Legg Mason's May AUM Dips Slightly

Baltimore-based Legg Mason Inc. ( LM - Analyst Report ) experienced a slight reduction in its May 2012 assets under management (AUM) compared to the prior month. The fall was driven by decreases in equity and fixed income AUM, which offset the rise in liquidity AUM.

Legg Mason’s preliminary month-end AUM came in at $627.4 billion, down 1.9% from the prior month. The company’s equity AUM as of May 2012 declined 8.2% from the prior month to $146.3 billion. Also, fixed income AUM inched down 0.5% to $357.9 billion.

The fall in equity AUM as well as fixed income AUM, resulted in a decreased long-term AUM of $504.2 billion compared with $519.0 billion in the prior month. However, liquidity assets, which are convertible into cash, grew 2.4% to $123.2 billion from $120.3 billion at the end of April 2012.

Quarterly Performance

As of March 31, 2012, Legg Mason’s AUM was $643.3 billion, up 2.6% sequentially from $627.0 billion as of December 31, 2011, driven by market appreciation of $24.4 billion, partially offset by net client outflows of $4.9 billion and dispositions of $3.2 billion.

Fixed income represented 55% of consolidated AUM as of March 31, 2012, while liquidity and equity represented 19% and 26%, respectively.

During the quarter, Legg Mason’s fixed income outflows were approximately $2.8 billion and equity outflows were $4.9 billion. However, liquidity inflows were $2.8 billion. Average AUM was $634.9 billion, up 2.1% from $622.0 billion in the prior quarter.

Peer Performance

One of Legg Mason’s peers, Invesco Ltd. ( IVZ - Analyst Report ) , announced a 5.4% decline in its preliminary month-end AUM for the month of May 2012. The company’s AUM for the reported month was $632.1 billion compared with $668.4 billion at the end of April 2012.

Invesco’s May AUM decline resulted from market depreciation, long-term net outflows and unfavorable foreign exchange worth $7.1 billion. Total long-term outflows were largely driven by Passive outflows from the PowerShares DB and PowerShares QQQ products, as well as a stable value client termination reported in Active fixed income.

Further, another peer, Franklin Resources Inc. ( BEN - Analyst Report ) witnessed a fall in its preliminary month-end AUM for May 2012. The company reported preliminary AUM of $683.5 billion for its subsidiaries, reflecting 5.9% decrease from $726.4 billion as of April 30, 2012.

Conclusion

We believe Legg Mason has the potential to perform better than its peers in the long run, given its varied product mix and leverage to the changing demographics in the market. However, in the near term, assets outflows will remain a significant headwind. With restructuring initiatives and cost-curtailing measures, we expect operating leverage to improve, and dividend payments to 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 also maintain a long-term ‘Neutral’ recommendation on the stock.