These days, Legg Mason Inc. is a bit weak in the knees.
These days, Legg Mason Inc. is a bit weak in the knees.
The Baltimore-based mutual fund company, which acquired the money-management group of New York's Citigroup Inc. last year, is battling significant outflows of cash from some of its largest mutual funds.
Investors pulled $9.6 billion more in equity assets from the company than they put in during the quarter ended Sept. 30, compared with $5 billion in net outflows in the year-earlier period, according to the company's earnings reports.
Year-to-date through Sept. 30, the company's stock and bond funds had bled $3.7 billion compared with $1.51 billion in inflows a year earlier, according to Financial Research Corp. of Boston
Also, two of its most prominent funds — the $19 billion Legg Mason Value Trust (LMVTX) and the $9 billion Legg Mason Partners Aggressive Growth Fund (SHRAX) — have the dubious distinction of appearing on the latest mutual fund "lemon list" issued by newsletter editor Doug Fabian.
To make this dreaded list, which is updated quarterly, a fund has to have lagged its benchmark for the past one-, three- and five-year periods.
Legg Mason disputes the inclusion of its funds on the list.
"We believe their data is flawed," said a company spokeswoman, Mary Athridge. "Our data doesn't support the findings of this survey and we continue to support our managers' long-term records, which are excellent."
For the lemon list, Mr. Fabian said, he compares funds with their peers according to categories classified by the major data services. He said he gets his data from Lipper.
"It's three strikes, and you're on the list," Mr. Fabian said. "You have to have underperformed, compared to your peers, for the one-, three- and five-year periods.
"I stand by my data," Mr. Fabian added. "There are other good funds at Legg Mason."
Legg Mason Value Trust's 15-year streak of outperforming the Standard & Poor's 500 stock index ended in 2006. Year-to-date through last Wednesday, the fund had fallen 4.87%, trailing the S&P 500 by 10.22 percentage points. It is in the bottom 2% of large-cap-blend funds, according to Morningstar Inc., a Chicago-based fund tracker.
Year-to-date through Sept. 30, investors had pulled $1.39 billion more out of Legg Mason Value Trust than they had put in, according to FRC.
"They're suffering," said Burton Greenwald, a Philadelphia-based mutual fund consultant. "This is a period where [fund manager] Bill Miller is out of sync. He had a halo effect on the entire Legg Mason operation."
Mr. Miller's unprecedented streak of beating the S&P 500 may have set investors' expectations for Legg Mason too high, said Mr. Greenwald.
"Miller — it turns out the guy is mortal," Mr. Greenwald added. "He stumbled, which they all do."
That said, Mr. Greenwald is confident that Legg Mason will recover from its missteps.
"Legg Mason has excellent products, excellent managers and a good team," he said. "They will weather the storm and come out strong."
Indeed, Legg Mason may be down, but it's not out.
In September, the firm's overall assets under management crossed the $1 trillion threshold for the first time.
For Legg Mason's second fiscal quarter, which ended Sept. 30, assets increased 13% over the level in the year-earlier period. The company's net income was $177.5 million, or $1.23 per share, up 24%, and earnings were up 23%. Flows into its fixed income products were strong at $11 billion.
Even so, year-to-date through last Wednesday, Legg Mason shares had dropped 20.3% to $75.18.
"The firm has been through lots of market cycles, good and bad. We will forge through this one and continue to provide excellent long-term results," said Mark Fetting, senior executive vice president of the managed-investments group at Legg Mason.
"We are always vigilant and remain confident in the long-term success of our managers and our firm," he added. "If it extends to a longer time period, then we would be more concerned. We do not believe that's the case in this current situation."
Mr. Fetting attributed the bout of underperformance to the firm's contrarian style of investing.
"On the short term, they buy what others don't see as valuable, and it takes time to earn those returns," he said of the firm's managers.
That said, Mr. Miller is tweaking his investment approach in an effort to boost returns.
"The fund will become more of what it already is, large-capitalization U.S., as we systematically reduce our mid-cap names in favor of those with larger market values," he wrote in a November letter to shareholders. "We will own more stocks, and in new industries."
Many of Legg's funds are doing well, Mr. Fetting added, such as Legg Mason Growth Trust, international-equity funds, small-cap Royce Funds and Western Asset Management Co.'s fixed-income portfolios.
While that may be true, Legg Mason continues to face challenges.
On Nov. 16, Fitch Ratings Inc. of New York reduced its outlook on the firm's debt to "negative" on concerns that it will be forced to spend more to protect its money market funds from losses on structured-investment vehicles.
On Nov. 9, Legg announced that it had invested $100 million in one of its money funds and arranged $238 million in credit for two others to cushion them against SIV losses.
"We do have limited exposure issues in the midst of an unprecedented liquidity challenge," said Mr. Fetting. "We will provide support where it makes sense.
Thus far, that seems to be meeting with a good response. We stay very close to our clients."
In June 2005, Legg Mason an-nounced that it was swapping its brokerage business for New York-based Citigroup Inc.'s asset management business and gave Citigroup and Smith Barney, also of New York, exclusivity in the sale of Legg Mason Capital Management Funds. The deal closed last July.
Legg Mason modified its exclusive relationship a couple of months ago and now has the ability to sell certain share classes of Legg Mason Capital Management Funds — institutional shares and financial-institution shares — on other distribution channels, said Donald Froude, head of U.S. retail and U.S. distribution at the firm.
"We are able to go to some of the firms we have distribution agreements with and offer them the opportunity to have some of the Legg Mason Capital Management Funds so they can offer them in their fee-based products," he said. "They are the perfect funds to go on a wrap or fee-based platform."
Primary shares are still sold through the exclusivity agreement set to expire in February 2009.
"We are seeing traction in that as we speak," said Mr. Froude. "We are working with a variety of partners and introducing the product to financial advisers and brokers."
The firm is also expanding its retirement business, using existing products but introducing the sale of R shares, Mr. Froude added.
Legg Mason is seeking a new chief executive in anticipation of the retirement of Raymond "Chip" Mason, who has served in that post since 1981.
No deadline has been set.
The company is doing "all right," said Andrew Richards, a Morningstar stock analyst.
"Their equity offerings are only one-third of the funds they have to offer. They have so many other moving parts to that company that are all doing just fine."
Sue Asci can be reached at sasci@crain.com.
