Fund Times: Legg Mason Restructures Fund Lineup

Legg Mason Inc. recently announced extensive changes to its fund lineup, with many of the moves affecting former Smith Barney funds now carrying the Legg Mason Partners name. The consolidation will reduce the number of its open-end offerings across both families to 119 from 166. Much of the reduction will be the result of fund mergers, although some offerings, such as Legg Mason Partners Real Return Strategy SBSAX, will simply be liquidated.

We view many of these mergers as positive for shareholders, as lower-cost funds will generally acquire funds with higher expense ratios. For instance, Legg Mason Partners Aggressive Growth SHRAX, a large-growth fund with more than $10 billion in assets, will absorb Legg Mason Partners Health Sciences SBIAX, a specialty health fund with $60 million in assets. This means shareholders in the health-sciences fund, who gave up 1.50% of their returns to expenses last year, will soon be charged the larger fund's lower cost, which was 1.21% in the most recent fiscal year. (However, investors who originally selected Legg Mason Partners Health Sciences for targeted exposure to the health-care sector should note the Aggressive Growth fund, while often overweight in biotech names, invests in a broad range of other sectors as well.)

That's not to say every acquiring fund has lower fees. Salomon Brothers Investors Value SINAX, a large-cap value fund with a 0.93% expense ratio, will assume the assets of smaller sibling Legg Mason Partners Large Cap Value SBCIX, which has an expense ratio of 0.88%. At least both funds have been run by the same managers using similar buy-and-hold strategies. And considering the combined assets will now total more than $2.6 billion, it is possible that Salomon Brothers Investors Value's expense ratio could fall.

In addition to fund mergers, Legg Mason plans to rebrand most of the Salomon Brothers funds and other funds formerly run by Citigroup as Legg Mason Partners Funds. The Smith Barney funds already took that label earlier this year. Legg Mason Inc. will then have four fund lines: Legg Mason Partners Funds, Legg Mason Funds, Royce Funds, and Western Funds.

That's not all. The fund company also aims to reduce the number of its governance boards from 10 to three. One board of trustees will oversee equity funds, the other fixed-income funds, and a third will keep an eye on closed-ends. This will reduce some of the confusion resulting from Legg Mason's series of recent fund family acquisitions and likely will result in continuity among offerings. Of course, we are wary of boards of trustees taking on too many funds, as we question their ability to remain actively involved with each one.

A few management changes lie in store here as well. On July 12, ClearBridge Advisors, a unit of Legg Mason Inc., announced the addition of Robert Gendelman as managing director and portfolio manager of  Legg Mason Partners Capital & Income SOPAX. Mark McAllister, former manager of the fund, will remain in charge at Salomon Brothers Investors Value. Gendelman comes from Cobble Creek Partners, a long-short hedge fund. He has previous experience as a fund manager at Neuberger Berman Regency NBRVX and Neuberger Berman Partners NPRTX.

ClearBridge also announced Brian Posner, who took over as CEO of ClearBridge Advisors in November 2005, will assume added duties as lead manager of Salomon Brothers Capital SACPX. His comanager on that fund will be Brian Angerame, who remains a comanager at Legg Mason Partners Mid Cap Core SBMAX. They replace Kevin Caliendo, who is leaving the firm.

Many of these changes (not including manager changes) require shareholder approval, so Legg Mason will be sending out one set of proxies in August and another in October.