Joseph A. Sullivan was selling men's suits at a department store while a third-year economics major at St. Cloud (Minn.) State University in 1978 when he was asked by a customer — the economics chairman at St. John's University in Collegeville, Minn. — why he didn't attend St. John's. Mr. Sullivan said he couldn't afford to go there, but he was persuaded to bring his transcripts to St. John's, and the school was sold on him, offering him financial aid to take his last year of studies there. He graduated in 1979.
Thirty-four years later, the one-time suit salesman now heads Legg Mason Inc., the giant money management holding company with a combined $654 billion in assets under management. The Baltimore-based firm has been challenged in recent years by asset outflows and a changing industry that has moved more to passive investment from Legg Mason's traditional active style and to outcomes rather than performance.
Mr. Sullivan says he's up for that challenge. He's held high-ranking fixed-income trading positions at Piper Jaffray and Dain Bosworth; led the fixed-income capital markets business at both Legg Mason Wood Walker and Stifel Nicolaus; and became chief administrative officer at Legg Mason in 2008 and head of global distribution in late 2010.
Last October, the Legg Mason board asked Mr. Sullivan to serve as interim CEO when Mark Fetting stepped down. During his interim tenure, a deal was reached with BNP Paribas Investment Partners to acquire funds-of-funds manager Fauchier Partners and combine it with Legg Mason's own funds-of-funds subsidiary, Permal Group. Permal management also received an approximately 15% equity stake in the firm. He then oversaw the combination of Legg Mason's ClearBridge and Legg Mason Capital Management affiliates under the ClearBridge name.
Legg Mason's board and affiliates were sold on Mr. Sullivan; he was named CEO on Feb. 13.
Did you feel like you were trying out for the job as interim CEO? If you go back and read a lot of the media and research reports, early on I was mentioned as a candidate for the position, but I don't think anyone really thought I was a legitimate candidate. There was an assumption that Legg really needed to go outside and so I think I was significantly discounted as a candidate. When I was asked to be interim CEO, my question back to (W. Allen Reed, non-executive chairman) was, “OK, what does that mean?” ... His response to me was very clear; he said, “Joe, we don't have the luxury of this being a caretaker, this being a maintenance job. We've got a lot of work to do. I want you to work with the board to develop strategy for the company going forward, and if you want ultimately to have a shot at being CEO, then act like a CEO during the interim period.” It didn't mean that by any stretch I was assured of the job and I didn't assume that. I just kind of put my head down and did what needed to be done.
How do you keep the affiliates happy? I think the way to do it is simply to be in frequent dialogue with them, to listen to what their challenges are, what their needs are, how I can help them try to figure out how we can leverage the best of what Legg Mason's holding company and corporate structure ... (and) what the affiliates do well. When we bring these all together it's incredibly powerful and we succeed, we win, when we collaborate and bring the best of the affiliates and corporate structure together. It's about taking the time to listen and solicit their input on things. These are really smart people.
Some analysts say Legg Mason doesn't have a solutions business, and that may be a problem for shareholders. Is there a disconnect between what the industry sees and what Legg Mason offers? “Solutions” is a catch-all, a term that people kind of throw around; what exactly do you mean by that? That can mean modestly different things to different people. If there is a disconnect, candidly, what we need to do is a better job — and I own this — of telling our story in a clearer fashion. The fact that some analysts don't think that we're in the solutions business is indicative of the fact that we haven't done a good job in telling them because, in fact, we are in the solutions business. Now, it's not as prominent as it may be at some other firms, like a BlackRock or elsewhere. It's a relatively nascent effort, it's not as developed as it needs to be or will be, but that said, we do have some meaningful wins with clients in what would be called “solutions.”
That is an area in which we will continue to invest and continue to build out because, quite frankly, our model and our collection of world-class managers play into the whole solutions concept beautifully. We need to invest more and focus on it more, and then we need to make sure people understand that in fact we are in that business.
How do you stop the long-term trend of asset outflows? It's a lot of work. You have to have compelling investment performance. For a period of time around the onset of the (financial) crisis and then a couple of years after, we didn't. ... It's very difficult and very challenging to deliver consistently strong performance. At the same time, I can pretty much assure you if we deliver poor performance we're going to struggle to get flows. By the same token, simply having good performance is not sufficient. You have to bring other things to the table. ... Our investment performance now is strong. I'm not saying it's perfect, not saying we don't have pockets that are challenged here and there. ... So what we have to do is stay the course and build the business because consistently good performance delivered with consistent strong sales and client service will ultimately yield results.
We are seeing that in the retail space a little more than the institutional space, but I'm convinced the institutional space is the same way and that those flows will return.
Will Legg Mason be looking to go into passive management more? We do respect the fact that the passive space is here to stay. It's probably going to be a growing percentage of the marketplace. I don't think the rate of growth will continue, but the passive space will continue to take market share. We do believe that active management really delivers ... Beta alone is not going be enough to solve the investment challenge needs of investors, they're going to need more than that, and that's where the active space comes in. That would lead some people to believe that alternatives is going to pick up, and we would tend to agree.
We would tend to believe that global, whether it be fixed income or equities, will continue to be a bigger part of the investment pie because, quite frankly, there's great alpha opportunities in them.
The bottom line is we think active management is still critically important for investors to meet their goals. The passive space will simply not deliver enough in terms of return.
Following the Permal equity ownership agreement, is it possible to reach similar equity stake agreements with other affiliates? Yes, it's possible; I hope that we do it. ... What we did with Permal is a framework or a template that we can potentially use for other affiliates ... But the broad concept of having our affiliates participate with an equity stake in their franchise is a very, very powerful concept. n