Legg Mason's June AUM Perks Up

Baltimore-based Legg Mason Inc. (LM - Analyst Report) experienced a slight rise in its assets under management (AUM) in June 2012 compared with the prior month, recording resurgence from the first two months of the current quarter. Both in May and April 2012, the company witnessed a fall in AUM.

Preliminary month-end AUM came in at $631.8 billion, up 0.7% compared with the last month. Growth in fixed income AUM and equity AUM was recorded, though partially offset by a decline in liquidity AUM.

Legg Mason’s equity AUM as of June inched up 3.3% from the prior month to $151.1 billion and fixed income AUM crept up slightly to $360.6 billion.

The upside in equity AUM coupled with a rise in fixed income, resulted in long-term AUM of $511.7 billion, reflecting a 1.5% rise against the prior month. However, liquid assets, which are convertible into cash, plummeted 2.5% to $120.1 billion from $123.2 billion at May 2012-end.

Quarterly Performance

On a quarterly basis, as of March 31, 2012, Legg Mason’s AUM was $643.3 billion, up 2.6% sequentially from $627.0 billion, 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, liquidity represented 19% and equity comprised 26%.

During the quarter, 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) also reported a 2.3% rise in its preliminary month-end AUM for the month of June. The company’s AUM for the reported month was $646.6 billion compared with $632.1 billion at the end of May 2012. The increase in Invesco’s AUM was a result of encouraging market returns, long-term net inflows and favorable foreign exchange worth $2.3 billion. However, the active net long-term flows remained unchanged.

Another peer - Franklin Resources Inc. (BEN - Analyst Report) also declared an increase in its preliminary month-end AUM for June 2012. The company reported preliminary AUM of $706.9 billion for its subsidiaries, as of June 31, 2012, reflecting a rise of 3.4% from $683.5 billion as of May 31, 2012.

Our Take

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 demographics in the market. However, in the near term, assets outflows will remain a significant headwind. Yet, with the restructuring initiatives and cost-cutting measures, we expect operating leverage to improve, and dividend payments to continue inspiring investors’ confidence in the stock.

Shares of Legg Mason currently retain 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.