Legg Mason's August AUM Trips - Analyst Blog

Legg Mason Inc.'s (LM) assets under management (AUM) slipped in August. The company reported preliminary month-end AUM of $656.3 billion for August, down slightly from $659.3 billion at the end of the prior month. However, the August AUM was down nearly by 4% from $681.6 billion in December 2009 and around 7% from $702.7 billion in September 2009 (Legg Mason's fiscal second quarter).

The bumpy equity market set in some amount of skepticism on the part of the investors, leading to Legg Mason's equity AUM dip to $157.3 billion, down 5% from $165.3 billion at the end of the prior month. However, fixed income AUM managed to increase slightly by 0.3% to $365.9 billion from $364.7 billion at the end of the last month.

This equity AUM drop ultimately led to a 1.3% decline in long-term AUM of Legg Mason to $523.2 billion. However, liquidity assets, which are convertible into cash, increased 3% to $133.1 billion from $129.3 billion at the end of July 2010.

Legg Mason's first-quarter 2011 (period ended June 2010) earnings of 30 cents per share were a penny below the Zacks Consensus Estimate. The results reflected a higher-than-expected increase in operating expenses and lower AUM, partially offset by an increase in revenues.

As of June 30, 2010, Legg Mason's AUM was $645.4 billion, down 6% sequentially from $684.5 billion, driven by net outflows of $23.1 billion and market declines of $16.0 billion. On a year-over-year basis, AUM was down 2% from $656.9 billion.
 
However on the contrary, for the period ended June 2010, the company's closest competitor BlackRock Inc. (BLK) reported AUM of $3.15 trillion, which more than doubled from $1.37 trillion in the prior-year quarter, substantially surpassing Legg Mason. BlackRock is also witnessing stronger inflows in the third quarter (ending September 2010). The company also boasts of a strong pipeline.

Legg Mason continues to reel under the acute recessionary environment as most of the company's businesses continue to face difficult market conditions. Management believes the conditions will remain moderately challenging in the upcoming quarters as well. Near-term challenges remain with asset outflows.

However, its diversified product mix and leverage to the changing demographics in the market are encouraging. Additionally, with the restructuring initiatives and the cost-cutting measures, we expect operating leverage to improve while share buybacks should reinvigorate investors' confidence in the stock.

Legg Mason currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we have a Neutral stance on the shares in the long term.

 
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