Legg Mason affiliates back new CEO Sullivan

Joseph Sullivan has Legg Mason affiliates' backs. And in the past five months, he worked to let them know that.

Mr. Sullivan's appointment as chief executive of Baltimore-based Legg Mason Inc., announced Feb. 13, came with the support of CEOs at Legg's affiliate money managers who saw that, as interim CEO, he knew what each subsidiary needs and wants from the parent while also granting autonomy.

“I'm a big supporter of Joe,” said William Elcock, Boston-based CEO of Legg affiliate Batterymarch Financial Management Inc. “We (the affiliates) were involved in the selection.”

“Joe got right into the thick of it and in five months (as interim CEO), we got a lot done,” added Isaac Souede, chairman and CEO of another affiliate, Permal Group, New York.

Mr. Sullivan's new job won't be easy. He takes permanent control of a firm whose total assets under management of $648.9 billion as of Dec. 31 grew only 3% from a year earlier, with a net loss of $453.9 million in the fourth quarter and, except for the third quarter of 2012, experienced six years of net outflows. He also leads an array of traditional performance-based money managers in an industry that is moving toward more outcomes-based business.

“It's no secret that first and foremost, one, two and three, we need growth, growth, growth,” Mr. Sullivan said in an interview Feb. 13. “We need sustained positive flows. This is a big organization — institutional, retail, global. We have lots of moving parts we want to go in the same direction.”

In Legg Mason's fourth-quarter earnings call on Feb. 1, Peter Nachtwey, senior executive vice president and chief financial officer, said long-term outflows that totaled $7.5 billion in the fourth quarter were driven by three redemptions at its largest affiliate, Western Asset Management Co.: $2.4 billion from a large state pension client he did not identify, $1.1 billion from the wind-down of its participation in the U.S. Treasury's Public-Private Investment Program through the RLJ Western Asset Public/Private Master Fund and $1.6 billion in ongoing redemptions related to low-fee global sovereign mandates.

However, WAMCO did gain $600 million in new emerging markets debt business in mid-2012 — $300 million each from the $23.3 billion Iowa Public Employees' Retirement System, Des Moines, and the $13.7 billion Louisiana Teachers' Retirement System, Baton Rouge.

Other Legg Mason affiliates are ClearBridge Investments LLC, Brandywine Global Investment Management LLC, Legg Mason Investment Counsel, Private Capital Management and Royce & Associates LLC.

Executives from those affiliates interviewed for this story said Mr. Sullivan is capable of directing the subsidiaries and the parent company as a whole.

“Joe is someone who knows Legg Mason very well,” said James Hirschmann, CEO of Western Asset in Pasadena, Calif. Western Asset is Legg Mason's largest affiliate based on AUM, with $462 billion as of Dec. 31. “Joe's personality makes it very easy to work with him. He's very open, very direct, very willing to deal with issues in a straightforward manner.”

It's that straightforward approach and ease in working with affiliates that W. Allen Reed, non-executive chairman of Legg Mason, said came to the fore while Mr. Sullivan was interim CEO following the Oct. 1 resignation of then-Chairman and CEO Mark Fetting.

“I think when Joe became interim CEO, we recognized quickly that Joe's ability to have relationships with affiliates was important,” said Mr. Reed, who replaced Mr. Fetting as chairman in October. “Joe really earned the right to be CEO; his demonstrated effectiveness in dealing with affiliates was seen by the (Legg Mason) board.”

Mr. Reed said executives at the affiliates were involved in the selection from the start and recommended their choices to the board's search committee. The full Legg Mason board made the final decision.

“Clearly there were a number of issues,” said Michael Castine, chairman of asset and wealth management at Korn/Ferry International, New York, who assisted in the CEO search. “The key thing was leadership — who could work with Legg Mason on a number of complex issues, and clearly one was the relationship with affiliates.” He said increasing shareholder value was also an important consideration.

Mr. Sullivan was no shrinking violet during his time as interim CEO. In December, Legg Mason announced it would acquire funds-of-funds manager Fauchier Partners from BNP Paribas Investment Partners and combine it with Permal Group. Also, an agreement was reached in which Permal management would receive an approximately 15% equity stake in the firm. The following month, Legg Mason combined its ClearBridge and Legg Mason Capital Management affiliates, which will operate under the ClearBridge brand. Mr. Sullivan's handling of those moves drew praise from Mr. Hirschmann; Terrence Murphy, president of ClearBridge; and Permal's Mr. Souede.

“In a very short period of time (Mr. Sullivan's tenure as interim CEO) we accomplished a lot together — the Fauchier deal and employee equity stakes in the future growth of Permal,” Mr. Souede said.

Mr. Sullivan will need to be nimble as Legg Mason deals with issues like retail distribution and the industry trend toward solutions-based businesses, said William Katz, New York-based analyst at Citigroup Global Markets Inc. “I think on the one hand, Legg Mason has skill and global capabilities,” Mr. Katz said, but “they don't have a tremendous solutions-focused business. Their brand is tarnished in U.S. retail, and the (industry) in general has scaled up the solutions business and they're lacking in that.”

Jeffrey Masom, managing director and head of financial institutions at Legg Mason, said the company and its affiliates already have solutions-based strategies but acknowledged, “We haven't talked enough about this.” He said Legg Mason's global asset allocation team oversees strategies that include “the best of the best from our affiliates.”

“We've just scratched the surface,” Mr. Masom said. “The analysts aren't all wrong. This is where we could become a force in the industry. ... Expect us to do more of this.”

Permal's Mr. Souede agreed that his firm already is in the solutions business. “The way we measure our portfolio managers, it's definitely outcomes-based,” he said. “We're doing it that way already.”

Batterymarch's Mr. Elcock added: “We have those abilities. The strength of Legg Mason is that we're in a position to do that kind of business, and Joe can bring the glue to help bring this together; Joe has the skills and vision to make this happen.” Batterymarch has $12.5 billion in AUM, managed in equity strategies.

Mr. Hirschmann said that while differences between Western Asset and Legg Mason over distribution “will always be on the table,” he downplayed reports last fall that Western Asset had been looking at possibly separating from Legg Mason over differences with the parent's centralized approach to defined contribution and retail distribution (Pensions & Investments, Oct. 29). Legg Mason affiliates generally handle institutional distribution themselves. “I was amazed how (the spinoff reports) took on a life of their own,” Mr. Hirschmann added.

“The multiaffiliate model at Legg Mason is best for the way we manage money,” he said. “We hope we agree all the time, but that's not how life is. With Joe, what's nice to see is that he's open to honest debate on all issues.”

Mr. Sullivan had been senior executive vice president and head of global distribution. Terence Johnson, managing director and head of international distribution, took on Mr. Sullivan's responsibilities on an interim basis. Spokeswoman Mary Athridge said no announcement has been made on filling Mr. Sullivan's previous post. n