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Legg Mason division to cut jobs by one-third

The Baltimore Sun

Legg Mason Inc. said yesterday that it will cut jobs at its Baltimore headquarters and money-management subsidiaries, starting with the dismissal today of about one-third of the employees at the division run by famed stock picker Bill Miller.

Legg Mason Capital Management, which Miller oversees as chairman and chief investment officer, confirmed yesterday that it plans to cut 40 to 50 people from its work force of 147, with notices going out today.

The Baltimore-based division, like its parent, is having a turbulent year. Clients have pulled large sums of money out of its mutual funds, including the well-known Value Trust fund managed by Miller, and the remaining investments have fallen significantly in value because of poor performance and market volatility.

The news came as the corporate parent reported its third-straight quarterly loss, mostly due to costs of supporting some money-market funds to prevent investor losses.

"Given the unprecedented market environment and its impact on our assets under management, Legg Mason Capital Management made the very difficult decision to reduce its staff by one third," the Baltimore-based subsidiary said in a statement. "The decision was made after careful analysis to ensure we do not compromise the quality of our investment team or process and that we continue to deliver the highest quality of service to our clients."

The parent company did not provide any other details on how many other jobs it will cut and where. Legg is one of the region's largest employers, with about 1,000 employees in Baltimore, and has about 4,220 employees companywide.

Legg Chief Executive Officer Mark R. Fetting said in an interview yesterday that the company would not implement an across-the-board reduction as some of its competitors have announced in recent days.

"We rather go about our cuts in a more surgical way," Fetting said, without elaborating.

Spokeswoman Mary Athridge said job cuts will likely come at the corporate level while Legg subsidiaries, which operate fairly autonomously, would make their own decisions.

Miller, who built his reputation as a contrarian investor, helps oversee a $28 billion portfolio at Legg Mason Capital Management. He is directly responsible for managing the Value Trust fund, which beat the Standard & Poor's 500 index for an unprecedented 15 straight years until 2006.

Since then, the fund has been one of the worst-performing stock funds on the market. The fund's assets have declined to $7.6 billion, from about $20 billion in March 2007.

The fund's shares have lost nearly 51 percent of their value this year, according to Morningstar.

Miller's struggles have contributed to Legg's poor financial performance, and Legg's earnings have been further weighed down by costs to support money-market funds hurt by investments in soured mortgage-backed securities.

The company yesterday reported a fiscal second-quarter loss of $103.8 million, or 74 cents per diluted share, compared with a profit of $177.5 million, or $1.23 per diluted share, in the year-ago period. The results included an after-tax charge of $191.1 million to shore up the money funds.

But Legg shares climbed 30 percent yesterday because earnings, excluding the money-market fund charge, were better than analysts expected. Without the charge, Legg said it would have a profit of $137.2 million for the three months ended Sept. 30, or 97 cents per diluted share.

The stock, which has fallen nearly 77 percent since the beginning of the year, gained $3.94 to close at $16.92 yesterday.

Legg's revenue in the second quarter dropped 18 percent to $966 million, from $1.17 billion from the year-ago period - which Fetting said requires Legg to control its expenses.

Legg is looking to reduce $120 million in annualized corporate expenses in technology, finance and legal services, among others.

The subsidiaries also are expected to trim expenses as they see fit, given their revenues have also declined as assets under management have fallen, Fetting said.

Legg has eight core affiliates, including Pasadena, Calif.-based Western Asset Management Co., its largest unit focused on fixed-income funds, and New York-based ClearBridge Advisors, its largest equity money manager. Each subsidiary generally operates as a separate business, under agreements that typically pay their managers a percentage of revenue.

So when overall revenue declines, each money-management division receives a smaller slice. Legg subsidiaries received $70 million less in revenue compensation in the second quarter compared with the previous three months.

The company showed some signs of improvements in the second quarter.

Assets under management fell 9 percent to $841.9 billion, from $922.8 billion in June, but the decline was less than some of its competitors, Legg said.

About 75 percent of the decline was due to market losses, while Legg clients pulled $20 billion from its funds in the quarter. That's up slightly from $18.4 billion in net outflows in the previous quarter.

But outflows from equity stocks were $9 billion in the second quarter, less than $11 billion in the previous quarter. Investors took out $12 billion from fixed-income funds, while clients invested $1 billion in money market funds.

"Outflows have been steady in the last three quarters; they haven't accelerated," said Morningstar analyst Alan Rambaldini. "It might signal a bottom in terms of outflows."

The company has reduced its money-market funds' exposure to so-called structured investment vehicles by $1 billion, to $4.4 billion, Fetting said. Legg is supporting $4 billion of that debt, while the remaining $400 million is bank-sponsored and will mature in 30 days, he said.

SIVs issue debt, some backed by mortgage-linked securities, that have plummeted in value amid the widening credit crisis. SIVs were popular investments for money funds looking to increase yields.

While acknowledging its challenges, Fetting said many investors are underestimating Legg's ability to weather the financial turmoil and emerge as a stronger company.

"By any set of convention metrics, whether it's price to revenue, price to assets or price to earnings, we're well below any normalized level. Yes, we have some challenges, and yes, the markets overall have significant challenges, but I think this is overdone," he said.

"Ultimately, it will be based on performance. How we grow our business in that regard, I'm increasingly confident based on the management team, our strategy [which was] sharpened and the momentum under way."

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