Legg posts loss, first in 25 years

The Baltimore Sun

Legg Mason Inc. suffered its first quarterly loss in the public company's 25-year history after spending millions to support several of its money market funds hampered by mortgage-backed debt.

The Baltimore asset manager reported yesterday a bigger-than-expected loss of $255.5 million, or $1.81 per diluted share, in the fiscal fourth quarter that ended March 31, compared with a net profit of $172.5 million, or $1.19 per diluted share, in the corresponding period last year. Besides more cash infusions to shore up its troubled money market funds, yesterday's results showed investors continuing to pull money from underperforming stock funds overseen by star managers, such as Bill Miller and Bruce Sherman. Legg's stock lost $6.46, or 10.29 percent, to close at $56.30 yesterday. Shares have fallen 21 percent since the beginning of the year.

The company took a $151 million impairment charge to account for the reduced value of management contracts under Sherman's Private Capital Management, which was acquired by Legg in 2001. That's because some clients have stopped doing business with Private Capital Management, which manages money for wealthy individuals.

To shore up its balance sheet, Legg also announced plans yesterday to raise $1 billion by selling 20 million equity units. The company said it will use the money to support its liquidity funds, finance acquisitions or pay debt. It's the second time in six months that Legg has taken steps to generate cash. In January, Legg said it sold $1.25 billion in senior notes to private equity firm Kohlberg Kravis Roberts & Co.

While acknowledging his disappointment in Legg's earnings, Chief Executive Officer Mark R. Fetting told analysts yesterday that things are starting to look up, including evidence of better mutual fund returns by some managers.

"For the first time in more than a year ... I have to say we are gratified to see some daylight on the horizon," said Fetting, noting the Federal Reserve's recent moves to loosen the global credit crunch as an example. "It appears that in the credit crisis, we are at or near the summit with the worst of the elevation behind us. Yet, we also believe the next phase of our expedition continues to be very demanding and not prone to quick fixes."

Since November, Legg has infused nearly $2 billion to prop up its money market funds to cover unrealized losses from structured investment vehicles, or SIVs, which issue debt that has lost value as the market continues to worsen for mortgage-backed securities.

As of March 28, about 2 percent of its $176 billion of money market and cash assets under management had exposure to SIVs, Legg said.

The company's cash support is intended to prevent the value of the money market funds, considered a safe investment, from dropping below $1 per share, a rare occurrence known as "breaking the buck."

Legg attributed its fourth-quarter loss largely to an after-tax charge of $291 million, or $2.06 per diluted share, related to shoring up its money market funds, which was larger than the company previously announced. The company allotted $517 million in the fourth quarter to support its money funds.

Fetting said improving the performance of Legg's stock funds remains a major priority. He told analysts that he has met with all managers and has had "candid discussions" about performance.

"I can assure you for those where there is an underperformance issue, they are immensely aware of it and focused on improving those records," Fetting said.

Besides Sherman's Private Capital Management, Miller's Value Trust Fund and ClearBridge Advisors have seen clients move their money elsewhere.

Assets under management as of March 31 were $950.1 billion, down $48.4 billion from the previous quarter. Market depreciation was $28.5 billion, while net client cash outflows were $19.2 billion in the fourth quarter.

Legg saw money market investments of $5 billion. But clients withdrew $17 billion from stock funds and another $7 billion from fixed-income products.

Legg's revenue in the fourth quarter was $1.07 billion, down about 6 percent from $1.14 billion in the corresponding period last year.

Analysts said they were concerned that more clients were taking their money out of Legg's equity mutual funds.

"Weak investment performance and money fund capital support issues continue to weigh on [Legg's] fundamentals, which, this quarter, were exacerbated by equity market declines," Michael Hecht, an analyst at Banc of America Securities, said in a research report.

Matthew Albrecht, an analyst at Standard & Poor's, reduced his earnings forecast for the year to $4.45 a share from $4.90 as he expects lower asset balances and a shift to fixed incomes to hurt revenue this fiscal year.

Legg's "performance continues to lag peers," Albrecht wrote yesterday in his research note.

Fetting said he is confident that Legg's top managers will turn things around and deliver long-term results. He said Miller, for instance, is pursuing other opportunities, such as a financial services mandate from a sovereign wealth fund, which manages funds for foreign governments. Fetting declined to give additional details.

Miller's Value Trust Fund, which beat the S&P; 500 Index for 15 consecutive years, had the worst performance relative to the benchmark index for the three months ended March 31 in its 26-year history.


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