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 $684.5 billion in total assets under management, with clients ranging from retirement accounts to endowments to individual investors. 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 swung from a $1.97 billion loss in 2009 to a net profit of $204 million in 2010 (Legg Mason's fiscal year ends March 31 of each year).
In response to tumultuous markets caused in part by the credit crunch and financial crisis, Legg Mason restructured its business segments. 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.
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.
In 2010 (Legg Mason's fiscal year ends March 31 of each year), Legg Mason had total operating revenues of $2.6 billion, operating expenses of $2.3 billion, an operating income of $321 million. Legg Mason was able to swing to a net profit from its 2009 net loss of $1.97 billion primarily because it avoided a $1.4 billion charge related to unwinding its Structured Investment Vehicle (SIV) products, as well as avoiding an $864 million impairment on its goodwill.
Legg Mason restructured its business, reducing its former three operating segments (Managed Investments, Institutional Management, Wealth Management) into two: Americas and International. Americas (70.9% of Operating Revenue, 69.5% of Assets Under Management (AUM)) International (29.1% of Operating Revenue, 30.5% of Assets Under Management (AUM))
This segment of Legg Mason specializes in stocks, and its percentage of total LM AUM has fallen from 37.5% 25.4%. 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.
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% to 53.2% as a fraction of total AUM. Part of the increase is attributed to declining stock markets and economic uncertainty.
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, due in part to increasing demand for more liquid assets on the part of investors.
For the first time in its company history, Legg Mason will try to run actively managed ETFs. Legg Mason is trying to enter into the fastest growing segment of the asset management industry, as ETF assets have increased ten times in the past decade to $777.1 billion. The application process can take months to approve, and even if approved, it remains to be seen if Legg Mason can offer desirable products against industry giants such as BlackRock (BLK), which had $495.5 billion in ETF assets after it acquired Barclays Global Investments. However, if successful, an actively managed ETF may generate substantial income for Legg Mason in the future.
Legg Mason has around $1.2 billion of total debt and $5.8 billion in stockholder's equity. 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. 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. 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 company has reported high outflows in the past. This continues an alarming trend for the company, especially since it earns revenues based on its total assets under management (AUM). While this outflow from equity towards fixed income is an issue that the entire industry faces, Legg Mason has been unable to capture the resulting inflow of capital into fixed income securities.
Legg Mason announced a significant overhaul of its executive structure, with only CEO Mark Fetting remaining in the same role. The goal of the executive shake up is to try and slow and eventually stop the firm's asset outflows. Legg Mason had total asset outflows of nearly $13 billion. Whether this redefining of roles on the executive level will help turn things around is still uncertain. For the first quarter after the realignment, Legg Mason had net asset outflows of $16.7 billion.
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.