Fetting, who previously ran the company's division that includes mutual funds, takes the helm at a challenging time for Legg. Its star fund managers have seen weak returns compared with their peers and customers continue to take money out of Legg's stock funds.

The company's earnings for the fiscal third quarter dropped 11 percent primarily because of a charge related to propping up money market funds invested in mortgage-related securities.

Net profit for the three months that ended Dec. 31 was $154.6 million, or $1.07 per diluted share, compared with $174.6 million, or $1.21 per diluted share, in the year-ago period.

Legg reported yesterday the previously announced after-tax adjustment of $23 million, or 16 cents per diluted share because of the declining value of mortgage-related securities known as structured investment vehicles.

The company has reduced its exposure to SIVs to 2.6 percent of its total liquidity assets, from about 6 percent in October, Fetting said, noting the company has taken a "purposeful" approach to mitigate the situation.

"We will continue to review our exposure, and we'll support the funds as appropriate," company founder Raymond A. "Chip" Mason told analysts. Fetting replaced Mason as CEO.

Legg's assets under management dipped $13.1 billion to $998.5 billion, dropping under $1 trillion from the previous quarter. Net client cash outflows were $9.1 billion in the third quarter, while market losses were $4 billion.

Clients plowed $2 billion into fixed-income accounts, an amount some analysts noted as the lowest in several years.

Clients withdrew $10.6 billion from stock investments, including Legg Mason Capital Management run by renowned stock picker Bill Miller, whose Value Trust fund is lagging behind the market.

Daniel T. Fannon, an analyst at Jefferies & Co. who does not own stock in the company, said it's hard to see a turnaround in cash outflows on equity investments during the next few quarters.

"This is continuing a trend that has blighted the company for a while," he said.

Revenue climbed 5 percent to $1.19 billion compared with $1.13 billion in the third quarter of last year. Shares rose 92 cents, or a little more than 1 percent, to close at $72.18.

Mason, who remains at Legg as a nonexecutive chairman, acknowledged the difficulties facing the company he built into one of the world's largest money managers. Mason noted concerns about the declining dollar, rising energy costs and a recession.

Although Legg's largest equity managers have struggled with client withdrawals amid volatility in the equity market, funds at others subsidiaries such as Royce & Associates have performed strongly, Mason said.

Fetting, whose appointment ends Mason's 38-year tenure, said management is working to improve fund performance by continuing to support its autonomous equity managers, who have been meeting with clients. Fetting said management plans to develop metrics to deliver the best service to clients across its subsidiaries.

Fetting said he also wants to do a better job of marketing Legg's services in the U.S. and abroad. Moreover, Fetting said, he would like to speed up the pace in expanding overseas by possibly adding sales personnel and pursuing an acquisition.

To that end, Mason will take the lead on that initiative. The company recently strengthened its balance sheet by selling $1.25 billion in senior notes to private equity firm Kohlberg Kravis Roberts & Co. and plans to use some of the proceeds to finance an acquisition.

"It's good that [Fetting] didn't go crazy with some initiatives that's tangential to the core problems going on," said Andrew Richards, an equity analyst at Morningstar Inc., who does not own Legg stock. "Everyone recognizes what needs to be done to improve long-term revenue growth."

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