Inside Value recommendation Legg Mason (NYSE:LM) hasn’t caught a single break over the last year, between fund manager underperformance and soured money-market investments. With the stock down almost 50% year-to-date, fiscal year 2009 first-quarter results are an opportunity to look for signs of re-animation.

The structured investment vehicles (SIVs) in Legg’s money-market funds are a gift that keeps on giving – or taking away, in this case. The company recorded a $155 million net charge or $1.09 per diluted share for the quarter. The press release contains all sorts of adjusted metrics that remove the effects of this and other “one-time” charges. The trouble is, even the adjusted numbers are worse than those for the previous quarter.

The numbers worsened, but at a decreasing pace
If you look hard enough, you can see the glass a third full (half is asking a bit much). Although the profit margin, assets under management and net asset outflows all deteriorated, they did so at a decreasing rate with respect to the previous quarter. That suggests the firm’s performance may be bottoming out.

The firm is also diversifying its product offerings, including a big push in Global Equities, to include a new group with investment teams in the U.S., the U.K., and Singapore.

Say it ain’t so, Bill Miller
It’s difficult to talk about Legg Mason without referring to their flagship Value Trust fund and its manager, Bill Miller. The fund’s performance has been horrific over the past three years. In 2008, large positions in stocks such as Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), UnitedHealth Group (NYSE:UNH) and General Electric (NYSE:GE) have contributed to a near 40% loss in the fund’s value. Legg’s equity assets under management are a casualty of that number, with approximately $11 billion in net outflows in the quarter.

The fact is, Legg Mason’s results are highly dependent on a single investment orientation (“value,” that is) and it doesn’t have a strong, centralized risk management function like BlackRock (NYSE:BLK). When value is out of favor, Legg’s name is mud.

Where I stand on this Legg
Where does that leave investors? Firstly, Legg Mason isn’t going anywhere – its balance sheet is very solid. Secondly, although I’ve been resistant to this conclusion, its franchise value has been impaired over the last eighteen months – that’s inescapable. The $5.4 billion question is, to what degree?

And finally, value doesn’t exist in a vacuum; investors need to consider the price they‘re being asked to pay for the stock. It looks to me like the decline in franchise value is more than compensated for by the freefall in the share price; it’s difficult for me to imagine that Legg shares don’t offer substantial value at these levels. All the same, it’s a situation I’m less comfortable with than I was previously and interested investors should arm themselves with tremendous patience.

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Alex Dumortier, CFA has no beneficial interest in any of the stock mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor pick. UnitedHealth Group and Legg Mason are Motley Fool Inside Value selections. UnitedHealth Group is a Motley Fool Stock Advisor pick. The Fool owns shares of Legg Mason. The Fool has a disclosure policy.