Legg Mason's October AUM Rises - Analyst Blog

Legg Mason Inc. (LM) has been able to experience a rise in assets under management (AUM) in October. The company reported preliminary month-end AUM of $676.6 billion for October, up from $673.5 billion at the end of the prior month.

Legg Mason's equity AUM in October was up 3.2% from the prior month to $175.0 billion. However, fixed income AUM remained almost flat at $371.9 billion compared with $371.6 billion at the end of the prior month.

This equity AUM increase ultimately resulted in a 1.1% rise in long-term AUM of Legg Mason to $546.9 billion. However, liquidity assets, which are convertible into cash, decreased 2.0% to $129.7 billion from $132.3 billion at the end of September 2010.

The overall economic recovery and the market appreciation have been beneficial for the company. The company also continued to execute its strategic initiatives for longer term enhancements. It is also making efforts at key affiliates to build its pipeline of new business while distribution teams continue to expand its penetration into new channels globally.

Legg Mason's second-quarter 2011 (period ended September 2010) adjusted earnings of 44 cents per share were ahead of the Zacks Consensus Estimate of 36 cents. Results improved due to higher revenues coupled with an increase in total AUM, partially offset by higher operating expenses.

As of September 30, 2010, Legg Mason's AUM was $673.5 billion, up 4% sequentially from $645.4 billion due to a market appreciation of $40.8 billion, partially offset by net outflows of $12.7 billion. On a year-over-year basis, AUM was down 4.2% from $702.7 billion. Fixed income represented 55% of the consolidated AUM as of September 30, 2010, liquidity represented 20% and equity comprised 25%.

However, for the period ended September 2010, the company's closest competitor BlackRock Inc. (BLK) reported a significant rise in AUM to $3.4 trillion, which increased 9% from the prior quarter, primarily due to strong investment performance, favorable foreign exchange movements and robust net new business. AUM also increased 140% year over year, substantially surpassing Legg Mason. BlackRock is witnessing stronger inflows. The company also boasts of a strong pipeline.

Though near-term challenges remain with asset outflows, we believe 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. 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.