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Legg Mason Profit Up With First Net Inflows Since 2007

Asset manager Legg Mason Inc said on Friday quarterly profit topped expectations as the company reported its first quarterly net inflows of client funds since 2007.

Asset manager Legg Mason Inc said on Friday quarterly profit topped expectations as the company reported its first quarterly net inflows of client funds since 2007.

Although some flow trends remained negative, the results could ease pressure on Legg Mason. The company is searching for a new chief executive and its board includes activist investor Nelson Peltz, known for breaking up companies.

Speaking publicly for the first time since taking over as interim CEO earlier this month, Legg Mason sales chief Joseph Sullivan said on a webcast the company is "committed to the affiliate model" but has sold affiliates and made other structural changes in the past.

"These are things that we have done in the past and we're going to be open to doing in the future," he said. Legg Mason is comprised of independent asset management units which it calls affiliates.

Legg Mason shares were up 1 percent to $24.96 in morning trading.

Assets under management stood at $650.7 billion at Sept. 30, up from $631.8 billion at June 30, driven by market appreciation of $20.7 billion and net inflows of $200 million of client funds, Legg Mason said.

Clients added a net $9.7 billion to money market funds, offset by outflows of $5.7 billion from equity funds and $3.8 billion from bond funds.

Analysts took a mixed view of the fund flows. In a report to investors, Sandler O'Neill analyst Michael Kim noted improvement from net outflows of $2.6 billion in the preceding quarter. He said he was maintaining his "buy" rating on the stock.

But Nomura analyst Glenn Schorr wrote in a note that "the flow trends were disappointing" and that "the LM story remains the same." He said the company still needs to work on improving operating efficiencies and capital return.

The results come at a time of strategic tension at Legg Mason after Mark Fetting stepped down as chief executive earlier this month.

In selecting its next CEO, the board must decide whether to seek more growth or make changes, like spinning off investment units, as some private-equity specialists have suggested.

On the webcast, Sullivan said the search for a permanent CEO could take several months. Legg Mason has hired recruiting firm Korn/Ferry International to run the search.

Sullivan said a standstill agreement that caps Peltz's ownership of the firm at around 10 percent expires Nov. 15, but he gave few hints about Peltz's intentions. "We've found Nelson to be a constructive member of the board, and we're comfortable working with him," he said.

Referring to the standstill agreement, he said, "If there is an update, we'll let you know."

A spokesman for Peltz and his investment firm declined to comment.

For the fiscal second quarter ended Sept. 30, Baltimore-based Legg Mason reported net income of $80.8 million, or 60 cents per share, compared with $56.7 million, or 39 cents per share, a year earlier.

Analysts, on average, expected 55 cents per share, according to Thomson Reuters I/B/E/S.

Unlike some peers, Legg Mason shares have not recovered from the financial crisis, and client withdrawals have continued amid performance troubles. Since taking the helm in 2008, Fetting had bought time with deep cost-cutting and debt restructuring.

But unresolved tensions between the parent company and some of its investment affiliates on issues like sales costs helped lead to Fetting's departure.

Copyright 2010 by Reuters. All rights reserved.

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