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On Friday, Baltimore-based Legg Mason Inc. (LM - Analyst Report) reported a slight decline in its assets under management (AUM) as of Dec 31, 2012. However, the company reported a rise in the prior quarter.

Preliminary quarter-end AUM came in at $647.9 billion, down 0.4% compared with the prior quarter. Equity AUM and Fixed Income AUM were down in the quarter under review, though liquidity AUM advanced.

Legg Mason’s equity AUM inched down 5.6% from the prior quarter to $144.8 billion while fixed income AUM declined 0.7% compared with the prior quarter to $366.7 billion. Notably, the reported quarter's fixed income AUM includes $2.4 billion redemption from a major state pension client.

The fall in equity and fixed income AUM resulted in long-term AUM of $511.5 billion, reflecting a 2.2% decline against the prior quarter. However, liquid assets, which are convertible into cash, surged 6.6% to $136.4 billion.

Peer Performance

One of Legg Mason’s peers, Invesco Ltd. (IVZ - Analyst Report), announced a marginal 0.6% rise in its preliminary month-end AUM for Dec 2012. The AUM for the month came in at $687.7 billion compared with $683.8 billion at the end of November. Favorable market returns and positive foreign exchange drove the increase.

Another peer - Franklin Resources Inc. (BEN - Analyst Report) - declared preliminary AUM of $781.8 billion by its subsidiaries for the month of December 2012. The company’s results witnessed a rise of 1.7% from $768.8 billion as of Nov 30, 2012. Moreover, it increased 16.6% from $670.3 billion as of Dec 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, asset outflows will remain a significant headwind. Yet, owing to the restructuring initiatives and 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 Rank #3 (Hold). Considering the fundamentals, we also maintain our ‘Neutral’ recommendation on the stock.

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