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Morningstar | Legg Mason's platform diversification has yet to spark greater levels of organic growth.

Poor relative active investment performance and the growth of low-cost index-based products continue to make organic growth challenging for active fund managers like Legg Mason, leaving the group far more dependent on market gains to drive asset levels higher. Rising interest rates will only compound the problem for firms that have large retail fixed-income platforms, as market losses on bonds will only amplify fund redemptions. With fees and performance under greater scrutiny (spurred on by the introduction of the Department of Labor's fiduciary rule), the industry is ripe for fee and margin compression as active asset managers are forced to narrow the spread between the management fees being charged on their funds and fees associated with index-based products, while at the same time having to spend more heavily to improve investment performance and enhance distribution.While Legg Mason should be less affected by some of these pressures, given that it sources more than 70% of its AUM from institutional investors, it will not be totally immune. Efforts to further diversify its operations last fiscal year--via a major investment in Clarion Partners, a leading diversified real estate investment firm; the combination of its Permal hedge fund operations with EnTrust Capital, a leading hedge fund solutions provider; and the taking of a 20% stake in Precidian Investments, a developer of mutual fund and ETF products and strategies--should allow the firm to provide clients with the products they want and need, delivered in the vehicles they prefer, and accessible in the manner they choose. That said, it has come at a heavy cost, as the company's debt load has more than doubled. It has also done little to spark a much higher level of organic growth at the firm, with our forecast for organic growth being only slightly positive in each of the next several years. We expect Legg Mason to continue to face an uphill battle on the growth front in the near to medium term.