From: Reuters
Published May 6, 2008 01:59 PM

Legg Mason posts first-ever loss

By Muralikumar Anantharaman

BOSTON (Reuters) - Legg Mason Inc <LM.N> posted on Tuesday a wider-than-expected quarterly loss, the U.S. money manager's first loss ever, as it took a big charge related to a bail-out of money market funds exposed to risky securities and suffered outflows from its poorly performing funds.

Its shares fell over 6 percent by early afternoon, but the second-largest publicly traded U.S. asset manager and home to star stock picker Bill Miller was optimistic about quarters ahead, saying performance of the funds had improved in April and the worst of the credit crisis was over.

"What a disaster. Terrible," said Roger Smith, an analyst at Fox-Pitt, Kelton, of the outflows and the earnings overall.

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Legg Mason posted a net loss of $255.5 million, or $1.81 a share, for the fiscal fourth quarter ended March 31, compared with net income of $172.5 million, or $1.19 a share, in the same quarter of last year.

Analysts' average forecast was a loss of 84 cents a share, according to Reuters Estimates.

Legg took a charge of $291 million, or $2.06 a share, related to bailing out the money market funds. It also took a charge of $94.8 million, or 66 cents a share, for a write-down of some management contracts at its Private Capital Management unit.

Legg Mason's competitors such as BlackRock Inc <BLK.N>, AllianceBernstein Holding LP <AB.N> and Franklin Resources Inc <BEN.N> also posted quarterly earnings that came in below expectations. But outflows at Legg more than doubled to $19.2 billion in the quarter from $9.1 billion in the third quarter.

"It's just bad. It's more a matter of figuring out how bad it is than whether or not it's bad news," said Andrew Richards, an analyst at research firm Morningstar.

Assets under management, the key driver of revenue and profit at money managers, fell to $950.1 billion at end-March from $968.5 billion a year earlier and $998.5 billion at end-December.

The decline in assets from the end-December level was due to market depreciation of $28.5 billion and the outflows of $19.2 billion. Equity outflows were $17 billion, up from outflows of $10.6 billion in the company's third quarter. Fixed-income outflows were $7 billion, compared with inflows of $2 billion in the third quarter.

MILLER'S PAIN

"What's the most disappointing thing in the quarter is really that equity outflows ballooned up to $17 billion," said Smith of Fox-Pitt, Kelton.

Legg Mason's flagship Value Trust Fund <LMVTX.O> managed by Miller suffered its worst quarterly performance ever when it lost 19.7 percent in the three months ended March 31, hurt by its exposure to financial stocks such as Bear Stearns Cos Inc <BSC.N> and Countrywide Financial Corp <CFC.N>.

The size of the fund declined to $12.2 billion at the end of March from $17.3 billion at end-2007. Miller is the only manager to have beaten the Standard & Poor's 500 index for 15 straight years, through 2005.

Mark Fetting, who took over as company chief executive officer in January from founder Raymond Mason, said in a conference call that Legg Mason's outflows in the quarter were mainly in three units -- Capital Management, which is run by Miller; Private Capital Management; and ClearBridge Advisors.

Fetting said Miller had recently won a financial services-focused investing mandate from a sovereign wealth fund but declined to give details. He also said the firm was cutting discretionary expenses.

"We are disappointed in these results but we are encouraged by the market (and) some of the fundamental improvements that we have seen," Fetting said, adding: "We are gratified to see some performance upticks in some key areas of our managers."

Legg Mason's money market funds saw inflows of $5 billion against outflows of $500 million in the third quarter. The company said exposure of money funds to structured investment vehicles, which are causing the write-downs, was $4.5 billion at the end of March, against about $10 billion six months earlier.

Legg Mason also said it is raising $1 billion through an offering of 20 million equity units at $50 each. The cash may be used to support its money market funds, for financing acquisitions or debt repayment, it said. Fetting said the issue will be "modestly dilutive" to existing shareholders.

The company more than doubled its assets when it swapped its brokerage arm for Citigroup Inc's <C.N> asset management division in 2005.

Legg shares were down $4.00 or 6.4 percent at $58.76 on the New York stock exchange. They have suffered the most among peers in the S&P Asset Management and Custody Banks index <.15GSPAMCB> over the past year, losing 44 percent.

(Editing by Gerald E. McCormick)

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