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On Monday, Baltimore-based Legg Mason Inc. (LM - Analyst Report) reported a fall in its assets under management (AUM) as of October 2012, compared with the prior month. However, the company reported a rise in the last four months.

Preliminary quarter-end AUM came in at $645.6 billion, down 0.8% compared with the prior month. Equity AUM and liquidity AUM were down in the quarter under review, though Fixed Income AUM advanced.

Legg Mason’s equity AUM as of October-end inched down 4.5% from the prior month to $146.5 billion while liquid assets, which are convertible into cash, dipped 0.5% to $127.3 billion.

Fixed income AUM surged 0.6% compared with the prior month to $371.8 billion. The fall in equity AUM, partly offset by the rise in fixed income AUM resulted in long-term AUM of $518.3 billion, reflecting a 0.9% decline against the prior month.

Quarterly Performance

As of September 30, 2012, Legg Mason’s AUM was $650.7 billion, up 3% sequentially from $631.8 billion, driven by market appreciation of $20.7 billion and net client inflows of $0.2 billion, partially offset by dispositions of $2.0 billion.  Fixed income represented 57% of consolidated AUM as of September 30, 2012, liquidity represented 20% and equity comprised 23%.

During the quarter, liquidity inflows were about $9.7 billion. However, equity and fixed income outflows were $5.7 billion and $3.8 billion, respectively. Besides, average AUM was $639.4 billion compared with $635.5 billion in the prior quarter.

Peer Performance

One of Legg Mason’s peers, Invesco Ltd. (IVZ - Analyst Report) announced a 0.8% fall in its preliminary month-end AUM for October 2012. The company’s AUM for the reported month was $677.4 billion compared with $683.0 billion at the end of September.

Another peer - Franklin Resources Inc. (BEN - Analyst Report) - declared preliminary AUM of $753.9 billion by its subsidiaries for the month of October 2012. The company’s results witnessed an escalation of 0.5% from $749.9 billion as of September 30, 2012. Moreover, it increased 8.6% from $694.1 billion as of October 31, 2011.

Our Viewpoint

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

Legg Mason currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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