Legg Mason: Breakdown in Baltimore

Can it get any worse for Legg Mason (LM-NYSE) and its suffering shareholders? The stock has traded down 12 of the last 13 months, quite a streak. Bill Miller's new performance streak, one of the worst turned in by a mutual fund manager in modern times, is only one of the problems confronting the new CEO:

The shares of the second-largest U.S. money manager closed down $2.32 at $41.25 after being down as much as 9 percent earlier and hitting a five-year low.

Legg said late on Monday it had pledged another $240 million in capital to support investors from losses in three of its money market funds whose bets in risky asset-backed securities was hurt by fresh market turmoil in June.

The company said it would take a charge of $154.5 million, or $1.09 a share, in the quarter ended June 30 for the several rounds of support it has lent to its money funds.So far, Legg Mason has pledged $2.1 billion in support to its money market funds, put up collateral of $1.1 billion and taken charges of $468 million after taxes and other adjustments. Reuters

The pledges and charges from the money market funds are looming ever larger given the shrinking equity market cap; which slipped below $6 billion for the first time since 2003. Baltimore's investment community is taking its biggest lumps since Alex Brown & Sons disappeared.

I started to warm up to the stock in the mid-50’s. Wrong.

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Much of the recent blame might have to be shouldered by founder Chip Mason, who “rolled up” a number of BuySide shops earlier this decade in creating the firm.

Mason’s series of interviews with Financial Times Editor Chrystia Freeland were not terribly inspiring. It took Chip “three to four years” to find a successor, and his predictions on oil, the stock market and commodity prices were quaint, but have been dead wrong.

Hiring Brian Posner to run Clearbridge Advisors at a crucial juncture was a huge mistake, and Mason gets full blame for this misstep. Posner, who had run a failed hedge before signing on, was hardly qualified him to run the shop. Perhaps Mason had read too many press releases from Fidelity circa 1997, which made Posner out to be some sort of wiz kid. But he was no Will Danoff or Joel Tillinghast, and his personal foibles were well known in the investment community, although Chip Mason did not dig deep enough to get the dirt.

Bruce Sherman of Legg’s Private Capital Management subsidiary went down as hard as Miller, thanks to many poor stock picks, including Bear Stearns. The damage to his reputation will be tough to repair.

The new CEO Mark Fetting has been thrown in the frying pan. He has his eyes on entering the Chinese market, but making a transformational deal in this environment takes guts, despite the attraction valuations. Before he does anything overseas he might want to deal with his problems at home.

But Bill Miller’s implosion has reached legendary proportions. His assets under management are still a relatively small piece of the pie, however. Of course, he is the face of the firm, and his numbers probably have an undue influence on investor’s perception of the shop.

Equity assets under management will continue to bleed from the firm; marketing their existing track records will not be easy, or make up for the outflows. In the first quarter equity assets dropped $50 billion, $17 billion of which were redemptions.

What is the end game? Perhaps a buyer will emerge, assuming there are no impediments to a sale.

The firm’s balance sheet is in good shape; perhaps they muddle through and try to pick up the pieces. But the rebuilding will be measured in years, not months, and you have to begin to consider that Bill Miller will be long gone by the time the process is complete.

Miller’s ten-year numbers are now approaching the bottom quartile, and even a slow turn in his fortunes cannot rescue this track record.

It is a stunning reversal for a man, and a firm, that 24 months ago were heralded as the best in the business.

Historical valuations have mattered little of late, but it must be noted that the stock is trading at multi-year valuation lows. Unfortunately, in this market, building an investment thesis based primarily on valuation is a fools game, as Bill Miller can certainly attest.
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Bill swapped out of Dell and bought Hewlett-Packard some time back, one of his better moves in the past few years, but not enough to offset his many miscues.

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Robert Hagstrom of Legg Mason has been buying financials over the past few months, and in late June laid out his case for buying Citigroup.

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Legg Mason shares slump on mounting worries
Reuters
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