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Legg Mason's annus horribilis Thursday, January 29, 2009

Image via WikipediaLegg Mason has experienced an awful year. In 12months

- Its' money market funds had to be significantly propped up to prevent them "breaking the buck"
- Star manager Bill Miller had a collapse in performance after 15 years of consistent out-performance, albeit many of those gains have now been wiped out
- assets under management have fallen to less than $700bn, 30% lower than a year ago
- it has just reported a $1.5bn loss for the last quarter to produce the worst results in 25 years

Unsurprisingly, its' shares has fallen by about 70% over the year.

Legg aren't alone in being battered by market conditions, but being one of the largest fund management firms makes the impact looks much larger.

You have to have some sympathy for Mark Fetting, Legg's Chief Executive. He only took over in January 2008, inheriting the reins from "Chip" Mason, who had led the firm for the previous 46 years, and who also stepped down as Chairman in December 2008 in favour of Fetting. Yet, as Napolean said, "give me lucky Generals" and Mason will be known as the successful Patriarch whilst Fetting will be the CEO who oversaw the downturn in the firm's fortunes. Indeed, if it was a movie script, you can imagine Chip being called out of retirement in 18 months time to "save the day and rescue the firm".

I've commented on Legg previously here, here, here, and here.

Labels: Bill Miller, Legg Mason, Money fund, Raymond A. Mason

posted by John Wilson @ 9:00 AM Permanent Link ,

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Legg Mason undone by money funds Thursday, October 30, 2008

Image via WikipediaHaving pumped $2bn into their money funds within the last 12 months, Legg Mason's share price fell 78% over the same period and in the last quarter its' assets under management have fallen by a further 9% to $842bn.

Aside from money market fund troubles, their former star equity chief Bill Miller who outperformed the market for 15 years from 1991 has seen big reversals in the last few years in his main fund, "Legg Mason Value Trust". Between Jan-Jun 2008 it fell by over 28% and its' 10 year performance to Jun 2008 was lower than the S&P500.

Legg Mason operates funds under a range of brands operated by semi-autonomous fund management subsidiaries that tend to specialise in particular asset classes e.g. Western focusses on fixed income.

The Legg Mason sales and distribution teams will have a considerable uphill struggle to maintain existing business, let alone secure new wins. Their saving grace may be their ability to push product from other brands in their stable that have performed better and which have not been "tainted" with the current problems.

Labels: Bill Miller, Legg Mason, Money fund, money funds

posted by John Wilson @ 4:01 PM Permanent Link ,

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Morgan Stanley injects $23bn into Money Funds Wednesday, October 29, 2008

Despite the US Government underwriting US domiciled money funds, Morgan Stanley had to inject $23bn cash into its money funds in September by buying securities such as US Treasuries to cover net redemptions on the funds which totalling $46bn, which is almost a third of the $134bn in such funds.

Morgan Stanley was able to refinance the purchases through a combination of depositing the assets with the Federal Reserve and via sales in the open market.

This action was to avoid the funds "breaking the buck", given the wave of redemptions which would have required liquidation of assets held by the funds in a climate of volatile prices.

I anticipate redemption levels will have been greatly reduced in October with the introduction of the Government guarantee that offers unlimited protection to investors in funds that have subscribed to the scheme. However, I also believe firms will still top-up funds to avoid breaking the buck, despite the scheme, given the reputational harm that would result from having to call on the guarantee scheme.

Presently, the regulatory capital requirement for fund management firms tends to be relatively low. The actions of firms in topping up funds may well prompt a review of whether their capital base is adequate to meet such reputational commitments, regardless of the actual legal wording that firms have no legal obligations to funds.

Labels: Federal Reserve, Money fund, money funds, Morgan Stanley

posted by John Wilson @ 9:04 AM Permanent Link ,

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US Treasury listen to the Banks re Money Funds Wednesday, October 01, 2008

Image via WikipediaWhen the scheme to underwrite money market funds was mooted by the US Treasury a few weeks ago with the aim of dissuading investors from making panic withdrawals, I commented here how the banks were understandably annoyed since it put them at a considerable competitive disadvantage.

The details of the scheme which finally aired on Monday had addressed these concerns in a number of ways

temporary scheme only lasting 3 months, albeit that will undoutedly be extended if current circumstances prevail
only covers investments made up to 19 September i.e. investors who fled/flee to "safety" after this date are not protected
Sliding scale fee charged to a fund based on how far below the "buck" the fund is valued at, with lowest rate being 1 basis point [0.01%]

The scheme does provide unlimited protection, unlike for bank deposits which is capped at $100k. It also covers all investors including foreign and institutional ones.

The Treasury payouts will be triggered if a participating fund sees its net asset value fall below $0.995 a share but the fund must be liquidated within 30 days. Investors will receive their capital in full.

It is almost certain that every fund will seek to join the scheme - not because they have to or have problems, but because they need to preserve investor confidence and will not want to cause investors concern by not joining.

Labels: Money fund, money funds, Money market

posted by John Wilson @ 8:31 AM Permanent Link ,

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AIG break the buck on their money fund Friday, September 26, 2008

AIG Life (UK), part of the US insurance group rescued by the US Government, has advised investors in its Premier Bond enhanced money market fund that it will wind-up the fund in mid December and that investors should not expect to receive all of their capital back. The $5.8bn fund is already closed to redemptions after facing a deluge of withdrawal requests it couldn't meet.

Similar to other enhanced funds, the AIG had a heavy weighting in illiquid paper in order to generate higher returns. Illiquidity and depressed prices mean the fund will suffer losses by selling early rather than holding the paper to maturity.

More on this here and here.

The fund had been popular because AIG offered a rate which was 50 to 70 basis points better than deposits offered by rival providers. It did this through a wrapper which meant that tax on the interest payments could be avoided.

This fund almost certainly falls outside of the US announced scheme to underwrite money funds as this was not offered by one of AIG's US entities.

Labels: aig, American International Group, Money fund, money funds

posted by John Wilson @ 2:03 PM Permanent Link ,

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US Cavalry rides to the rescue of Money Market funds Saturday, September 20, 2008

Image via WikipediaTiming is everything - no sooner had I written about the fallacy surrounding money market funds breaking the buck and the need for regulators to either require fund manager to set aside capital to cover their implicit guarantees or else increase the prominence given to risk warnings, than the US Treasury Secretary, Hank Paulson steps in to underwrite such funds with Government money.

According to Reuters

The Treasury said it would back money market funds whose asset values fall below $1 a share. Separately, the Fed said it would lend money to banks to finance purchases of certain assets from money market funds.
Set to last for at least a year, it is understood that the guarantee is unlimited, transforming US money market funds into a far safer haven than bank deposits, which is sure to delight the banks [NOT!]. Significantly, might this have the unintended consequence of starting a switch of funds out of bank deposits to this new safe haven for anyone with funds exceeding the existing FDIC limits of $100,000 per depositor per bank, especially since money funds typically pay higher rates than bank deposits? Act in haste, repent in leisure?

The Treasury clearly acted to stem a panic and sudden exodus from such funds, current estimated at $3.5trillion, which would have created further havoc in markets. According to reports citing the Investment Company Institute, money-market fund investors withdrew a record $169 billion during the seven-day period that ended Wednesday. This was causing funds to hoard cash and buy Treasury Bills, which drove their yields down to virtually zero. In shunning the commercial paper they typically buy, yields on these assets shot up to 8% and according to the Wall Street Journal, even firms like IBM were paying 6% for money.

Interestingly it is suggested that a fee is going to be levied for this guarantee, without clarifying from whom this is to be collected - fund managers or investors? Likewise, it is unclear whether any investment constraints will accompany the insurance but this would seem reasonable to assume since otherwise reckless funds might invest in excessively risky assets to increase returns, knowing such "bets" were underwritten.

Prior to the announcement, the LA Times reported that
Legg Mason Inc. said it would make $630 million available to its funds to guard against losses, taking a hit against quarterly earnings. The Baltimore-based asset manager had already injected $2.2 billion into seven funds since November to cover potential losses on debt issued by so-called structured investment vehicles.

source Wall Street Journal

Labels: Money fund, money funds, Money market

posted by John Wilson @ 8:39 AM Permanent Link ,

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Money Funds - the mythical damn weakens Friday, September 19, 2008

I've written a number of times over the last year about money market funds [here, here, and here] and the myth surrounding "breaking the buck" i.e. the notion that they always return the capital invested and hence are safe. On a number of occasions during the last 12 months, Managers of money funds have been required to financially support them in order to preserve this fallacy i.e. directly top-up funds to maintain investors capital.

Money market funds invest in short-term money market instruments such as Govt Treasury Bills, Certificates of Deposit, and Repos. Such short-term horizons should minimise the likelihood of capital losses arising but cannot eliminate it and any losses directly impact the value of the fund.

As an industry, Money Market Fund Managers are very aware that if confidence in these funds were to be damaged and the illusion of safety to be impaired, the impact would manifest itself in huge withdrawals from a sector with trillions under management.

In 2008, the top ten Managers by funds under management were:

Fidelity $425.6bn
JP Morgan $267.9bn
Blackrock $259.8bn
Federated $231.1bn
Dreyfus $199bn
Schwab $194.4bn
Vanguard $191.4bn
Goldman Sachs $183.5bn
Columbia $146.8bn
Morgan Stanley $112.6bn

source FT.com

However, the fallacy was exposed this week when Reserve Primary's Money Market Fund was forced to announce that it had "broken the buck" - the fund was priced at 97cent following losses on Lehman short term debt. This is the first fund to actually price a fund at below $1 in 14 years, all other losses having been funded by the managers.

As I stated in past posts, most fund managers aren't capitalised sufficiently to provide such guarantees other than for small losses. It was for this reason that BNY Mellon and State Street both saw sharp falls in their share price, amidst concerns about potential money fund losses, with the former having admitted capital losses on one of its institutional money funds but confirming it would be supporting their net asset values.

At the same time, Putnam Investment decided to close it's money fund and return $12bn of funds to the investors. It did so not because of losses experienced, but because of the potential for losses especially after a period of heavy redemptions, when some assets may not have realised their value due to the need to sell them quickly to fund the said redemptions.

Given clear examples of implicit support by Managers, you would expect the regulator to either require these off-balance vehicles to be brought on balances or ensure risk warnings are given plenty of airing. Fund managers want neither of these, but unless something is done soon we may face a "mis-selling" scandal when a large fund encounters losses too great to be compensated by its' manager. Despite this, I doubt regulators will want to introduce any measures that could affect confidence in fund managers or the funds at present.

Labels: Money fund, money funds, Money market

posted by John Wilson @ 8:28 AM Permanent Link ,

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Barclays Global Investors takes a hit on liquidity funds Thursday, August 07, 2008

Included in Barclays Bank results today was the news, highlighted by the FT, that profits before tax at Barclays Global Investors, the investment management business, fell 32 per cent to £265m, after charges of £196m, which the bank said were related to “selective support of liquidity products” to help clients.

This is a similar tale to that of firms like Legg Mason, who've wished to avoid "breaking the buck" on their money funds i.e. reporting a capital loss to investors. The support has normally taken the form of buying certain assets, usually illiquid ones, from the funds at above market value and absorbing the loss.

I've commented on this before here, here and here.

Will someone break ranks and admit that these are risky investments or will these funds continue to be "protected" by asset managers, in which case at what point will they be forced by regulators to capitalise accordingly?

Labels: Barclays Global Investors, Barclays plc, Legg Mason, Money fund, money funds

posted by John Wilson @ 11:55 AM Permanent Link ,

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Standard Life Money Fund bailout Friday, May 02, 2008

Image via WikipediaIn the scheme of things it's not huge, and they claim it's not embarassing, but Standard Life has injected cash into its £1.8bn sterling 7 day money fund. In doing so, the FT reports [free version here] that

The restructuring of the £1.8bn fund,which involves it moving to a mark-to-market pricing structure, will trigger a £52m pre-tax loss, or £37m post-tax, in the group’s first-half figures, it said. However, the cash cost would be only £17m.

The restructure has included swapping out some asset backed securities for corporate bonds.

The action is accompanied by a removal of the "guarantee" that it wouldn't "break the buck" i.e. return less capital to investors than they invested, a subject I wrote on here.