Overhaul at Legg Mason

The Baltimore Sun

Baltimore money manager Legg Mason Inc. is overhauling its mutual fund lineup and planning to introduce two products after losing millions last year in the market turmoil and as investors pulled money out of its funds.

The reorganization means the company likely will whittle its current offering of 142 mutual funds, Matthew Schiffman, Legg's head of product and marketing, said yesterday.

Legg still expects to introduce two new funds in the spring, said Schiffman, who was appointed to the new position in November to create a product innovation team.

One new fund would invest in municipal bonds. The other is designed as a global allocation portfolio, pulling together mutual funds from Legg's management subsidiaries and other investments, such as exchange-traded funds, Schiffman said.

The changes are designed to help bolster Legg, some of whose mutual funds performed among the worst in the industry in 2008. And industry analysts expect the company to weed out some of its weakest-performing funds in hopes of luring more investors back to Legg's products.

Schiffman said the market turmoil is prompting fund companies to re-examine the strength of their product lineup.

Last year "was clearly off the chart from everyone's experiences and expectations," he said. "All of us, investors and money managers, stumbled out of 2008. ... We need to get back to the basics of getting people to the table and restoring confidence that long-term investing makes sense."

Like many in the mutual fund industry, the worst stock market returns since the Depression hurt Legg's financial performance. The company's assets under management fell nearly 9 percent to $841.9 billion at the end of September, from $922.8 billion in June. And some of Legg's flagship funds, including Bill Miller's Value Trust, posted the weakest returns among their peers.

Across the industry, investors withdrew record amounts from their mutual funds and other investments.

Legg clients withdrew $21.8 billion from the company's stock and bond funds last year, second only to Fidelity Investments, according to data complied by Morningstar Inc.

"The industry has always been in a state of evolution, whereby some strategies come to the fore and others fade," said Jeff Tjornehoj, a senior research analyst at Lipper.

"And 2008 sort of hastened that movement to shed weaker-performing portfolios and strategies, so it's not surprising that firms are evaluating what works and what doesn't work and accelerating the demise of certain portfolios."

Janus Capital Group, for instance, announced this week that it is abandoning its institutional money market business by April 30 as it reported a 60 percent drop in fourth-quarter profit.

Legg, expected to announce its fiscal third quarter earnings Wednesday, said it will take a $632.5 million after-tax charge in the three months ending Dec. 31 because of costs associated with shoring up some of its money market funds.

Review of Legg's fund products began last quarter, and investors will likely see the outcomes in the third or fourth quarter of this year, Schiffman said. Changes would require approval by fund boards.

In evaluating the funds, the company will look at the long-term performance and consider whether they meet the needs of investors.

Besides the creation of two funds, the new product team is looking at developing other funds that meet long-term retirement needs, Schiffman said.

The last time Legg reorganized its mutual funds was 2006, when it streamlined and integrated funds acquired in a business swap with Citigroup. About a third of its funds were liquidated or merged with existing products.

Legg swapped its brokerage firm for Citigroup's asset management business in a $3.7 billion deal in 2005.

The brokerage side of the business was merged into Citi's Smith Barney. A controlling interest in Smith Barney was sold to Morgan Stanley this month.

Shares of Legg Mason closed yesterday at $19.07, up nearly 6 percent. The stock lost almost 70 percent last year.

rethinking funds

Money manager Legg Mason is evaluating its mutual fund lineup and planning to introduce two new funds after a volatile year in which the mutual fund industry saw record outflows and falling assets.

The five money managers with the highest client withdrawals in 2008 were:

1. Fidelity Investments: $40.2 billion

2. Legg Mason Inc. (including Western Asset and Legg Mason Partners funds): $21.8 billion

3. Franklin Templeton Investments: $21.5 billion

4. American Funds: $19.7 billion

5. Putnam: $14.4 billion

Source: Morningstar Inc. Doesn't include money market funds or mutual funds that invest in other mutual funds.

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