Baltimore-based Legg Mason Inc. (LM) experienced a decline in its assets under management (AUM) in April on a sequential basis. This was preceded by a modest rise in March and February AUM.

Preliminary month-end AUM came in at $672.0 billion, down 0.8% from $677.6 billion at the end of March. Fixed income and equity AUM grew sequentially during the month, while liquidity AUM plummeted.

Legg Mason’s equity AUM in April inched up 0.8% from the prior month to $191.3 billion and fixed income AUM increased 2.3% from the prior month to $364.9 billion. The increase in equity and fixed income AUM primarily resulted in a 1.8% climb in long-term AUM to $556.2 billion from $546.2 billion at the end of the prior month. However, April AUM reflected the transfer of $16 billion of liquidity assets to Morgan Stanley Smith Barney, coupled with the divestiture of Barrett Associates, which reduced long-term AUM by $1 billion.

On the other side, liquid assets, which are convertible into cash, edged down 11.9% to $115.8 billion from $131.4 billion at the end of March 2011.

On a quarterly basis, Legg Mason’s AUM was $677.6 billion as of March 31, 2011, up 0.9% sequentially from $671.8 billion, driven by market appreciation, partly offset by net outflows of $8.7 billion. On a year-over-year basis, AUM was down 1.0% from $684.5 billion. Fixed income represented 53% of consolidated AUM as of March 31, 2011, liquidity consisted of 19% and equity comprised 28%.

Besides, average AUM was $673.5 billion, up 0.2% from $672.4 billion in the prior quarter, but inched down 1.1% from $681.2 billion in the year-ago quarter. For fiscal year 2011, average AUM was $669.3 billion compared with $675.5 billion in the prior year.

Earnings Recap

Earlier in May, Legg Mason reported fourth-quarter 2011 earnings of 77 cents per share, significantly outpacing the Zacks Consensus Estimate of 45 cents. Reported quarter results included 7 cents per share in transition-related costs. Earnings surpassed the prior-year quarter by 8 cents. Results improved due to higher revenue, offset by higher operating expenses coupled with a decline in total AUM.

Peer Performance

Legg Mason’s closest competitor Invesco Ltd. (IVZ) reported preliminary AUM of $668.6 billion at the end of April 2011, marking an increase of 4.2% from $641.9 billion at the end of March 2011. The improvement in AUM was driven by positive returns from financial markets, net flows and decreased foreign currencies volatility against the U.S. dollar.

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 remain a significant headwind. Yet, with the restructuring initiatives and the cost-cutting

measures, we expect operating leverage to improve, and share buybacks to continue boosting investors confidence on the stock.

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

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