(LM) Legg Mason’s August AUM Plunges Assets Under Management

Baltimore-based Legg Mason Inc. (LM) experienced a decline in its assets under management (AUM) in August on a sequential basis. This was preceded by a drop in both July and June.

Preliminary month-end AUM came in at $643.4 billion, down 1.8% from $655.4 billion at the end of July. Moreover, equity AUM and fixed income AUM both plummeted compared with the prior month, while liquidity AUM increased.

Legg Mason’s equity AUM in August dipped 7.7% from the prior month to $162.6 billion while fixed income AUM inched down 0.9% to $367.2 billion. The decrease in equity AUM coupled with drop in fixed income, resulted in long-term AUM of $529.8 billion, down 3.1% compared with the prior month. On the other hand, liquid assets, which are convertible into cash, edged up 4.6% to $113.6 billion from $108.6 billion at the end of July 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 inched up 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. Results for the reported quarter 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 competitors Invesco Ltd. (IVZ) and Franklin Resources Inc.(BEN) both reported drop in month-end AUM for the month of August 2011. Invesco’s AUM for the reported month dropped 3.6% to $629.4 billion from $652.8 billion at the end of July 2011, resulting from negative market returns.

Moreover, the foreign exchange lowered the AUM by $1.5 billion during the month under review. Franklin’s declared preliminary AUM of $716.4 billion by its subsidiaries, down 4.1% from $747.2 billion as of July 31, 2011, but up 19.3% from $600.4 billion as of August 31, 2010.

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.

FRANKLIN RESOUR (BEN): Free Stock Analysis Report

INVESCO LTD (IVZ): Free Stock Analysis Report

LEGG MASON INC (LM): Free Stock Analysis Report

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