T. Rowe, Legg Mason keep afloat in tough 2nd quarter

Legg Mason moved to protect its reputation by propping up several ailing money market funds.

Both of Baltimore’s major investment firms reported earnings Friday, with T. Rowe posting a net income of $162 million, identical to the second quarter of 2007, and up from a net income of $151.5 million in the first quarter. Legg Mason narrowed its losses to $31.3 million last quarter from $255.5 million in the previous quarter.

Legg Mason stock closed Friday up 3.4 percent to $39.51, and T. Rowe stock also rose 1.09 percent to close at 56.62.

Legg’s losses were driven by charges connected to its $155.4 million support of several troubled money market funds. Legg on June 30 said it would contribute capital to prevent investors from losing money on the mortgage-backed funds.

“Legg, to protect its reputation, has gone out of its way to ensure those funds aren’t going to take losses,” said Andrew Roberts, an analyst covering both Legg Mason and T. Rowe Price for Chicago-based investment research firm Morningstar. “That’s sort of why they’re willing to do this … because their reputation is more important to them than a few quarters of accounting losses.”

Investors placed $8.1 billion with T. Rowe Price during the second quarter, favoring the firm’s target-date retirement investment portfolios with $2.3 billion in assets. However, T. Rowe Price President and CEO James Kennedy said nearly all of the firm’s products saw some growth.

“The driver for the firm is their retirement business, they’re managing assets for the retirement portfolios that are extremely sticky,” Roberts said. “There are tax penalties for leaving the program, so they’re assets that [tend to] stay with the company.”

Meanwhile, investors continued to pull money out of Legg Mason. The firm’s assets under management fell by $27.3 billion, or 3 percent, in the second quarter to $922.8 billion, and were down $69.6 billion, or 7 percent, from the year before.

Legg Mason President and CEO Mark Fetting in a statement backed the firm’s money managers and said they would be borne out once the market improves.

“We have principal managers who are doing well, and others who are facing investment performance issues,” Fetting said. “What all of our managers have are highly disciplined investment strategies that have been validated across market cycles.”

Executives with both companies pointed to strong balance sheets as positive signs while the current economic slowdown continues.

“Our second quarter performance was achieved during a tough market environment in which major U.S. stock indexes experienced marked volatility,” Kennedy said. “Looking ahead, the credit crisis, deleveraging financial institutions, and inflationary pressures continue to be a brake on the economic recovery.”

Major national investment firms also cope with slow economy

The nation’s largest investment firms weren’t safe from the same economic slowdown that has dragged on Baltimore-based Legg Mason and T. Rowe Price, as they reported mixed results for the second quarter. Hardest hit was New York-based Merrill Lynch, which reported a net loss for the quarter of $4.6 billion, compared to net earnings of $2 billion a year ago. Significant losses included $1.7 billion in the firm’s U.S. bank portfolio and $1.3 billion in residential mortgages.

“Our core franchise continues to perform well despite the extremely challenging market environment,” Merrill Lynch Chairman and CEO John Thain said in a release, echoing similar statements from executives at other firms.

Not all blue-chip investment firms faced such a difficult quarter. Goldman Sachs, the pre-eminent New York firm, in June reported net revenues for the second quarter of $9.42 billion, and net earnings of $2.09 billion. Investors backed the company with an increase of $22 billion in assets under management during the quarter, up 18 percent from a year before to $895 billion. The firm also ranked first in worldwide announced mergers and acquisitions in the calendar year, it said.

“Given the difficult market conditions, we are particularly pleased to report strong results for the second quarter,” Goldman Sachs Chairman and CEO Lloyd Blankfein said in a release. “We continue to benefit from our strong client franchise, a broad and diverse set of businesses, and the deep commitment and experience of our people.”

Between the two extremes was San Francisco-based Charles Schwab, which reported a second quarter income of $313 million, up 22 percent from the same quarter a year before. Clients brought $26 billion in net new assets to the company and total client assets at the end of June were $1.4 trillion, up slightly from a year before.

“I’m very pleased with how our business model continued to deliver great service and consistent financial results in the second quarter,” former company chairman and CEO Charles Schwab said in a statement.

acahall@baltimoreexaminer.com