Plain vanilla beats flash

The Baltimore Sun

Baltimore-based T. Rowe Price Group's plain vanilla approach to investing led it to a $162.2 million quarterly profit, while its flashier crosstown peer, Legg Mason Inc., reported a $31.3 million loss as its star fund managers continued to struggle in a bear market, the companies reported yesterday.

Price's profit for the second quarter that ended June 30 matched the $162.2 million it earned in the year-earlier period despite a volatile market that left most major financial firms staggering. The firm's conservative approach was a draw to whipsawed investors, who poured $8.1 billion of new money into its funds.

By contrast, investors pulled $18.4 billion from Legg funds as its managers continued to trail their peers. The fiscal first-quarter loss compared with a profit of $191 million in the year-earlier quarter. Still, it represented a significant improvement from the previous quarter's loss of $255.5 million - Legg's first since going public in 1983.

The firm continued to shore up its troubled money funds, resulting in a $155.4 million charge after taxes and adjustments for expenses.

Chief Executive Officer Mark R. Fetting said there are "no new discoveries or difficulties" in the funds, and the firm doesn't expect to raise additional capital to support them.

Analysts say the quarterly results reflect the contrasting management styles of Baltimore's two biggest money managers. If they were baseball teams, Price would have a roster of dependable hitters, consistently producing singles and doubles but rarely winning the World Series, said J. Jeffrey Hopson, a Stifel Nicolaus analyst who has a "hold" rating on the shares. Legg's team would be packed with streaky all-stars who often swing for the fences but sometimes fall short.

"Unfortunately, right now their streaky players are cold," Hopson said.

But Hopson said Legg is getting closer to working out the problems in its money funds, and its talented equity fund managers won't be in a slump forever.

"I think they'll survive this and they'll have their day," he said.

Legg's quarterly loss amounted to 22 cents per share, compared with profit of $1.32 a year earlier. Legg shares gained $1.30 to $39.51 in trading yesterday. The shares traded at $97.54 a year ago, and are down 46 percent this year.

T. Rowe Price's shares climbed 61 cents to $56.62 per share, and are down 7 percent on the year.

Legg's revenue slipped 13 percent to $1.05 billion for the quarter. Investors withdrew $11 billion from the firm's stock and fixed-income funds. Withdrawals from bond funds were partially offset by roughly $4 billion in deposits to money market funds. Assets under management were $922.8 billion, down 7 percent from a year ago.

Much of the withdrawals on the equity side came out of the Legg Mason Capital Management division run by Bill Miller; fund manager Bruce Sherman's Private Capital Management; and ClearBridge Advisers.

But Fetting said the firm's funds will rebound as the market moves back to the kind of value-driven holdings that make up much of Miller's portfolio. He noted that Miller's Value Trust fund, which has trailed benchmarks after beating the market for 15 straight years, has gained 600 basis points, or 6 percent, on the S&P; 500 index since July 15th.

Miller's fund took hits in recent months because of its large investments in Bear Stearns and Fannie Mae, both of which have been at the heart of the housing and credit crises. He also has a major position in Yahoo, whose shares fell after its proposed deal with Microsoft fell apart.Referring to Value Trust's recently improved performance, Fetting said, "That's primarily because [Miller] and the team have stayed true to their portfolio."

The fund was down 30 percent for the year through yesterday, according to Morningstar Inc.

At Price, revenue grew to $587 million from $551 million in the year-earlier quarter. The results equaled 60 cents per share, compared with 58 cents a year ago. The 3 percent difference in earnings reflects the firm's repurchase of 11.2 million of its shares.

Hopson, the Stifel analyst, said Price's solid earnings were partially the result of its emphasis on retirement funds. Investors generally continue to invest in retirement accounts during difficult swings in the market. Price's target-date retirement funds, which adjust assets as investors age, now account for 13.6 percent of its mutual fund assets. Investment advisory revenue grew 7 percent, or $31.2 million, from the year-earlier period.

Mutual fund assets climbed $2.8 billion, or 1.2 percent, during the quarter, but remain down 5.2 percent from the start of the year.

James A.C. Kennedy, Price's chief executive and president, said results will continue to be challenged by a tough economy, which he said is unlikely to see significant improvement as the housing crisis reaches bottom."But this economy is quite resilient," he said. "We'll come through this, and come through this just fine."

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