Legg Mason reports quarterly loss, driving down shares

(Reuters) - Money manager Legg Mason Inc (LM.N) reported its first loss since 2009 on Friday, as customers withdrew money for the 19th straight quarter.

Legg Mason, one of the largest U.S. asset managers, posted a net loss of $9.5 million, or 7 cents per share, for the June quarter, compared with year-earlier net income of $60 million, or 40 cents per share. Analysts polled by Thomson Reuters I/B/E/S had expected break-even results.

The stock fell as much as 7 percent before paring losses to about 1 percent at $24.91 on the New York Stock Exchange at mid-afternoon, in an overall market rally.

The latest loss, along with continued customer withdrawals, frustrated investors still waiting for Chief Executive Mark Fetting to repair Legg Mason's standing after its funds' losses during the financial crisis, analysts said.

At under $25 a share, Legg Mason's stock remains stuck at one-quarter of its price of around $100 in mid-2007 before the crisis hit. Shares of major rivals like BlackRock (BLK.N) and T. Rowe Price Group (TROW.O) have already recouped all their losses and more.

"Once an asset manager digs themselves a hole, it takes a long time to turn themselves around," Nomura analyst Glenn Schorr said.

Investors withdrew $2.6 billion from Legg Mason during the quarter, continuing a streak of firmwide outflow begun in the last three months of 2007. Investors pulled $3.9 billion from stocks, added $1.2 billion to short-term cash funds and added $100 million to fixed-income products, which make up the majority of the firm's assets.

Gabelli & Co analyst Mac Sykes said the shift away from stock funds hurt profits since other products carry lower fees.

"The takeaway is that unfortunately the quarter was impacted by the mix shift toward lower-paying assets," said Sykes, who rates the stock a "buy".

PAST MISTAKES

Even in the bond area, Legg Mason's inflow was disappointing, since investors poured $46 billion into all bond mutual funds during the quarter according to U.S. data from Morningstar.

But past troubles continue to haunt Legg's Western Asset unit, which underperformed rivals during the financial crisis. And Legg had to bail out its money market funds by buying back tainted mortgage securities, further hurting its reputation with investors.

Overall, Legg Mason's $631.8 billion of assets under management at the end of the quarter had shrunk by almost 5 percent over the past year, trailing its rivals.

BlackRock, the world's largest money manager, suffered a 3 percent decline over the same period, ETF-heavy InvescoN> shed only 1 percent of its assets and T. Rowe has actually grown by 4 percent, helped by strong international and retirement businesses.

CEO Fetting conceded that despite his turnaround efforts over the past several years the company still faces some problems. "We are proud of the progress we've made, but keenly aware that we aren't delivering on all fronts," he told analysts on a conference call on Friday, vowing to improve flows and margins.

Excluding cash funds, the outflow was the smallest in roughly five years, Fetting said in an interview after the call. He also blamed tough markets during the quarter. The MSCI All Country Index .MIWD00000PUS lost 6.4 percent in the second quarter while the Standard & Poor's 500 .SPX lost 2.8 percent.

"If the market goes down, it takes its toll," Fetting said.

Results from other asset managers this week have also missed expectations, reflecting market declines and customer withdrawals.

Through Thursday, shares in Legg Mason had risen 5 percent in 2012, in line with the Dow Jones index of U.S. asset managers .DJUSAG. But the stock is down about 22 percent over the past 12 months, twice the decrease of the index, and trades far below its early 2006 high above $136.

Legg Mason's struggles reflect lingering problems from the financial crisis. For years, the company was best known as the home of star stockpicker Bill Miller, whose fund outperformed the Standard & Poor's 500 index 15 years in a row. But Miller's performance tailed off starting in 2006 and led to outflows. Miller stepped down from his best-known fund earlier this year.

The financial crisis also blew up a bet that Legg Mason founder and prior CEO Raymond "Chip" Mason made in 2005 when he swapped its brokerage unit for Citigroup's asset-management business. Many of Citi's funds were stuffed with structured investment vehicles and required expensive rescues that led to its last quarterly net loss - $325.1 million for the quarter ended in March 2009.

DISCLOSED CHARGES

Mason retired at the start of 2008 and was replaced by Fetting. Fetting has spent much of his tenure trying to restore the company's competitiveness through layoffs and cost-cutting efforts, and new products. For instance, Legg Mason plans to introduce retail share classes for some Western funds this fall, he said.

The loss in the quarter was due in part to two previously announced charges. In May, Legg Mason said it would buy back notes held by private equity firm KKR & Co LP (KKR.N), leading to an accounting charge of $69 million.

Expenses for new fund launches came in at $22.7 million in the quarter, in line with the company's past estimate and roughly twice their level of a year earlier.

Besides the outflows, market depreciation cut $4.3 billion from assets in the June quarter. Assets were also reduced by the transfer of $4.6 billion held in sweep accounts to Morgan Stanley (MS.N), part of a previous arrangement in which the New York bank has been taking over business once handled by Legg Mason.

Only about $1 billion of the assets remain and will be gone by the end of the current quarter, said Legg Mason spokeswoman Mary Athridge.

(Reporting By Ross Kerber; Editing by Jeffrey Benkoe, Lisa Von Ahn, Aaron Pressman and Richard Chang)