My favorite article from this week’s Barron’s is the turnaround-in-progress story on Legg Mason ($LM) by Beverly Goodman. Goodman talks with Chip Mason, the now-retired founder as well as the current CEO Mark Fetting to find out what went wrong and how the firm is addressing the issues.
The Legg Mason saga is required understanding for anyone working in the investment business. Essentially, it’s the story of a 1970’s regional broker-dealer that made big acquisitions in the asset management space and rode their in-house show pony Bill Miller (of Legg Mason Value Trust mutual fund fame) to a trillion in assets and a $136 share price by 2006. Then Miller blows up his track record and fund between ’06 and ’08, the outflows start and the other affiliated investment management subsidiaries (Western Asset Management, Royce) begin to come unglued as well.
LM now sits at $26 a share, even with massive cost-cutting, layoffs and the presence of activist hall-of-famer Nelson Peltz in the stock.
Barron’s makes the case that what LM needs to truly turn around the firm is better returns and performance in its funds. No duh. Performance attracts assets and then, as Chip Mason wistfully relates, a lot of the problems start to take care of themselves.
But I think there are three other things Fetting (and Peltz) ought to consider:
1. Buy Some Stars – With Bill Miller now retired from active management and his market-beating aura extinguished, it’s time to replenish the stables. The reality is that Western and Royce are great brands with good reputations, but inflows follow stars, not brands. Jeffrey Gundlach could have named his new firm Hellhole Capital Destruction Inc and made his corporate logo a f***in’ skull & crossbones and he still would’ve raised $20 billion out of the gates. Because first, he performs and second, he’s a star. John Hussman’s a star, too, even if he’s missed a great deal of the recovery rally. He can still maintain fund flows as a result of his star power – the insights, the commentary, the historical record of missing the dot bombs etc. LM needs some star power, not just good brand names. Time to write some checks.
2. Get Your ETF Game On – There are a handful of companies that build and operate actively-managed ETFs (AdvisorShares comes to mind as does First Trust. Mr. Fetting I highly recommend you buy one of them out immediately and make the personnel and expertise the centerpiece of your comeback. It’s time to take all those great niche Royce funds and turn them into active ETFs. As more and more of the fund world’s distribution goes advisory, the broker-sold fund is simply a dead proposition. Be bold, take the short-term hit on internal expense fees and ETF your top mutual funds. Be a leader, Pimco did it and Pimco sees the writing on the wall just like you must. You can take these to the advisor community and have a brand new story to tell about your storied franchises in a fresh, new wrapper. You will surprise and delight your existing fans and convert many new ones who would never look at a traditional mutual fund.
3, Hire Thomas Brakke – My friend Tom could walk into Legg Mason on a Monday, meet with all of the relevant people and by Friday he’d have enough information to begin hammering out a real plan to turn around the investment management businesses – from process to personnel. Most of you know Tom from his blog Research Puzzle, but you should also know that he runs a top-flight investment company consulting firm called TJB Research. When Wall Street agreed to the $1 billion Global Settlement in 2003, Tom was brought in to one of the large wirehouses to rebuild their research apparatus so that it could be both useful and compliant with the terms of the agreement. LM should get him on a plane to Baltimore this afternoon.
Anyway, these are my ideas, click over for the Barron’s piece or tell me yours below.