Legg Mason Inc. (LM): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
Legg Mason's fiscal second-quarter 2015 earnings outpaced the Zacks Consensus Estimate, however it came below the prior-year quarter figure. Top line growth and increased assets under management (AUM) with net client inflows were the positives. However, these were partially offset by higher expenses. The company looks ahead to reinforce its global investment products portfolio through several acquisitions it has undertaken. Further, recently it acquired UK-based international equity specialist firm Martin Currie. 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 market demography. However, a persistent low interest rate environment, regulatory headwinds along with a volatile economy keeps us apprehensive.


Overview:

Headquartered in Baltimore, MD, Legg Mason Inc. (LM) is a global asset management firm focused on the growth and preservation of its clients' capital through its proprietary mutual funds and separately-managed accounts (SMAs). It was founded in 1899 and incorporated in 1981. As a holding company, Legg Mason provides asset management, investment banking and related financial services through its various subsidiaries. The company conducts its business primarily through 6 core asset managers and 4 additional asset managers. The company operates principally in the United States of America and the United Kingdom but also has offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Luxembourg, Poland, Singapore, Spain, Switzerland and Taiwan.

In Dec 2005, Legg Mason changed its business model to focus solely on asset management through an asset-swap transaction with an investment banking firm. In this transaction, Legg Mason sold its capital markets, as well as private client businesses, and acquired the asset management arm of the firm. Legg Mason and its subsidiaries operate through 3 primary divisions: Managed Investments, Institutional, and Wealth Management. The company markets its services to individuals and institutions through brokerage houses, insurance companies, and other third-party distributors.

Legg Mason is organized around 2 principal revenue segments:

The Investment advisory Services segment (accounted for 87% of total operating revenue in fiscal 2014) includes discretionary and non-discretionary management of separate investment accounts in numerous investment styles for institutional and individual investors. The investment products include proprietary mutual funds ranging from money market and other liquidity products to fixed income, equity funds managed in a wide variety of investment styles, other domestic and offshore funds offered to both retail as well as institutional investors, and funds-of-hedge funds.

The Distribution and Service Fees segment (13%) includes fees received for distributing investment products and services or for providing other support services to investment portfolios, and are generally calculated as a percentage of assets in an investment portfolio or as a percentage of new assets added to an investment portfolio.

Legg Mason's AUM is split between fixed income, equity and liquidity investments. Equity assets are primarily managed by ClearBridge, Royce, Batterymarch, Permal and Brandywine, with fixed income assets primarily managed by Western Asset and Brandywine, and liquidity assets managed by Western Asset.

As of Sep 30, 2014, Legg Mason's AUM was $707.8 billion. Of the total AUM, fixed income constituted 51%, liquidity 22% and equity 27%.

On Jun 2, 2014, Legg Mason announced the completion of the acquisition of New York-based private asset manager QS Investors in order to expand its global investment products portfolio. Legg Mason assumed QS Investors' AUM and assets under advisement, which stood at $4.9 billion and $96.5 billion, respectively, as of Apr 30, 2014. As per the agreement, Legg Mason's quantitative equity division Batterymarch Financial Management and its solutions unit Legg Mason Global Asset Allocation will gradually merge with QS Investors. The merged entity that will be recognized under the QS Investors name will serve both institutional clients as well as retail investors.

Through this integration process, Legg Mason incurred restructuring costs of $8.7 million and $14.4 million in during the quarter ended Sep 2014 and Jun 2014, respectively. The company expects to incur additional restructuring costs of around $16 million and remaining $13 million of the expected costs to be incurred in the remainder of fiscal 2015. The company expects the acquisition to be accretive to earnings in calendar year 2015.

On Oct 1, 2014 Legg Mason completed the acquisition of UK-based international equity specialist firm Martin Currie. The transaction is expected to fetch modest benefits in the first year. Martin Currie, with AUM worth $95 billion as of Sep 30, 2014, will serve as a core independent investment partner of Legg Mason. With six Martin Currie offices in different locations, after the integration, Legg Mason's product capabilities will be expanded in active equity strategies including Global Equity, Global Emerging Markets, Asian Equity, European Equity and strategies particularly focused on Japan and China.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




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