Is Legg Mason in Play?

Perhaps I have been unduly harsh to Bill Miller over the last 18 months; but it is doubtful Main Street is feeling too charitable toward him given his performance:

According to Lipper and Morningstar, Value Trust is ranked last out of more than 500 peer funds over a three-year period. Year to date, the fund is down more than 17%. Assets in Value Trust have fallen to a little more than $12 billion from more than $20 billion in 2006. DealJournal

Perhaps the hiring of Brian Posner to run Legg's ClearBridge arm nearly two years ago was the first clue the Chip Mason's due diligence efforts and judgment were flawed. Character issues have dogged Posner for years; his departure a few weeks ago was preordained, in our view. Hiring his business school buddies who failed, much like Brian, in their attempts to run money long/short was not a prescription for success, particularly when they were afraid to short stocks while running a hedge fund:

New York Post
Unlike the more measured pace at Legg Mason, where his days are often spent on research and meetings with companies in his portfolio, Gendelman often did not have time to catch his breath at Cobble Creek. “I also felt uncomfortable with the necessity to short stocks,” he says, referring to the controversial practice of borrowing stocks and then selling them, hoping to make a profit by returning the stocks later after the price drops.

Several days ago I had tried to make a case that the worst might be over for Miller and Legg Mason's shareholders. Alas, the blowup of UnitedHealth (UNH-NYSE) was the latest setback for Miller, but Legg's stock might be washed out. And some people are even speculating that bankers are shopping the company around.

Indeed, several high profile fund executives have stated that the asset management business is due for a round of consolidation. And while valuing the recent entries to the publicly traded alternative space, such as Och-Ziff GLG and Fortress presents its own challenges, due in part to their limited valuation history, Legg Mason is one cheap stock, and certainly out of favor at the moment:

Is the sum worth more than the parts? With a market cap of $8 billion, Legg trades at around 0.8% of its $1 trillion assets under management, compared with more than 2% at competitor BlackRock. Given Legg’s current modest valuation, investors are saying no.

Although Miller is the face of the franchise, he accounts for only 10% of the assets under management in Legg’s equity funds. And for the first time, ever, someone is finally speculating that Miller’s days might be numbered:

Mark Fetting, the Legg CEO, however, faces a dilemma. If losses and negative press mount, does he keep Miller? Or does he dare push out the man Fortune once dubbed “the greatest money manager of our time.” If mishandled, either path could cause investors to pull their money, create significant instability and put the company into play......Fetting may not have the luxury of time. Kohlberg Kravis Roberts put $1.25 billion into Legg Mason in January and now has a board seat. Highfields Capital, an activist hedge fund, took a stake in Legg late last year. The most dangerous thing for Fetting may be to leave Miller and several of the other poorly performing fund managers in place. If he doesn’t move them, perhaps outsiders will force him to.

While assigning the appropriate valuation to GLG Partners, given the pending departure of a star trader, is a bit of a guessing game, valuing Legg Mason is a more straightforward proposition.

And the odds are rising that Bill Miller will be spending more time playing on his yacht. A deal in the mid-$80’s would ensure that Legg Mason shareholders are able to fuel up their SUV’s, although a boat is out of the question given the hit they have taken.

And with Posner gone, we will take Legg Mason off double secret probation.

October 16, 2006
....investors might want to closely monitor this fund family for further signs of underperformance.  Hiring your biz school buddies who could not generate alpha in the long/short world might comfort Posner, but it is likely to leave investors feeling blue.

The days of Crony-ism are over at Legg Mason, and the stock is worth a look long for the first time in years.

Mean Street: Trouble Ahead, Trouble Behind at Legg Mason
DealJournal

Legg, Posner parting ways
Baltimore Sun

The Hedgie Who Didn’t Like to Short
1440 Wall Street
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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