Peltz Continues Legg Mason Saga

Chidem Kurdas

Nelson Peltz has been a large investor in asset manager Legg Mason for six years. This May he marginally reduced his stake, a move reported as a possible first step toward selling off altogether.

But several funds he manages still hold almost 11.4 million shares, accounting for around 10% of Legg Mason equity. Question: what opportunity does Mr. Peltz see in the company?

After five years on the board, he resigned in December. At that time, Legg Mason announced that it waived restrictions on share ownership to allow Mr. Peltz a stake of up to 13%. As a board member he showed his activist bent by working to oust the chief executive & install a new one, Joseph Sullivan.

Mutual funds are the core Legg Mason business, though its lineup of managers includes the $22 billion hedge fund investment operation, Permal. Traditional actively managed funds face stiff competition from exchange-traded funds, which are increasingly attracting investors seeking low fees. Under Mr. Sullivan, Legg Mason is moving into ETFs. Last Friday the company filed with the U.S. Securities and Exchange Commission for launching four new ETF products.

This move to diversify may work. But Legg Mason will be competing against ETF giants Vanguard and BlackRock—not to mention a host of others. Whether as a newcomer it can gain a significant share of the ETF market is an open question.

Legg Mason says it will offer “smart beta” ETFs. These hybrids of market index and active management are popular. Doesn’t smart beta sound so much better than dumb beta?

In any event, the demand for such ETFs looks strong and Legg Mason is capable of reaching a lot of investors. It does have one obvious advantage: an established distribution network.

Given that Mr. Peltz is holding on to the stock, he presumably finds Legg Mason’s ETF prospect encouraging.



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