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Legg Mason, in turnaround bid, says profit up despite outflows

By Ross Kerber

Oct 25 (Reuters) - Asset manager Legg Mason Inc on Friday said its quarterly profit rose 7 percent compared with a year ago as assets and performance fees rose, but reported an outflow of investor cash from its equity funds.

The results showed both signs of progress and the challenges facing Legg Mason Chief Executive Joseph Sullivan as he tries to restore the fortunes of one of the largest U.S. fund firms.

Since taking the helm just over a year ago, Sullivan has shed smaller operating units, worked to expand Legg Mason's product lineup and begun revamping relations with the company's network of investment affiliates, like its Western Asset Management bond unit and its ClearBridge Investments equity division.

In an interview, Sullivan said the quarterly results showed Legg Mason positioned to resume inflows and that the outflows in equity funds - $4 billion during the quarter - reflected some unusual circumstances like a previously-announced redemption by a sovereign wealth fund.

"I don't feel as bad about where we came out on equities as the numbers would normally suggest," Sullivan said. Flows have been stabilizing, he said, and "Once we start growing, that covers a multitude of sins."

Analysts closely watch fund flows as a measure of asset manager performance. On Thursday, a number of large competitors also reported quarterly outflows, including T. Rowe Price Group of Baltimore and Franklin Resources Inc of San Mateo, California, amid signs of caution from large institutional investors looking to reduce their risk exposure. [ID:nL1N0ID2DA ]

"Investors remain disengaged," said Sandler O'Neill analyst Michael Kim. That mood in turn is slowing Legg Mason's efforts to regain investor cash, he said. "The macro backdrop is not helping them," Kim said.

Legg Mason's assets under management rose to $656 billion at the end of the quarter from $644.5 billion at the end of June, due mainly to a $14.2 billion increase in market performance and foreign exchange.

Total outflows were $1.4 billion, Legg Mason said, driven by the $4 billion in outflows from its equity funds. Bond funds and money market funds took in $300 million and $2.3 billion respectively during the quarter, Legg Mason said.

For the three months ended Sept. 30, Legg Mason reported net income of $86.3 million, or 70 cents per share, up from net income of $80.8 million, or 60 cents per share, in the same period in 2012. Operating revenue was $669.9 million, up from $640.3 million a year ago, due mainly to higher equity assets under management and higher performance fees.

Analysts surveyed by Thomson Reuters I/B/E/S had expected Legg Mason to report net income of 61 cents per share for the period, the company's second fiscal quarter. Shares in Legg Mason were up 0.4 percent at $37.02 in late morning trading.