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A Rating Upgrade as Legg Mason Mends

We've raised Legg's Parent rating to Positive from Neutral following improvements to its affiliate portfolio, but challenges do remain.

Morningstar, 03/14/2017

Legg Mason operates a multiaffiliate model, in which the parent company handles distribution and marketing while affiliates--all owned by Legg Mason--operate with a fair amount of autonomy on the investment side. The firm has been on the mend since its poor showing during the financial crisis of 2007-09, making several changes to its leadership team and its affiliate portfolio.

There are now nine affiliates, down from more than a dozen a few years ago, including Western Asset, a major fixed-income player traditionally focused on credit, and ClearBridge Investments, a quality-driven fundamental equity shop. Other prominent affiliates include Royce & Associates, a specialty small-cap equity player, and Brandywine Global, a global fixed-income and equity firm. Western Asset, ClearBridge, Royce, and Brandywine Global account for more than 85% of Legg Mason’s assets under management, and all have strong investment cultures and stick to their areas of expertise.

To reflect the strength of its underlying affiliates’ investment cultures--and its progress addressing risks in recent years--Legg Mason’s Parent rating was recently upgraded to Positive from Neutral. Below is an overview of the affiliates, changes that have taken place in recent years, and challenges that remain.

Tough Times Spurred Improvements to Legg’s Affiliate Portfolio
Legg Mason fell on hard times during the financial crisis of 2007-09, as several of its prominent funds performed poorly, leading to steep outflows and personnel turnover.

In the wake of these problems, and partly because of pressure from activist investor Nelson Peltz, CEO Mark Fetting left in the fall of 2012. Joe Sullivan then became interim CEO before taking over as permanent CEO in early 2013. Sullivan has since helped make the firm more focused by merging some affiliates and buying new ones to fill holes in the lineup.

Just a few years ago, there were more than a dozen affiliates, some of which filled similar roles in investor portfolios, leading them to compete for Legg’s distribution attention. Today’s affiliate portfolio numbers nine, each with its own investment culture and area of expertise. Overall, Legg’s collection of affiliates seems more complementary, with representation from various asset classes and no real redundancy.

As had been the case, Legg continues to afford its affiliates complete investment autonomy, and it is encouraging to see its largest affiliates sustain their strong investment cultures. But Sullivan has also made a change in its treatment of affiliates. Historically, Legg Mason has owned its affiliates outright, but equity has increasingly been offered to affiliates’ senior management. For example, employees of RARE Infrastructure and Clarion Partners continue to own 15% and 17% of their respective affiliates after being purchased by Legg Mason.

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