Legg Mason back on top as Sullivan ends slump

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Legg Mason Inc., among the best-performing money-management stocks before the 2008 crisis, has returned to the top as CEO Joseph A. Sullivan expands offerings with acquisitions and clients return to its rebounding bond funds.

Legg Mason shares returned 48 percent in the past 12 months, the most among the 18 companies in the Standard & Poor’s index of asset managers and custody banks, with below-average volatility, giving it the best risk-adjusted gain in the group, according to the Bloomberg Riskless Return Ranking.

Sullivan, who took over in 2013 with the stock trading 81 percent below the pre-crisis peak, said in March that this year will be one of growth for the money manager. Legg Mason, whose equity and bond funds were hurt by more than five years of withdrawals after slumping in 2007 and 2008, is luring investors back into its fixed-income products as performance improves. The firm’s Western Asset Management Co. bond unit made prescient calls on long-term Treasuries this year that boosted performance at its main funds.

“It’s been a nice turnaround for the company,” Macrae Sykes, an analyst at Gabelli & Co. in Rye, New York, said in a telephone interview. “The most important challenge going forward is to execute on growth.”

Legg Mason will probably report a 36 percent increase in fiscal first-quarter profit tomorrow, according to the average estimate of 15 analysts in a Bloomberg survey.

“We’re pleased with our stock performance, which we believe reflects improvement in long-term flows and strengthening operating performance,” said Mary Athridge, a spokeswoman for Legg Mason.

Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of performance per unit of risk.

Legg Mason produced a risk-adjusted gain of 2.1 percent in the 12 months through yesterday. It had a volatility of 22.8, compared with an average of 23.6 for the group.

Ameriprise Financial Inc. ranked second when adjusted for volatility and Bank of New York Mellon Corp. ranked third. Financial Engines Inc., and Eaton Vance Corp. ranked at the bottom after handing investors losses in the period.

Before the 2008 financial crisis, Legg Mason was among the top U.S. asset management stocks, thanks to funds run by managers including Bill Miller. The firm’s assets peaked at more than $1 trillion in 2007 and the share price hit a record $136.40 in February 2006.

Legg Mason’s fortunes changed when its stock and bond funds were hurt by bets on risky securities and its money funds suffered losses in the subprime mortgage crisis. In the five years ended July 29, 2013, Legg Mason ranked 15th out of the 18 money managers in the risk-adjusted ranking.

Legg Mason’s affiliates operate independently and have revenue-sharing agreements with the corporate parent, limiting the parent’s influence, said Greggory Warren, an analyst with Morningstar Inc., the Chicago-based fund researcher.

“Their affiliate model has really inhibited their ability to affect a quick turnaround,” Warren said in a telephone interview.

Legg Mason has restructured businesses following a review to make the company more efficient, including closing its emerging-markets equity unit Esemplia Emerging Markets and transitioning the client-services business in Canada to the firm’s affiliates.

In 2009, activist investor Nelson Peltz, known for pushing companies to improve their share price, took a stake in Legg Mason and gained a board seat. The firm cut costs and boosted profit, yet redemptions continued. In October 2012, Mark R. Fetting stepped down as CEO amid pressure from Peltz, and five months later Sullivan took over.

Sullivan improved the cost structure and performance. He has also added new investment units, agreeing in March to spend as much as $41 million to buy QS Investors, a global quantitative equity firm that split from Deutsche Bank AG in 2010. QS had $4.1 billion in funds under management and $100 billion in advisory assets.

Legg Mason last week agreed to buy Edinburgh-based Martin Currie to expand into active international stock funds. Terms weren’t disclosed. Martin Currie, founded in 1881 as an accountancy partnership, will add $9.8 billion in assets.

“We have been clear about what we’re trying to do and we have been executing on that,” Sullivan said in a telephone interview on July 24, when the acquisition was announced. “Our real focus from here just turns to growth.”

Legg Mason, whose affiliates include stock investor ClearBridge Investments, managed $704 billion as of June 30, up 9.3 percent from a year earlier. While that’s still below the $1 trillion peak, it’s a rebound from a low of $612 billion in September 2011.

The rally in equities helped lift assets and improve performance at some stock funds. The $2.1 billion Legg Mason Opportunity Trust beat 90 percent of rivals over the past five years, according to data compiled by Bloomberg.

On the bond side, performance improved more broadly. Western Asset, Legg Mason’s largest affiliate, benefited this year from buying longer-dated Treasuries, betting the Federal Reserve couldn’t curb its record stimulus as much as intended as the recovery fell short, S. Kenneth Leech, chief investment officer at Western Asset, said in a telephone interview.

“This is one of the more challenging, if not the most challenging, periods in fixed-income investing because of the fact that central banks are keeping short rates so brutally suppressed at zero,” Leech said.

Western bought debt of governments and companies in emerging markets, after a sell-off last year pushed prices too low, Leech said.

“The Fed wins all the battles but the fundamentals win all the wars,” he said. “The road away from the crisis and back to normalization has still got a long way to go.”

The $10.4 billion Western Asset Core Plus Bond Fund has advanced 8.6 percent over the past five years, outperforming 92 percent of similar funds, according to data compiled by Bloomberg. This year, the fund is up 6.1 percent, ahead of 94 percent of peers.

“Fixed income has stabilized and started to show growth, and equity franchises have stabilized and had a couple spurts of growth but haven’t shown consistency yet,” said Sykes at Gabelli & Co.