Baltimore-based Legg Mason Inc. (LM) experienced a decline in its assets under management (AUM) in July on a sequential basis. This was preceded by a drop in both June and May AUM.
Preliminary month-end AUM came in at $655.4 billion, down 1.1% from $662.5 billion at the end of June. Moreover, equity AUM and liquidity AUM both plummeted compared with the prior month, while fixed income inched up.
Legg Mason’s equity AUM in July inched down 2.9% from the prior month to $176.2 billion while fixed income AUM surged 1.4% to $370.6 billion. The decrease in equity AUM was compensated by a rise in fixed income, which resulted in stable long-term AUM of $546.8 billion compared with the prior month. On the other hand, liquid assets, which are convertible into cash, edged down 6.1% to $108.6 billion from $115.6 billion at the end of June 2011.
On a quarterly basis, as of June 30, 2011, Legg Mason’s AUM was $662.5 billion, down 2.2% sequentially from $677.6 billion, driven by dispositions and client outflows of $3.7 billion, partly offset by market appreciation. On a year-over-year basis, AUM was up 3.0% from $645.4 billion. Fixed income represented 55% of consolidated AUM as of June 30, 2011, liquidity represented 18% and equity comprised 27%.
During the quarter, fixed income inflows were approximately $0.1 billion, liquidity inflows were $2.0 billion and equity outflows were $5.8 billion. Total client outflows decreased to $3.7 billion from $8.7 billion in the first quarter of fiscal 2012. Besides, average AUM was $670.8 billion, down 0.4% from $673.5 billion in the prior quarter, but increased 0.4% from $668.3 billion in the year-ago quarter.
Earnings Recap
Legg Mason’s fiscal first-quarter 2012 earnings of 73 cents per share significantly outpaced the Zacks Consensus Estimate of 39 cents. Reported quarter results included 6 cents per share in transition-related costs and 5 cents per share of expenses related to closed-end fund launch. Earnings outpaced the prior-year quarter by 4 cents. Results improved due to higher revenue, offset by higher operating expenses coupled with a decline in total AUM.
Peer Performance
Legg Mason’s closest competitor Invesco Ltd. (IVZ) announced its monthly performance report for July 2011. As per the report, Invesco recorded preliminary AUM of $652.8 billion at the end of July, slipping 0.1% from $653.7 billion at the end of June 2011. The AUM fell primarily due to a drop in Institutional money market and the effects of negative market returns. However, foreign exchange increased AUM by $3.2 billion during the month under review.
Further, we believe that Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage to the changing demographics in the market. However, in the near term, assets outflows remained a significant headwind. Yet, with the restructuring initiatives and the cost-cutting measures, we expect operating leverage to improve, and share buybacks to continue boosting investors confidence in the stock.
Legg Mason currently retains its Zacks #3 Rank, which translates to a short-term ‘Hold’ rating. Also, Considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
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