Morningstar | Double-Digit Equity AUM Losses in Fourth Quarter Will Affect Legg Mason's Fiscal 2019 Results
A confluence of several issues--poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel--has made it increasingly difficult for asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. While we still believe there will always be room for active management, we believe the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.With $727.2 billion in managed assets at the end of December, Legg Mason has the size and scale necessary to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments--equities (25% of managed assets), fixed-income (56%), alternatives (9%) and money market funds (10%)--but this has not always translated into solid organic growth or above-average profitability, with the firm's adjusted operating margins of 17.4% on average during fiscal 2014-18 being well below the group average of 30%.During the past five (10) fiscal years, Legg Mason's organic growth rate averaged 0.0% (negative 4.6%) with a standard deviation of 1.5% (5.6%), worse than its peers, which generated positive 0.5% (positive 0.9%) average annual organic growth with a standard deviation of 6.3% (7.8%). Given that we expect the industry to continue to face stiff cyclical and secular headwinds, we envision Legg Mason's organic growth averaging negative 0.2% annually during fiscal 2019-23, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.Legg Mason is a holding company. Through its subsidiaries, the company is an asset management company that provides investment management and related products and services. The company's investment advisory services include discretionary and non-discretionary management of separate investment accounts for institutional and individual investors. The company's investment products include proprietary mutual funds ranging from money market and other liquidity products to fixed income, equity and alternative funds managed in various investment styles. The company also provides other domestic and offshore funds to both retail and institutional investors, privately placed real estate funds, hedge funds, and funds-of-hedge funds.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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