If there has been a rising tide lifting the results of asset managers likeT. Rowe Price (Nasdaq: TROW) andFranklin Resources (NYSE: BEN) lately, it seems to have missed Legg Mason's (NYSE: LM) boat. Legg Mason reported its third-quarter results yesterday: Revenue grew a sluggish 5% year over year and earnings per share fell 12%.
The $91 million hit that the company took from asset-backed security troubles at its liquidity funds contributed a lot to the poor bottom line. Even without that hit, though, profits would have been roughly flat. Though assets under management were up from December 2006, they fell back to less than $1 trillion after topping that level in September. The decline was a combination of client cash outflows of $9.1 billion and market depreciation of $4 billion.
A big slug of the mud in Legg Mason's tires is from the disappointing performance at some of the flagship equity funds at Legg Mason Capital Management. There's Bill Miller -- often mentioned alongside great investors like Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett because of an impressively long streak he had beating the S&P 500. The value fund that he runs has wound up on the wrong side of the S&P over the past couple of years, and now is rated just two stars by Morningstar, as exposure tocompanies like Countrywide (NYSE: CFC) and Pulte Homes (NYSE: PHM) has significantly hurt its performance recently. The new year hasn't started out particularly well, either -- some of the fund's top holdings,like Sprint Nextel (NYSE: S) and Google (Nasdaq: GOOG), have been hit hard in January.
To me, it seems premature to start betting against an investor like Miller, who has performed so well over a long time. It's also worth noting that other Legg Mason funds have been in the spotlight recently. The earnings release included recognition from Morningstar: The Global Plus fund was named Fund of the Year 2007, the municipal bond team at Western Asset was a finalist for fixed income manager of the year, and, in equities, Robert Hagstrom of Legg Mason Capital Mason's (LMCM) Growth Trust fund received an honorable mention in the category of domestic stock fund manager of the year.
The challenges will continue because the stiff competition to attract investors isn't about to abate. Can Legg Mason step up the pace? Well, I'll steal a quote from Horace's Ars Poetica that Ben Graham used in his classic Security Analysis and Bill Miller used more recently in a commentary for the Value Trust fund: "Many shall be restored that now are fallen and many shall fall that now are in honor." As Miller pointed out, the quote says "many," not "all," but I think that Legg Mason falls in the camp that can turn things back around.
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