Mark Fetting first worked with Raymond “Chip” Mason almost 20 years ago, as a consultant with Greenwich Associates. At the time, Mr. Mason — founder of Legg Mason Inc. — wanted to build his brokerage company's asset management arm, even as one of his star portfolio managers, Bill Miller, was stumbling badly.
Just last month, more than two years after Legg Mason swapped its brokerage arm for Citigroup Inc.'s asset management operations and with performance issues once again bedeviling the firm, the company's board tapped Mr. Fetting as Mr. Mason's replacement. Widely seen as having been Mr. Mason's preferred choice in the company's nationwide search for his successor, the newly minted CEO has adopted a rallying cry — “accelerated evolution” — that promises both change and continuity. The company's decentralized, best-in-class multimanager model remains valid, he says, but enhancing that model by strengthening marketing and servicing, and boosting Legg Mason's international equity operations, will be priorities. Mr. Fetting — who promised to “hit the deck running” — wasted little time making his first key hire: Melbourne, Australia-based Ronald R. Dewhurst was tapped on Feb. 4 as senior managing director to quarterback the growth of Legg Mason's non-U.S. business.
That was quick. How do you know Mr. Dewhurst? Ron is someone I particularly wanted to join our senior team. (He was leading) IOOF Holdings Ltd., an umbrella group much smaller than us, but which had some underlying managers, one of which uses Western Asset Management as a fixed-income subadviser. So Ron was essentially a client. He made a decision to pursue some other opportunities, of which we were one.
Was the direction the company would pursue already settled when the search for a new CEO was launched? We had several strategy discussions with the board, at their request, and that became an important question to anyone considered: How do you see this firm going forward? Our model is a differentiated one — we believe the best way to outperform is to have multimanagers who specialize in their own space. ...
The board made their own assessment that that model made sense, and then to get someone who believes in it, and could further enhance it, was part of their deliberation.
How much is that model changing? People should expect accelerated evolution, not revolution. We're not changing the model, but we're going to pick up the pace on the evolutionary pieces we think are important. It's consistent with the strategy the firm has followed, led by Chip. It's like that (Stephen) Sondheim song “Putting It Together”: step by step, putting it together; inch by inch. ... We have a lot of the pieces. We want to make sure we put it together right. And in some cases, we absolutely have it right. In other cases, we're still getting there.
What's in the “still getting there” bucket? More capability on the international equity side — that's something we'll look at on an acquisition basis. To the extent we think it would help to have a deeper team of international leadership, with experience to help existing players to really capture the opportunities, you'll see that, as we've already done with Ron.
And distribution? We've done an awful lot over the past two years making the shift from a proprietary sales force ... to an open-architecture sales force, working with all the major firms. That "under the hood' work has been done — impressively and in a fairly short time frame. That ought to be to our advantage going forward as we focus now on just driving sales, improving flows, etc.
So distribution isn't a front-burner issue? Oh no, we've made a lot of progress, but we need to keep delivering that progress, even pick up the pace. And since we were making this strategic shift, and restructuring, there were certain things we just couldn't pursue. We very consciously, when we first took on the Citi business, put a moratorium on products, because we had to role up our sleeves and rationalize. But now we have an opportunity to be thoughtful and opportunistic on the new product side, launching a couple of 130/30 funds, rolling out a fund in China. On the institutional front, Western has done a couple of offerings in fixed income, working with clients on some distressed debt situations, and on the emerging markets debt side.
How do you see Legg's mix of institutional, retail and high-net-worth business? Institutional is a very attractive business. If we do our jobs right, we ought to become a destination of choice for increasingly sophisticated institutional clients, across an array of mandates. On the retail side, there's this institutionalization going on. To gain entry into big distribution firms — from Citi and Smith Barney, to Merrill, to Morgan Stanley, to emerging firms like LPL and Ameriprise — we see more institutional-quality teams selecting best-in-class firms and then working with them on new offerings for their clients. That bodes well for us.
You have a hedge fund of funds. Will you look at direct investments in hedge funds or private equity? We actually had a very interesting discussion on this in our board meeting. I think it's important that we continue to stay close to our clients, get a sense of where their investing priorities are going to be. Do we have those capabilities? If not, we're probably wise to seek them. We'll continue to have reservations around places where ... “if I can't understand what they're doing I'm not sure I want to invest.” But there's plenty of room within alternatives (130/30 for example) that wouldn't have you going down that path. Other areas that you talked about (like private equity) we certainly look at. Whether we do anything there or not remains to be seen.
What's your read on clients' investing priorities? In aggregate, (institutional) asset allocation to alternatives is 9%, (but) leading investors like Yale and Harvard are in the 40% to 50% range. That kind of directional sense would say we're wise to keep our eye on alternatives. That's not to say we're going to do something there. ... It's just we're wise to keep monitoring that. For asset-liability matching, there's a service element to that, in addition to the investing, that several of our managers are working on. ... That's a trend that could be interesting.
A growing number of big institutional investors seem to be awarding global mandates now. U.S. vs. international probably goes away over time. There's more of a convergence around global, and our existing managers are already on that: Western, Batterymarch, Brandywine. Bill Miller's core large-cap equity portfolios have more of a global quality, probably 20% to 25% in global names, and he's developing more and more coverage within his research team on that. He's looking, as an example, at a global fund. While nothing is imminent, it's something he's talked about and thought about.
In addition to your revenue-sharing arrangements with subsidiaries, is there any move afoot to provide equity as well? We have always evolved in ways that make sense. We look at it, but we haven't made any decisions on that specific issue. You want to make sure, in response to clients, that there's skin in the game. As long as you can preserve the entrepreneurial (culture), clients are less concerned with how you do it.
Does the weakness of Legg's share price oppress you? I believe that the franchise is undervalued. It's not unusual, in times when your more recent results are disappointing, that people might be factoring that excessively into future streams. The proof will be in the pudding: our ability as a team to deliver increased value to this wonderful franchise, of such a nature that we command a premium valuation among asset managers, which we've normally done.