Legg Mason mulls purchases, QDLP scheme, active ETFs

The US fund house’s chief executive, Joseph Sullivan, spoke to AsianInvestor about his global ambitions for the firm, with a focus on Asia, most notably China.
Legg Mason mulls purchases, QDLP scheme, active ETFs

Legg Mason, after buying fund-of-hedge-funds firm Fauchier Partners and folding it into subsidiary Permal in March, is now mulling similar ‘bolt-ons’ in Asia and elsewhere.

The US asset manager is also considering other potential acquisitions and team lift-outs, as well as areas such as actively managed exchange-traded funds. It would also like to see Permal considered for Shanghai’s qualified domestic limited partner (QDLP) scheme.

Global CEO Joseph Sullivan says he’s not interested in “asset-grab acquisitions or poorly performing properties”, whereas some asset managers are making such purchases with a view to “rationalising” the under-performing strategies. “We want firms that are performance-accretive, leveragable and scalable – ones that are looking 20 years down the road.”

Specifically, Legg Mason is looking to bring in investment capability, in global equities in particular. It has some non-US equity expertise, but not enough, Sullivan tells AsianInvestor. “We want more global and emerging market equity capabilities, and more local [expertise], be it in Asian or European equities.”

The firm is also looking at potential acquisitions or expansions on the fixed income side.

While two-thirds of the firm’s AUM is in fixed income, the majority of revenues come from its equities business. “People think we’re overweight fixed income,” says Sullivan, “but we’re more balanced than that.”

As for Legg Mason’s institutional versus its retail assets, 71% of its AUM is in institutional versus 29% retail, but the revenue split is roughly 50/50. “And we’d like to see retail become a bigger proportion, as it tends to be a higher-fee business,” says Sullivan. Meanwhile, close to 40% of AUM is sourced from clients outside the US, and the aim is to get that figure up to 50% and beyond.

The firm is “constantly in discussion” with potential targets, says Sullivan. He is open to acquisitions in the US, Asia or elsewhere; it all depends on the kind of people on offer and the potential for leverage. Yet finding the right potential acquisitions is proving difficult now in Asia, given the rising level of competition and scarcity of available assets, as previously reported by AsianInvestor.

Would Legg Mason enter the index or exchange-traded funds business? Probably not – this is a market that Sullivan sees as "an oligopoly; pretty much game, set and match already”.

“Let’s be clear: we are an active manager, and the index funds space is a more commoditised area, and I want to be in businesses that are differentiated," he adds.

The firm has, however, has considered actively managed ETFs and continues to do so. "But will this be a cornerstone of our business?” says Sullivan. “I'm not sure.”

One thing he does seem certain about is that “people are paying attention to Legg Mason in way they haven’t in a while. They have a sense that we’ve turned a corner. But we’ve got to prove that over time with our flows".

As a result, he adds, “I am getting more incoming calls not just about deals, from people but who want to talk about joining our firm. I think we’re seeing everything now [in terms of potential acquisitions], and that wasn’t perhaps the case a few years back."

Legg Mason will not be able to maintain and expand its $650 billion in global AUM without a “strong and growing presence” in Asia on top of that in the US, says Sullivan.

The firm is already well positioned in the region, he says – for example, with a long-standing presence in Japan, acquired via the purchase of Citi’s funds business there. It sourced $45 billion of its AUM from Japan as of August 31.

Sullivan also points to Permal’s recently opened research and client service office in Shanghai to add to its branch in Beijing. He stresses Legg Mason’s long-term commitment to China and says the firm would like to be considered if FoF managers were invited to seek QDLP approval. Under the scheme, alternative investment firms will be able to raise renminbi from mainland investors for the first time.

At this stage the QDLP programme has only been opened to single-strategy managers, and the identity of the first six firms set to obtain a licence emerged last month (Canyon Partners, Citadel Group, Man Investments, Oaktree Capital, Och-Ziff and Winton Capital).

Moreover, Legg Mason subsidiaries Western Asset and Permal obtained clearance to launch funds under China’s qualified foreign institutional investor (QFII) scheme in the second quarter.

Turning to the retail market in China – which is gradually opening up to foreign competition (see page 24 in the October 2013 issue of AsianInvestor) – distributors there are becoming more selective, says Sullivan.

One of the biggest fund distributors in China has relationships with 400-plus asset managers but wants to cut that down to 125, he says, as it can’t continue to provide such a high level of due diligence on so many products.

Sullivan argues that this will benefit Legg Mason’s model, whereby the firm offers a very wide range of funds through a multi-boutique approach, using a single point of contact for distributors and a “centralised and scalable” distribution model.

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