Legg Mason, Inc. (LM)

Legg Mason, Inc. – Just Need Time to Be Recognized?
Legg Mason, Inc. (LM) is a global asset management company, providing investment management and related services to institutional and individual clients, company-sponsored mutual funds and other pooled investment vehicles. LM breaks down their operations into Americas and International segments. In May 2010, Legg announced an initiative to streamline business model which will integrate the Americas and International segments.

 LM is a holding company which provides services through a number of asset managers. The major revenue comes from fees charged for managing the investment assets of clients.  Fees are calculated as a percentage of the value of assets under management (AUM). The fluctuation of AUM affects the revenue status of LM.

For the fiscal years ended March 31, 2010, 2009 and 2008, the AUM of Americas is $476.8 billion, $475.8 billion and $446.7 billion respectively, while the total investment advisory revenues are $2.3 billion, $2.9 billion and $3.9 billion respectively. AUM decreased by $50.7 billion, or 7.7%, from $662.5 billion at June 30, to $611.8 billion at September 30, 2011. The decline of equity assets and shift to fixed income contributed this performance.

There are 16 asset managers, each of which focuses on a portion of the asset management industry.

Under Americas division, the major asset managers are listed below.

Western Asset Management Company believes in long-term, fundamental, value-oriented investing and there are significant inefficiencies existing in the fixed-income markets. Western Asset managed assets of $303.4 billion as of March 31, 2010.

ClearBridge Advisors which managing 26 equity funds, retail separately managed accounts programs, and institutional clients. Clear Bridge offers a diverse array of investment styles and disciplines, such as large-cap growth and core equity management. ClearBridge generally utilizes a bottom-up, primary research intensive, fundamental approach to security selection that seeks to identify companies with the potential to provide solid economic returns. ClearBridge managed assets with a value of $54.4 billion as of March 31, 2010.

Royce & Associates, LLC managed $33.9 billion as of March 31, 2010.

Brandywine Global Investment Management, LLC managed $30.4 billion as of March 31, 2010.

Batterymarch Financial Management, Inc. managed a value of $20.9 billion as of March 31, 2010. Batterymarch applies quantitative tools to process fundamental data.

Legg Mason Capital Management (LMCM) managed six Legg Mason Funds, with a value of $17.9 billion. The stellar manager Bill Miller will step down and Sam Peter will succeed him on April 30, 2012. The $22 billion of AUM has waned to just below $3 billion from height of 2007 to the present. Bill Miller had continuously beaten the S&P 500 for 15 years in a row, delivered an inflation-busting annual return of 11.25 per cent in the past 30 years had put a fatal bet on consumer and financial stocks in recent years. People in the street say that Bill’s past glory were purely based on luck, however, statistically, I think it’s too rare a case to justify “luck factor only”. But I am very curious why such a great manager would keep sticking on his mistakes since 2005? There must be a complex story behind Bill Miller’s strategy and psychology.

The AUM managed by Western Asset Management Company is way much larger than that of LMCM ($303.4 versus $20.9) even though the media has talking more about the miserable Bill Miller. I am more interested to know the leader/manager that is running the giant Western Asset Management Company.

On September, 2008, Ken Leech would be stepping down from his role as Chief Investment Officer (CIO) at Western Asset Management while Steve Walsh will step up to the plate. His roles spread from Strategy Formation, Portfolio Management, Client Facing to Managerial Duties. He has been recognized an energetic motivator.
It is well known that asset management industry is affected by the market conditions tremendously. Since 2008, the global market has been concerning about debt issues, which contributed to significant contraction in LM’s business. However, in the tailwind time period, LM had been performing pretty well as can be seen from the stock price souring up from around $9 per share in 1996 to $125 per share in 2006, standing out to be the largest focused player in the sector of “institutional investment”.  In contrast, LM couldn’t maintain its competitive advantage over headwind period – after the financial crisis that happened in 2008. The stock price plunged to $11.14 on March 2009 and has been staying under $36 per share ever since.

I will look into the competitive landscape of asset management to understand what is going on behind LM’s performance. The principal competitive factors relating to this type of business are the quality of advice and services provided to investors, the performance records of that advice and service, the reputation of the company providing the services, the price of the services, the products and services offered and distribution relationships and compensation offered to distributors.
So the reputation which is verified by the track record that is being monitored by agents like Morning Stars every day is the key factor. This is a cruel and stressful game. Based on the past ten years’ terrific performance of this company, I think the bottom-up, fundamental strategy with some unique core advantage/know-how in this company has demonstrated its success, and these advantage/know-how always heavily relies on the human assets – employees in the company. The other important factors that contribute the success of LM could be management on motivation of the human assets, resource allocation and integration, technology adoption et al.

However, how to explain the relative worse performance of LM since 2008? Is it because the core valued-based strategy doesn’t work anymore, or is it because  the management has lost the know-how advantage that once kept LM ahead of the peers, or,  is it possible that nothing goes wrong with LM, instead, the investors/clients just need more patience to wait several years to witness LM’s fundamental approach reap great profits again?

People are talking about High Frequency Trading (HFT) a lot recently, which stands opposite to fundamental approach. Is HFT destructive to the market? Is HFT squeezed the profits that belong to fundamental guys, and in this case, adversely affected firms like LM?

I think HFT absolutely need to be more regulated, however, HFT shops only reap pennies in the street, while fundamental guys collect dollars, even though fundamental guys may need to wait several years to see the profits coming out.

Looking deep into companies, knowing what they are doing, what competitive landscape is, what other companies they have business relationship with, what geopolitical risk they might be exposed to, what is the value/culture of the firm, what type of leads/manager is running the company, what the balance sheet looks like…then you would be confident whether you should invest money into the firm or not. It’s so basic and simple, but it’s hard to apply for people in the market.

Because people are greedy when the market goes up and scared when the market goes down…

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