Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LM > SEC Filings for LM > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for LEGG MASON, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LEGG MASON, INC.


6-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements
We have made in this report, and from time to time may otherwise make in our public filings, press releases and statements by our management, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including information relating to anticipated growth in revenues or earnings per share, anticipated changes in our businesses or in the amount of our client assets under management ("AUM"), anticipated future performance of our business, anticipated future investment performance of our subsidiaries, our expected future net client cash flows, anticipated expense levels, changes in expenses, the expected effects of acquisitions and expectations regarding financial market conditions. The words or phrases "can be," "may be," "expects," "may affect," "may depend," "believes," "estimate," "project," "anticipate" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and we caution readers that any forward-looking information provided by or on behalf of Legg Mason is not a guarantee of future performance.

Actual results may differ materially from those in forward-looking information as a result of various factors, some of which are beyond our control, including but not limited to those discussed elsewhere herein, under the heading "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended March 31, 2013 and in our other public filings, press releases and statements by our management. Due to such risks, uncertainties and other factors, we caution each person receiving such forward-looking information not to place undue reliance on such statements. Further, such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligations to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Executive Overview
Legg Mason, Inc., a holding company, with its subsidiaries (which collectively comprise "Legg Mason") is a global asset management firm. Acting through our subsidiaries, we provide investment management and related services to institutional and individual clients, company-sponsored mutual funds and other investment vehicles. We offer these products and services directly and through various financial intermediaries. We have operations principally in the United States of America and the United Kingdom and also have offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Luxembourg, Poland, Singapore, Spain, Switzerland and Taiwan. Terms such as "we," "us," "our," and "Company" refer to Legg Mason.

The financial services business in which we are engaged is extremely competitive. Our competition includes numerous global, national, regional and local asset management firms, broker-dealers, commercial banks and other financial services companies. The industry has been impacted by continued economic uncertainty, the constant introduction of new products and services, and in prior years, by the consolidation of financial services firms through mergers and acquisitions. The industry in which we operate is also subject to extensive regulation under federal, state, and foreign laws. Like most firms, we have been and will continue to be impacted by regulatory and legislative changes. Responding to these changes, and keeping abreast of regulatory developments, has required us to incur costs that continue to impact our profitability.

Our financial position and results of operations are materially affected by the overall trends and conditions of the financial markets, particularly in the United States, but increasingly in the other countries in which we operate. Results of any individual period should not be considered representative of future results. Our profitability is sensitive to a variety of factors, including the amount and composition of our assets under management, and the volatility and general level of securities prices and interest rates, among other things. Sustained periods of unfavorable market conditions are likely to affect our profitability adversely. In addition, the diversification of services and products offered, investment performance, access to distribution channels, reputation in the market, attracting and retaining key employees and client relations are significant factors in determining whether we are successful in attracting and retaining clients. In the last few years, the industry has seen flows into products for which we do not currently garner significant market share. For a further discussion of factors that may affect our results of operations, refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.


Our strategy is focused on four primary areas listed below. Management keeps these strategic priorities in mind when it evaluates our operating performance and financial condition. Consistent with this approach, we have also presented in the table below the more important matters on which management currently focuses in evaluating our performance and financial condition.

  Strategic Priorities                             Initiatives
 Products                Create an innovative portfolio of investment solutions and
                           promote revenue growth through new product development and
                           leveraging the capabilities of our affiliates
                          Identify and execute strategic acquisitions to increase
                           product offerings and fill gaps in products and services

 Performance             Deliver compelling and consistent performance against both
                           relevant benchmarks and the products and services of our
                           competitors

 Distribution            Evaluation and reallocation of resources within and to our
                           distribution platform to continue to build a top tier
                           distribution function with the capability to offer solutions
                           to relevant investment challenges and grow market share
                           worldwide

 Productivity            Operate with the highest level of effectiveness and improve
                           ongoing efficiency
                          Manage expenses
                          Align affiliate economic relationships

The strategic priorities discussed above are designed to drive improvements in our operating margin, net flows, earnings, cash flows, assets under management and other key metrics. In connection with these strategic priorities, during the quarter ended September 30, 2013, we incurred $9.5 million in costs related to several corporate initiatives, including the closing down or reorganizing of certain businesses and the ongoing initiative to increase efficiency. Certain of these key metrics are discussed in our quarterly results discussion to follow.

Net Income Attributable to Legg Mason, Inc. for the three months ended September 30, 2013, was $86.3 million, or $0.70 per diluted share, as compared to $80.8 million, or $0.60 per diluted share, for the three months ended September 30, 2012. Both periods included significant increases resulting from reductions in U.K. corporate tax expense, as further discussed below. Average AUM, and total revenues, increased slightly during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. Strong overall investment performance contributed to a continued reduction in long-term asset outflows in the 12-month period ended September 30, 2013. Over this period, the outflows we experienced and AUM reductions from dispositions were more than offset by increases in AUM due to market performance and an acquisition.

The following discussion and analysis provides additional information regarding our financial condition and results of operations.

Business Environment
During the six months ended September 30, 2013, the U.S. economy continued to exhibit the slow, steady growth that has been experienced over the last several years. Uncertainty in the markets still remained high due to a looming U.S. federal government shutdown, the need for a U.S. federal debt ceiling increase, and continued speculation about when the Federal Reserve may reduce its asset purchase program.


All three major U.S. equity market indices increased during both the three and six month periods ended September 30, 2013 and 2012, and with the exception of the six months ended September 30, 2013, both the Barclays Capital U.S. Aggregate Bond Index and Barclays Capital Global Aggregate Bond Index increased in these periods as well, as illustrated in the table below:

                                       % Change for the three months ended      % Change for the six months ended
                                                  September 30:                           September 30:
Indices(1)                                 2013                  2012             2013                  2012
Dow Jones Industrial Average                1.5 %                 4.3 %             3.8  %                 1.7 %
S&P 500                                     4.7 %                 5.8 %             7.2  %                 2.3 %
NASDAQ Composite Index                     10.8 %                 6.2 %            15.4  %                 0.8 %
Barclays Capital U.S. Aggregate
Bond Index                                  0.6 %                 1.6 %            (1.8 )%                 3.7 %
Barclays Capital Global Aggregate

Bond Index 2.8 % 3.3 % (0.1 )% 3.9 %

(1) Indices are trademarks of Dow Jones & Company, McGraw-Hill Companies, Inc., NASDAQ Stock Market, Inc., and Barclays Capital, respectively, which are not affiliated with Legg Mason.

During the six months ended September 30, 2013, the Federal Reserve Board held the federal funds rate at 0.25%. Despite the low interest rate environment across most developed economies, we expect economic challenges and volatility in financial markets to persist and cannot predict how these factors will impact our results.


Quarter Ended September 30, 2013, Compared to Quarter Ended September 30, 2012

Assets Under Management

Our AUM is primarily managed across the following asset classes:
Equity                          Fixed Income                      Liquidity

   Small Cap Core                 U.S. Intermediate                U.S. Managed Cash
                                  Investment Grade
  Large Cap Growth               Global Government                U.S. Municipal Cash
  Large Cap Value                U.S. Credit Aggregate
  Equity Income                  U.S. Municipal
  Global Equity                  Global Opportunistic
                                   Fixed Income
  Sector Equity                  Global Fixed Income
  International Equity           U.S. Long Duration
  Global Emerging Market         U.S. Limited Duration
   Equity
  Mid Cap Core                   U.S. High Yield
                                  Emerging Markets

The components of the changes in our AUM (in billions) for the three months ended September 30, were as follows:

                                                   2013        2012
Beginning of period                              $ 644.5     $ 631.8
Investment funds, excluding liquidity funds(1)
Subscriptions                                       13.1        10.0
Redemptions                                        (15.1 )     (10.5 )
Separate account flows, net                         (1.8 )      (8.3 )
Liquidity fund flows, net                            2.4         9.0
Net client cash flows                               (1.4 )       0.2
Market performance and other (2)                    14.2        20.7
Dispositions                                        (1.3 )      (2.0 )
End of period                                    $ 656.0     $ 650.7

(1) Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes.
(2) Includes impact of foreign exchange movements, primarily on fixed income assets, of $2.4 billion, and $2.0 billion, for the three months ended September 30, 2013 and 2012, respectively. Also includes reinvestment of dividends and other.

AUM at September 30, 2013, was $656.0 billion, an increase of $11.5 billion, or 2%, from June 30, 2013. The increase in AUM was attributable to the positive impact of market performance and other of $14.2 billion, partially offset by net client outflows of $1.4 billion and a disposition of $1.3 billion related to the sale of a small affiliate. Market performance and other includes the positive impact of foreign currency exchange fluctuations of $2.4 billion. Net client outflows were driven by long-term asset net client outflows of $3.7 billion, which were partially offset by liquidity net client inflows of $2.3 billion. The long-term asset class outflows were driven by outflows in the equity asset class of $4.0 billion, which were offset in part by inflows in the fixed income asset class of $0.3 billion. Equity outflows were primarily in products managed at Batterymarch Financial Management, Inc. ("Batterymarch") and Royce & Associates ("Royce") and were offset in part by inflows at ClearBridge Investments, LLC ("ClearBridge"). Due in part to investment performance, we have experienced outflows in our equity asset class in all but one quarter since the fourth quarter of fiscal 2006. Net inflows in the fixed income asset class includes the impact of $0.9 billion in outflows from a single, low-fee global sovereign mandate managed by Western Asset Management Company ("Western Asset"). We expect to continue to experience similar outflows from this mandate during the remainder of fiscal 2014. We have experienced inflows in our fixed income asset class in the last two quarters, however, since the fourth quarter of 2008 we have had outflows in our fixed income asset class in all but four quarters.


AUM by Asset Class
AUM by asset class (in billions) as of September 30 was as follows:
                           % of                % of       %
                 2013     Total      2012     Total    Change
Equity         $ 169.5      26 %   $ 153.4      23 %    10  %
Fixed Income     355.0      54       369.4      57      (4 )
Liquidity        131.5      20       127.9      20       3
Total          $ 656.0     100 %   $ 650.7     100 %     1  %

The component changes in our AUM by asset class (in billions) for the three months ended September 30 were as follows:

                                                            Fixed
                                               Equity      Income      Liquidity       Total
June 30, 2013                                 $ 164.4     $ 351.0     $    129.1     $ 644.5
Investment funds, excluding liquidity funds
Subscriptions                                     6.4         6.7              -        13.1
Redemptions                                      (7.2 )      (7.9 )            -       (15.1 )
Separate account flows, net                      (3.2 )       1.5           (0.1 )      (1.8 )
Liquidity fund flows, net                           -           -            2.4         2.4
Net client cash flows                            (4.0 )       0.3            2.3        (1.4 )
Market performance and other                     10.4         3.7            0.1        14.2
Dispositions                                     (1.3 )         -              -        (1.3 )
September 30, 2013                            $ 169.5     $ 355.0     $    131.5     $ 656.0



                                                            Fixed
                                               Equity      Income      Liquidity       Total
June 30, 2012                                 $ 151.1     $ 360.6     $    120.1     $ 631.8
Investment funds, excluding liquidity funds
Subscriptions                                     3.9         6.1              -        10.0
Redemptions                                      (6.2 )      (4.3 )            -       (10.5 )
Separate account flows, net                      (3.4 )      (5.6 )          0.7        (8.3 )
Liquidity fund flows, net                           -           -            9.0         9.0
Net client cash flows                            (5.7 )      (3.8 )          9.7         0.2
Market performance and other                      8.0        12.6            0.1        20.7
Dispositions                                        -           -           (2.0 )      (2.0 )
September 30, 2012                            $ 153.4     $ 369.4     $    127.9     $ 650.7


The component changes in our AUM by asset class (in billions) for the trailing 12 months ended September 30, were as follows:

                                                            Fixed
                                               Equity      Income      Liquidity       Total
September 30, 2012                            $ 153.4     $ 369.4     $    127.9     $ 650.7
Investment funds, excluding liquidity funds
Subscriptions                                    23.1        26.9              -        50.0
Redemptions                                     (29.3 )     (29.0 )            -       (58.3 )
Separate account flows, net                      (9.4 )      (3.9 )         (1.8 )     (15.1 )
Liquidity fund flows, net                                                    4.2         4.2
Net client cash flows                           (15.6 )      (6.0 )          2.4       (19.2 )
Market performance and other                     27.6        (8.4 )          1.2        20.4
Acquisition (dispositions)                        4.1           -              -         4.1
September 30, 2013                            $ 169.5     $ 355.0     $    131.5     $ 656.0



                                                            Fixed
                                               Equity      Income      Liquidity       Total
September 30, 2011                            $ 144.9     $ 355.5     $    111.4     $ 611.8
Investment funds, excluding liquidity funds
Subscriptions                                    18.2        25.5              -        43.7
Redemptions                                     (25.6 )     (19.2 )            -       (44.8 )
Separate account flows, net                     (12.0 )     (19.9 )          1.2       (30.7 )
Liquidity fund flows, net                           -           -           23.2        23.2
Net client cash flows                           (19.4 )     (13.6 )         24.4        (8.6 )
Market performance and other                     29.7        28.5            0.2        58.4
Dispositions                                     (1.8 )      (1.0 )         (8.1 )     (10.9 )
September 30, 2012                            $ 153.4     $ 369.4     $    127.9     $ 650.7

AUM increased by $5.3 billion, or 1%, from September 30, 2012. The increase in AUM was attributable to $20.4 billion in market appreciation and other and $5.4 billion related to the acquisition of Fauchier Partners Management Limited ("Fauchier") in March 2013. These increases were partially offset by net client outflows of $19.2 billion and a disposition of $1.3 billion. Market performance and other includes the negative impact of foreign currency exchange fluctuations of $13.0 billion. Net client outflows were driven by long-term asset class outflows of $21.6 billion, which were partially offset by liquidity asset class net inflows of $2.4 billion. Long-term asset class outflows consisted of equity and fixed income outflows of $15.6 billion and $6.0 billion, respectively. Equity class outflows were primarily in products managed at Royce, Batterymarch and The Permal Group, Ltd. ("Permal") and were partially offset by inflows at ClearBridge. Equity assets also declined as the result of a disposition of $1.3 billion due to the sale of a small affiliate. Fixed income outflows were primarily in products managed by Western Asset and included $5.2 billion in outflows from the single, low-fee global sovereign mandate client previously discussed. Those outflows were partially offset by net fixed income inflows in products managed by Brandywine Global Investment Management, LLC ("Brandywine").

Average AUM by asset class (in billions) for the three months ended September 30 was as follows:

                           % of                % of       %
                 2013     Total      2012     Total    Change
Equity         $ 166.8      26 %   $ 151.3      24 %    10  %
Fixed Income     351.5      54       365.0      57      (4 )
Liquidity        132.1      20       123.1      19       7
Total          $ 650.4     100 %   $ 639.4     100 %     2  %


AUM by Distribution Channel
Broadly, we have two principal distribution channels, Global Distribution and Affiliate/Other, through which we sell a variety of investment products and services. Global Distribution, which consists of our centralized global distribution operations, principally sells U.S. and international mutual funds and other commingled vehicles, retail separately managed account programs, and sub-advisory accounts for insurance companies and similar clients. Affiliate/Other reflects the distribution of products through our asset managers, which principally sell institutional separate account strategies and liquidity (money market) funds.

The component changes in our AUM by distribution channel (in billions) for the three months ended September 30, 2013 and 2012, were as follows:

                                             Global Distribution      Affiliate/Other        Total
June 30, 2013                               $            231.7       $         412.8     $      644.5
Net client cash flows, excluding
liquidity funds                                           (2.4 )                (1.4 )           (3.8 )
Liquidity fund flows, net                                    -                   2.4              2.4
Net client cash flows                                     (2.4 )                 1.0             (1.4 )
Market performance and other                               5.7                   8.5             14.2
Dispositions                                                 -                  (1.3 )           (1.3 )
September 30, 2013                          $            235.0       $         421.0     $      656.0



                                                 Global
                                              Distribution       Affiliate/Other        Total
June 30, 2012                               $         217.5     $         414.3     $      631.8
Net client cash flows, excluding
liquidity funds                                         2.1               (10.9 )           (8.8 )
Liquidity fund flows, net                                 -                 9.0              9.0
Net client cash flows                                   2.1                (1.9 )            0.2
Market performance and other                            4.0                16.7             20.7
Dispositions                                              -                (2.0 )           (2.0 )
September 30, 2012                          $         223.6     $         427.1     $      650.7

For each of the three months ended September 30, 2013 and 2012, our overall effective fee rate across all asset classes and distribution channels was approximately 34 basis points. Fees for managing equity assets are generally higher, averaging approximately 75 basis points for each of the quarters ended September 30, 2013 and 2012. This compares to fees for managing fixed income assets, which averaged approximately 25 basis points for each of the quarters ended September 30, 2013 and 2012, and liquidity assets, which averaged under 10 basis points (reflecting the impact of current advisory fee waivers due to the low interest rate environment) for each of the quarters ended September 30, 2013 and 2012. 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. Fee rates for assets distributed through Legg Mason Global Distribution, which are predominately retail in nature, averaged approximately 50 basis points for each of the quarters ended September 30, 2013 and 2012, while fee rates for assets distributed through the Affiliate/Other channel averaged approximately 30 basis points for each of the quarters ended September 30, 2013 and 2012.


Investment Performance
Our overall investment performance in the three months ended September 30, 2013, was generally positive compared to relevant benchmarks.

For the three months ended September 30, 2013, most U.S. equity indices produced positive returns. The best performing was the NASDAQ Composite, returning 10.82% for the three months ended September 30, 2013. These returns were achieved in an economic environment characterized by continued domestic growth and improved economic data, mixed with heightened sensitivity to economic news.

In the fixed income markets, the Federal Reserve indicated that it may delay its planned reduction in the $85 billion monthly bond buying program currently in effect, based on current economic data. With the prospects of this reduction in the bond buying program largely priced into the market over the quarter, most asset classes recovered and outperformed U.S. Treasuries. The lowest yielding fixed income sector for the quarter was U.S. Government, as measured by the Barclays U.S. Government Index returning 0.12%. The best performing fixed income sector for the quarter was high yield bonds, as measured by the Barclays U.S. High Yield Bond Index returning 2.28% as of September 30, 2013.

The following table presents a summary of the percentages of our AUM by strategy(1) that outpaced their respective benchmarks as of September 30, 2013 and 2012, for the trailing 1-year, 3-year, 5-year, and 10-year periods:

                                  As of September 30, 2013                     As of September 30, 2012
                         1-year     3-year     5-year     10-year     1-year     3-year     5-year     10-year
Total (includes
liquidity)                   80 %       82 %       89 %        91 %       80 %       83 %       79 %        92 %
Equity:
Large cap                    62 %       67 %       91 %        74 %       70 %       65 %       78 %        88 %
Small cap                    27 %       16 %       51 %        69 %        8 %       10 %       53 %        67 %
. . .
  Add LM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LM - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.