Is Legg Mason Finally Back From the Lost Decade?
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As the financial markets rebound, asset manager Legg Mason (NYSE: LM) would appear a strong candidate for a rebounding stock. As investors shift more funds into equity funds that collect higher fees, the general asset management category should see fee growth.
The company widely benefited from the equity market rally of the 1990s as the lead mutual fund saw huge inflows from beating the market for 15 consecutive years from 1991 to 2005. At the time, portfolio manager Bill Miller was seen as one of the top money managers. The last decade has not been so kind with years of underperformance and large outflows of funds leading the stock to years of losing money for investors.
The company competes with a wide selection of asset managers including Eaton Vance (NYSE: EV) and Waddell & Reed Financial (NYSE: WDR). The big beneficiaries of the new investment climate will be firms with high concentration on equity funds, or at least fixed income assets converting to equity. Firms with high fixed income funds that don’t convert to equity funds could actually see asset declines during this period.
See chart below for the ten-year returns:
AUM not improving
The disappointing aspect of the May assets under management (AUM) release by Legg Mason is that the company continues to struggle to grow the asset base. The May balance is smaller then the March 2013 total and only slightly above the number from all the way back to September 2012. For the time periods listed in the below table, the company continues to lose long-term fixed income and liquidity assets at roughly the same rate as the equity assets are growing. Apparently, the equity funds no longer carry the same appeal as back in the 90s and early 00s.
Table - Legg Mason AUM
Earnings continue to struggle even with the shift into higher earning equity funds. Equity assets increased from $151 billion at the end of June 2012 to $166 billion in May. The increase of about 10% had no real impact as adjusted earnings actually declined from fiscal 2012 to 2013.
Analysts, in general, expect earnings to hit $2.16 for fiscal 2014 ending in March (not clear if this is adjusted earnings) and reach $2.51 in fiscal 2015. Even with slight revenue growth, analysts expect Legg Mason to report lower adjusted earnings in 2015 than the $2.77 from 2012.
Others growing assets faster
Eaton Vance reported assets that jumped from $197 billion at the end of April 2012 to $247 billion last quarter and $260 billion this year. The company had net inflows of $6.6 billion into long-term funds in the quarter helping lead to the 32% increase in AUM with roughly half the gain from the acquisition of Clifton Investment Management Company. With earnings expectations of $2.53 for fiscal 2014 ending in October, the company has a similar earnings profile as Legg Mason, yet trades higher due to higher growth and market conviction.
Waddell & Reed reported assets that jumped to $104 billion at the end of Q1 from $96 billion in Q4 and $89 billion last year. Consequently, the company has seen a much better stock performance in the last year. Analysts expect earnings to grow 16.5% annually with 2014 earnings hitting $3.09. At $44, the stock trades around 14 times forward earnings or slightly below the expected growth rate.
Unfortunately, Legg Mason appears to be having difficulty in pulling assets back into equity mutual funds that once dominated the sector. In addition, the company is heavily weighted towards fixed income funds that could see outflows for years, placing the company in the unfortunate scenario of not growing assets to the extent of the sector. If the company could improve the asset flow scenario, especially into equity funds, the stock offers a better valuation over Eaton Vance and Waddell & Reed.
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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!