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WIKI ANALYSIS
Legg Mason, Inc. (NYSE: LM) is an asset manager that provides investment management and similar services to institutional and individual clients, as well as company sponsored mutual funds. Legg Mason has over $632.4 billion in total assets under management, with clients ranging from retirement accounts to endowments to individual investors.[1] It earns revenues from a number of fees it charges to investors such as investment advisory fees, which are generally based on a percentage of the AUM. Legg Mason's net income fell from $268 million in 2008 to a $1.95 billion loss in 2009[2]
In response to this loss as well as tumultuous markets caused in part by the 2007 Credit Crunch and 2008 Financial Crisis, Legg Mason restructured its business segments. In 2009, Legg Mason not only replaced three executive officers, but it also restructured its three former business operating segments (Managed Investments, Institutional Management, and Wealth Management) into two geographically based segments: the Americas and International.[3] Since the 2007 credit crunch began, many of the bond markets have been particularly volatile and Legg Mason has provided $607 million in 2008 and $2.3 billion in 2009 in fund support to its fixed-income funds.[2]
For its second quarter of 2010, (Legg Mason's fiscal year ends March 31), Legg Mason earned $45.8 million in net income, compared to a loss of $108.7 million for the same period one year ago.[4] Despite operating revenues declining from $966 million in 2009 to only $660 million in 2010 for this quarter, Legg Mason had a $325 million fund expense in 2009 that it did not have to fund again in 2010.[5]
Company Overview
Legg Mason is a holding company that, through its subsidiaries, acts as a global asset management company. It provides investment management and similar services to institutional and individual clients and company sponsored mutual funds, among others. Its main source of revenue comes from its fees generated from managing assets for clients, and therefore also depends on its assets under management (AUM) level.
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]
Business and Financial Metrics
In 2009, Legg Mason had operating revenue of $3.4 billion, operating expenses of $4.0 billion, operating loss of $669 million, and a net loss of $1.9 billion.[2] Legg Mason's 2009 operating revenue fell 28% to $3.4 billion, largely due to its average AUM declining by 18% and a decline in average equity assets of approximately 38%.[9] Combined with a shift away from higher fee equities towards fixed income in its AUM, this resulted in lower fees, and thus lower revenues. Net income declined from $267.6 million in 2008 to a $1.9 billion loss in 2009 for a number of reasons, in part due to lower revenue, higher expenses, and a $2.3 billion charge related to Legg Mason eliminating their Structured Investment Vehicle (SIV) exposure at a loss.[1] As of March 31, 2009, Assets Under Management (AUM) stood at $632.4 billion, a 33% decline from its 2008 level of $950.1 billion.[1] Of the $317.7 billion decrease in AUM, $159 billion is attributed to net client outflow, meaning clients reduced the amount of assets they want Legg Mason to manage.[1] The remaining $158 billion is due to market depreciation, as equity and other asset values have fallen.[1]
For its first quarter of 2010 (Legg Mason's fiscal year ends March 31), Legg Mason turned a $50.1 million profit, compared to its $36.1 million loss a year ago.[10] Its operating revenue was $613.1 million, a decline from its year ago revenue of $1.1 billion; however, total assets under management increased 4% from $632.4 billion to $656.9 billion during the first quarter of 2010.[10]
| Legg Mason Financials (In Millions) | 2005[11] | 2006[11] | 2007[11] | 2008[11] | 2009[2] |
| Operating Revenues | 1,571 | 2,645 | 4,344 | 4,634 | 3,357 |
| Operating Expenses | 1,082 | 1,965 | 3,315 | 3,584 | 4,027 |
| Operating Income | 489 | 680 | 1,028 | 1,050 | -669 |
| Net Income | 408 | 1,144 | 647 | 268 | -1,948 |
Note: Legg Mason's fiscal year ends March 31.
Business Segments
In 2009, Legg Mason restructured from its business, reducing its former three operating segments (Managed Investments, Institutional Management, Wealth Management) into two: Americas and International.
Americas (68.2% of Operating Revenue, 70.6% of Assets Under Management (AUM)[8])
In 2009, Legg Mason's operating revenue from its Americas segment was $2.29 billion, a 28.8% decrease from its 2008 operating revenue of $3.22 billion.[7] This was primarily due to a declines on investment advisory fees, including reductions in its mutual fund advisory fees and separate account advisory fees.[7]
International (31.8% of Operating Revenue, 29.4% of Assets Under Management (AUM)[8])
Operating revenue in Legg Mason's International segment fell 24.7% in 2009 to $1.07 billion, compared to its 2008 operating revenue of $1.42 billion.[7] This decline in the International division was primarily due to decreases in fund revenues and performance fees, lower separate account advisory fees on assets managed, and decreased distribution and service fee revenues from International balanced and fixed income funds.[7]
AUM Breakdown
Legg Mason's assets under management are divided into three segments: Equity Assets, Fixed Income Assets, and Liquidity Assets.
Equity Assets (20.1% of 2009 AUM)
This segment of Legg Mason specializes in stocks, and its percentage of total LM AUM has fallen from 37.5% in 2006 to 20.1% in 2009.[8] Traditionally, advisory fees for equities are higher than for fixed income or liquidity assets, meaning Legg Mason's revenues increase when more of its AUM is in equities rather than other asset classes.
Fixed-Income Assets (56.5% of 2009 AUM)
LM's Fixed Income investments, or bonds, refer to funds invested in a government, corporation, or financial institution where regular returns to investors are based on the current interest rate. LM's AUM in this segment has increased steadily from 47.3% in 2006 to 54.0% in 2009 as a fraction of total AUM.[8] Part of the increase is attributed to declining stock markets and economic uncertainty.
Liquidity Assets (23.4% of 2009 AUM)
Liquidity investments include funds that are more accessible in the short run, such as cash and savings deposits. LM's AUM in this segment has grown as a percentage of total AUM from 15.2% in 2006 to 20.9% in 2008, due in part to increasing demand for more liquid assets on the part of investors.[8]
Key Trends and Forces
Legg Mason's leveraged investments increase profit opportunities yet inhibit general operations
As of March 31, 2008, Legg Mason has around $2.8 billion of total debt and $6.6 billion in stockholder's equity.[12] 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.[12] 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.[12] 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.
The firm's support of its subsidiaries impose costs
As a result of the 2007 credit crunch, the fixed-income markets have been particularly volatile. In response to decreased liquidity in the bond markets, Legg Mason provided financial support to its subsidiaries. In 2008, Legg Mason's fund support expense was $608.3 million, which was more than half of operating expenses and nearly three times net income.[2] In 2009, its fund support costs were $2.3 billion, contributing to its net loss of $1.9 billion.[2] The large increase was mainly due to Legg Mason eliminating their exposure to structured investment vehicles (SIV) by selling at a steep loss.[1]
Legg Mason faced interest rate risk
A significant portion of Legg Mason's investments are in bonds and equities, and both are impacted by higher interest rates. The value of bonds is inversely proportional to the interest rate, meaning higher interest rates represent lower investment returns for fixed-income funds. Higher interest rates also discourage investors from borrowing funds for Legg Mason to invest, which negatively impact its AUM. Finally, Legg Mason payments on debt increase along with interest rates and is significant since Legg Mason has $2.97 billion in long term debt.[2]
Competition
Legg Mason faces a number of competitors that offer similar services, including but not limited to Eaton Vance (EV), BlackRock (BLK), and T. Rowe Price Group (TROW), all of which invest in mutual funds.
- BlackRock (BLK), with $1.3 trillion in Assets Under Management (AUM), is among the largest investment advisory firms in the world.[13] In 2008, it had total revenues of $5.1 billion and net income of $786 million.[13]
- Eaton Vance (EV) had $127.2 billion in AUM as of April 30, 2009, making it another significant investment management firm.[14] In 2008, its revenues were $1.1 billion, and its net income was $195.7 million.[15]
- T. Rowe Price Group (TROW) is another large investment management firm, with$276.3 billion in Assets Under Management (AUM). In 2008, it had revenues of $2.1 billion, and net income of $491 million.[16]
| Company | AUM (In Billions) | Operating Revenue (In Millions) | Operating Expense (In Millions) | Net Income (In Millions) |
| Legg Mason[17] | 632.4 | 3,357.4 | 4,026.5 | -1,947.9 |
| Eaton Vance[15] | 127.2 | 1,095.0 | 732.0 | 195.7 |
| BlackRock[13] | 1,307.0 | 5,064.0 | 3,471.0 | 786.0 |
| T. Rowe Price[16] | 276.3 | 2,116.0 | 1,267.8 | 491.0 |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 LM 10-K 2009 Item 7 Pg. 37
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 LM 10-K 2009 Item 6 Pg. 33
- ↑ LM 10-K 2009 Item 1 Pg. 3
- ↑ Legg Mason swings to profit. Greg Morcroft. MarketWatch.
- ↑ LM 10-Q 2010 Item 1 Pg. 3
- ↑ LM 2008 Annual Report pg. 10
- ↑ 7.0 7.1 7.2 7.3 7.4 LM 10-K 2009 Item 7 Pg. 40
- ↑ 8.0 8.1 8.2 8.3 8.4 8.5 LM 10-K 2009 Item 7 Pg. 38
- ↑ LM 10-K 2008 Item 7 Pg. 41
- ↑ 10.0 10.1 Sue Chang. Legg Mason earnings improve in first quarter. MarketWatch.
- ↑ 11.0 11.1 11.2 11.3 LM 10-K 2008 Item 6 Pg. 32
- ↑ 12.0 12.1 12.2 LM 2008 Annual Report pg. 15
- ↑ 13.0 13.1 13.2 BLK 10-K 2008 Item 6 Pg. 30
- ↑ Eaton Vance Press Releases.
- ↑ 15.0 15.1 EV 10-K 2008 Item 8 Pg. 49
- ↑ 16.0 16.1 TROW 10-K 2008 Item 8 Pg. 23
- ↑ LM 10-K 2009 Item 8 Pg. 72
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