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Baltimore-based Legg Mason Inc. (LM - Analyst Report) experienced a rise in its assets under management (AUM) in December on a sequential basis. This was preceded by a decline in November and a rise in October AUM.

Preliminary month-end AUM came in at $627.0 billion, up 1.0% from $620.6 billion at the end of November. Though equity AUM plummeted, fixed income AUM and liquidity AUM climbed compared with the prior month.

Legg Mason’s equity AUM as of November inched down 1.6% from the prior month to $153.3 billion while fixed income AUM inched up 1.1% to $352.6 billion.

The decrease in equity AUM coupled with a rise in fixed income, resulted in long-term AUM of $505.9 billion, down slightly compared with the prior month. Concurrently, liquid assets, which are convertible into cash, edged up 4.3% to $121.1 billion from $116.1 billion at the end of November 2011.

On a quarterly basis, as of September 30, 2011, Legg Mason’s AUM came in at $611.8 billion, down 7.7% sequentially from $662.5 billion. The decline was driven by market depreciation, including foreign exchange, coupled with client outflows of $17.6 billion. On a year-over-year basis, AUM was down 9.2% from $673.5 billion. Fixed income represented 58% of consolidated AUM as of September 30, 2011, liquidity accounted for 18% and equity comprised 24%.

During the reported quarter, fixed income outflows were approximately $8.8 billion, liquidity inflows were $3.1 billion while equity outflows were $5.7 billion. Total client outflows increased to $17.6 billion from $3.7 billion. Average AUM was $643.3 billion, down 4.1% from $670.8 billion in the prior quarter and 2.3% from $658.6 billion in the year-ago quarter.

Peer Performance

One of Legg Mason’s peers- Invesco Ltd. (IVZ - Analyst Report) also reported a rise in month-end AUM for the month of December 2011. Invesco’s AUM for the reported month increased 0.5% to $625.3 billion from $622.4 billion at the end of November 2011. The increase in Invesco’s December AUM was primarily attributable to positive market returns and long-term net inflows. However, foreign exchange led to a $1.3 billion decline in AUM during the month under review.

Another peer-Franklin Resources Inc. (BEN - Analyst Report) declared preliminary AUM of $670.3 billion by its subsidiaries as of December 2011. The company’s results experienced a decline of 0.8% from $675.8 billion as of November 30, 2011 and marginally down from $670.7 billion as of December 31, 2010.

We believe Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage to the changing market demography. Assets outflows remain a significant headwind in the near term. However, considering the restructuring initiatives and ongoing cost-cutting measures, we expect operating leverage to improve. Besides, share buybacks will also continue inspiring investors’ confidence in the stock.

Legg Mason currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are also maintaining a long-term “Neutral” recommendation on the stock.

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