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Legg Mason (LM)Stock (Financial Services Industry, Investment Banks Industry)
 In a Wall Street Journal review of mutual fund performance, LM was ranked 57th in overall equities/bond performance but 2nd in tax-exempt bonds.[2] In this same survey, the WSJ concluded that firms like LM and AllianceBernstein, who have large amounts of assets under management and prefer Value-Equity strategies did not perform as well as Growth Managers.[2] Like many firms in the financial services industry, high interest rates hurt business as customers are discouraged from borrowing to invest. Also, Legg Mason uses substantial leverage in its investments, as it has $2.8 billion in total debt.[3] As a consequence of the 2007 credit crunch, some of the bond markets have been particularly volatile and LM has provided--and may continue to provide--money to support the fixed-income funds of its subsidiaries. The WSJ study placed Waddell & Reed, Eaton Vance, and Janus Capital at the top of the mutual fund survey and close competitors of Legg Mason.
[edit] Corporate Overview Legg Mason Assets Under Management Breakdown[4]  Legg Mason Assets Under Management Breakdown[5] According to a 2008 Asset Management ranking published by Pensions and Investments, Legg Mason is the fifth largest institutional manager in the world and the ninth-largest manager of US client assets as of FY2007.[6] The same survey ranked LM the sixth largest pension fund manager by AUM and LM was ranked the largest manager of fixed income assets within the pension fund category.[6] In 2007, Legg Mason achieved all-time highs in revenue and operating income even though total assets under management fell by 2 percent to $950 billion.[7] The fall in AUM was driven by relatively low investment performance, as equity asset outflows totaled about $44 billion, continuing a net outflow trend beginning in September of 2006.[8] However, FY2008 inflows of $15 billion and $3 billion in its fixed-income and liquidity segments helped to offset this decline.[8] [edit] Business SegmentsThe operations of Legg Mason can be divided into three segments:
^No Net Income Data Available [edit] AUM BreakdownLegg Mason's assets under management are divided up into three segments:
The decrease in net income for the fiscal year ending March 2008 was driven by a pair of non-cash transactions. First, Legg Mason gave financial support to some of its money market funds that had invested in Mortgage-Backed Securities (MBS). This financial aid amounted to $313.7 million, or $2.18 per diluted share.[11] Second, LM's purchased one of its Wealth Management subsidiary firms in 2001, and the value of management contracts fell by $94.8 million.[11] Both events cut into LM net income for FY2008, continuing the decrease since 2006.  Legg Mason Revenue, Operating Income, and Net Income Breakdown[12] [edit] Key Trends and Forces[edit] Legg Mason's leveraged investments increase profit opportunities yet inhibit general operationsAs of March 31, 2008, Legg Mason has around $2.8 billion of total debt and $6.6 billion in stockholder's equity.[3] Legg Mason has its own debt regulations that limit the maximum amount of debt the company can carry, so high leverage and debt limits the future ability to take out debt. In fact, regulations hold that the ratio of total debt to consolidated EBITDA cannot exceed 5:2 and the ratio of EBIDTA to interest payments on debt must exceed 4:1.[3] These regulations are in place to prevent LM from using too much of its revenue on principal and interest payments instead of cash flow for other operations.[3] Though high leverage creates the opportunity for greater profitability, continuous debt payments and upper limits on indebtness hamper LM cash flow and future leverage opportunities. [edit] The firm's support of its subsidiaries' liquidity fixed-income funds add to creditAs a result of the 2007 credit crunch, the fixed-income markets, especially the money market funds, have been particularly volatile. As a response to decreased liquidity in the bond markets, LM has provided--and may continue to provide--financial support to some of its subsidiaries. Some of these steps include borrowing $485 million to support securities held by a few of its mutual funds.[13] Additionally, Legg Mason has completed agreements with some of its subsidiaries to provide $415 million in support should the funds incur significant losses in commercial paper securities.[13] In total, FY2008 saw non-cash expenses amounting to $608.3 million, which was more than half of operating expenses and nearly three times net income of FY2008.[13] [edit] High interest rates hurt investment returnsThe bulk of LM's investments are in bonds and equities (82%) and both are impacted by high interest rates. The value of bonds is inversely proportional to the interest rate, so higher interest rates mean lower investment returns for fixed-income funds. Secondly, high interest rates discourage investors from borrowing funds for Legg Mason to invest, which hurts both the Managed Investments and Institutional segments. Finally, Legg Mason payments on debt increase along with interest rates and becomes especially significant when the firm has $2.8 billion in debt. [edit] CompetitionLegg Mason competes with a variety of companies within the financial services industry. Its closest competitors include Eaton Vance, Janus Capital and T. Rowe Price, which all invest in mutual funds. The Wall Street Journal published a mutual fund family ranking based on factors such as U.S. equity, world equity and bond performance, which listed Legg Mason in 57th total but second in tax-exempt bonds.[14] Waddell and Reed, Eaton Vance, and Janus Capital were the top three firms overall.[14] Below is a chart of relevant operating metrics for Legg Mason and its industry competitors.
Note: Margins and Returns Data for all companies but JNS taken from Reuters on September 30, 2008. JNS taken on October 11, 2008
 Legg Mason2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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