Legg Mason’s Gent on hitting the acquisition trail

Legg Mason has hit 2016 with a pace. Not fazed by the extreme volatility that marked the start to the year, the multi-boutique manager has already announced an acquisition, a business merger and a strategic investment and has launched two new products.

January marked the announcement of the deals, which saw the firm purchase New York-based real estate investment manager Clarion Partners. The firm also announced the tie-up of its hedge fund platform Permal with alternative asset manager EnTrust Capital. The tie-up created an alternatives firm with $29bn (£20.3bn) in total assets, with Legg Mason retaining a 65 per cent stake in the joint entity. At the same time Legg announced it was taking a strategic investment in ETF investment manager Precidian Investment, which will give it access to ETF product creation.

Rounding off a busy month for the firm, it launched two new products from its fixed income subsidiary Western Asset Management. The new Multi-Asset Credit fund, managed by Christopher Orndorff, will target a yield of more than 6 per cent but invest in global high income securities, while the Global Total Return Investment Grade Bond fund will be managed by a team headed by Gordon Brown and Andrew Cormack.

The latest acquisitions will have a “minimal impact” on the UK market, as the companies are currently very US-focused, says Adam Gent, head of UK sales at Legg Mason.

“Over time, we will continue to make sure that our UK offerings are providing solutions to clients’ investment needs, utilising all of Legg Mason’s global investment capabilities.”

For Gent, who joined the firm in 2007 and has built out the UK distribution business, the challenge is teaching advisers and wealth managers about the different brands and expertise Legg has within the company. Part of that played into the asset manager’s acquisition of Martin Currie in 2014, with Legg hoping to use the acquisition to better establish itself in the UK market.

However, the performance of some Martin Currie funds has been lacking recently, partly a result of its exposure to areas such as Asia, China and emerging markets, which have faced significant headwinds.

“When we acquired Martin Currie there were challenges with certain areas, and we – and Martin Currie – want to invest in the business to make sure any areas coming under performance challenges are addressed on a case-by-case basis,” he says.

A bright spot for Legg last year was its Legg Mason IF Japan Equity fund, run by Hideo Shiozumi. It returned more than 49 per cent for the year in sterling terms, making it by far the best performing UK-based fund of 2015. “There is good demand for Japan as an asset class and the type of strategy that Hideo Shiozumi runs,” says Gent. “Inflows are strong and assets are up to £435m.”

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Gent is fairly relaxed about the potential for hot money to rush into the fund as a result of the stellar performance over the past year, saying his team are trying to make it clear to clients that the fund is more volatile than a large-cap orientated fund.

With an eye to future expansion, Gent says the firm is always looking for ways to grow its UK product line-up. Smart beta is one area to which the asset manager has recently been linked. The US arm of the business has launched a couple of active ETFs, having hired two executives from Vanguard for help with the push into the market.

“We would look at that, we have no firm plans at the moment, but we do have capacity and we have done it in the US,” he says.

The process of transferring one of the US funds over to the UK market to UK-based advisers is relatively simple, says Gent. However, the internal decision-making leading up to that process can be more lengthy. Gent says the UK business is about to mark its seventh consecutive year of net positive sales in the UK retail space.

“Legg Mason is keen to continue to grow the number of potential solutions we can offer to clients in those areas we don’t have as much capability as we would like,” he says.

In particular, Gent says there is space to launch a product in European equities, in a Europe ex UK product, which tends to be popular with UK investors. Multi-asset is also an area Gent wants to develop, using the expertise in its QS Investors business, which is currently very US focused. “Over time it would be great to offer that capability to the UK market,” he says.

Legg also has a gap in which to launch a UK equities product. The group’s existing UK equity products are run from the US by US managers, which Gent says may not stand up well to UK-run rivals. “It would be great to have that capability, but we would need to put a lot of resource into such a launch,” he says.

Platforms have been a particular focus for Gent as he looks to boost recognition of Legg and its subsidiaries in the UK.

“We have made big strides making our products available on the major UK platforms and therefore available to all of UK retail, as opposed to just private banks, fund of funds and discretionaries going through their own nominees,” he says. “We have also made sure our biggest and most appropriate strategies are available on platforms when they are Dublin-based, such as the Macro Opportunities, Clearbridge Aggressive Growth, Brandywine Global Fixed Income funds.

One trend of which Gent is very aware in the company’s efforts to expand in the UK is the rush by others in the industry to have vertically-integrated companies.

“Vertical integration within the UK is obviously something that we need to be mindful of in terms of where we spend our time. If distribution is tied to a certain manufacturer then clearly that is going to be the preferred route for investment,” he says.

Looking ahead to potential headwinds for the industry, Gent points to regulation. The firm’s relatively new presence in the UK means it is not plagued with the large legacy book of business some asset managers have going into the Sunset clause, when all legacy trail commission on platforms must cease. However, Gent says he is interested to see how the industry reacts to the April deadline.

“Around 25 per cent of platform assets are still eligible for rebates as they stand at the moment. How fund management groups tackle that change in those rebates is going to be interesting to watch. We want to make sure any decision we take is in the spirit of what RDR was supposed to do,” he says.

As a result the asset manager has decided to reduce its annual management charge for class A shares from 1 April 2016. For fixed income funds the annual management charge will be reduced by between 40 basis points and 45 basis points, depending on the fund. Meanwhile equity funds will see a 50 basis point cut and the initial charge on any funds will no longer apply.

“With the considerable reduction in our fee levels, it will provide a more competitive fee structure for our clients. Our aim is to make sure that investors continue to receive value for money from our UK-based fund range,” says Gent.

Independent views:

Jason Hollands is managing director at Tilney Bestinvest

Legg Mason is quite an understated group in the UK market when you consider it has $670bn under management and 117 years of heritage. Within the UK market, I believe the firm is most closely identified with US small-caps through the Legg Mason IF Royce US Smaller Companies fund, and Japanese equities through the Legg Mason IF Japan Equity fund. Recently these have been a tale of two fortunes. The US small-cap fund has seriously lagged the Russell 2000 Index for some time now, owing to its focus on lowly geared, quality growth stocks. In contrast, the Legg Mason IF Japan Equity fund was the best-performing fund available to UK investors across all sectors last year. The addition of Martin Currie should allow Legg Mason to increase its visibility in the UK.

Chris Mayo is a director at Wellian Investment Solutions

Legg Mason is a global business that runs a multi-affiliate model, a collection of independent specialist asset management businesses that are predominantly based in the US. Of these affiliate firms, Western and Brandywine are best known for their fixed income capabilities, while Clearbridge and Royce are well known for US equities. Legg Mason’s purchase of Martin Currie last year will help it to develop business in the UK. In addition, the firm has been identifying strategies, often originating in the US, that would be attractive to UK investors and launching Dublin funds. As many of the businesses and investment managers are US based, this does give a different perspective on markets to London-based managers as they are closer to their own markets.

Lucy Walker is a fund of funds manager at Sarasin & Partners

Legg Mason’s profile has definitely increased in recent years, following a push to market its incredibly broad fund range to a UK audience. While it would be difficult to know every fund, the various underlying brands allow investment teams to retain a degree of autonomy, such as Clearbridge, which is known for US equities, or Western, for fixed income. I think there will be a limit to the number of brands it can realistically market, so we will watch to see how many more acquisitions it does. I felt the purchase of Martin Currie in 2014 was a surprising one, as the business did not have a clear expertise, but there have already been a couple of hires so it will be interesting to see how the business develops.

The numbers:

40%
Return of the Legg Mason IF Japan Equity fund last year

1899
Year Legg Mason was founded

$4.5bn
Assets in Dublin-domiciled funds

£2.8bn
Assets in the Legg Mason ClearBridge US Aggressive Growth fund

CV:
Legg Mason is a multi-boutique asset manager founded in 1899, and now has $671.5bn in assets, across equities, fixed income, alternatives and cash strategies. The company has 3,100 employees across 31 offices over six continents. Prominent brands under the Legg Mason umbrella include Brandywine Global, Western Asset Management, Martin Currie and ClearBridge Investments.