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Executives

Alan F. Magleby - Director of Investor Relations & Communications

Mark Raymond Fetting - Chairman, Chief Executive Officer, President and Member of Finance Committee

Peter H. Nachtwey - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Analysts

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

William R. Katz - Citigroup Inc, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Roger A. Freeman - Barclays Capital, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Legg Mason (LM) Q4 2012 Earnings Call May 1, 2012 8:30 AM ET

Operator

Greetings, and welcome to Legg Mason

fiscal Fourth Quarter and Year-End 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations and Corporate Communications. Thank you, Mr. Magleby. You may begin.

Alan F. Magleby

Thank you. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2012 fourth quarter, and the fiscal year ended March 31, 2012.

This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. For a discussion of these risks and uncertainties, please see risk factors and management's discussion and analysis of financial condition and results of operations in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011, and in the company's quarterly reports on Form 10-Q.

This morning's call will include remarks from the following speakers: Mr. Mark Fetting, Chairman and CEO and Mr. Pete Nachtwey, Legg Mason CFO, who will discuss our financial results. In addition, following the review of the company's quarter, we will then open the call to Q&A. Now I would like to turn this call over to Mr. Mark Fetting. Mark?

Mark Raymond Fetting

Thank you, Alan. And I would like to welcome everyone to the Legg Mason fiscal fourth quarter and year-end 2012 earnings call. Over the last fiscal year, we completed our streamlining initiatives and our full focus now is on growing our franchise. We believe that we have positioned the firm well across a number of categories to deliver investment solutions to our clients even with the near-term headwind of choppy markets.

Organic growth opportunities include strong positions in fixed income. With investment teams on the ground in most major investment centers, Western Asset can offer virtually any fixed-income solution in almost any currency. And Brandywine Global has strong traction in its global bond capability. Permal's macro strategies have significant appeal for investors in these markets, and we are working with them on opportunistic funds to capitalize on market volatility. Going forward, Permal sees significant opportunity in China, sovereign wealth funds, U.S. and non-U.S. institutions and high net-worth investors in the U.S. On the equity side, we continue to see opportunity in specific categories such as ClearBridge's income solutions products and MLP offerings, as well as opportunities to expand Royce's presence with investors outside the U.S. We also actively looking at bolt-on and lift-out acquisitions to fill in product gaps. As markets around the world continue to work through structural issues, we recognize that it may take time for investor sentiment to get in line with the investment opportunities our managers see. But we believe that we are well-positioned for the long term. And in the short term, we're well diversified and situated to withstand continued global financial challenges.

Let's start with Slide 3 and discuss our progress across the strategic goals we laid out last year.

As I've said many times, our success starts with our investment managers. As we'll discuss in more detail later in the presentation, performance remains strong in our team managers, with 80% of marketed composite assets beating benchmarks for the critical 3-year period. Managers continue to win recognition from third parties for performance in a variety of categories. We will go into more detail in the next slide. In the institutional space, our affiliates continue to see demand in specialized areas such as -- as investors search for returns. Western has branched out into the active ETF space through a sub-advisory arrangement. And in addition, Legg Mason has an application pending with the SEC to start our offerings in that segment.

We have launched a 1099 fund of hedge funds to target U.S. high net-worth individuals with Permal, that we expect to gain traction later in the year. ClearBridge sees additional opportunities for MLP investment vehicles as that market expands, particularly with institutions seeking yield.

At Legg Mason, we are focused on a corporate center that delivers strategic value. We've shifted resources in global distribution, providing more feet on the street and geographic reach. And we are working with our affiliates to launch new products where we see demand including 2 closed-end funds launched over the past year. And finally, we are allocating capital to benefit shareholders and strengthen our balanced portfolio. With our strong cash position, we repurchased 13.6 million shares in fiscal '12 and increased our quarterly dividend by 38% to $0.11 a share. Our SIV [ph] investment portfolio stands at nearly $400 million and represents $27 billion in assets today. And at the same time, we are more actively looking at targeted acquisitions to fill product gaps that will help to improve our asset mix and flows.

Slide 4 shows awards won by Legg Mason managers. We're pleased to have won awards across several including Western, Royce, Permal, ClearBridge, Brandywine and our Global Asset Allocation team. I would call out the institutional investor awards for Western and Brandywine, who won Municipal Manager of the Year and Global Fixed Income Manager of the Year awards, respectively, for 2011.

Slide 5 highlights our results for the quarter. Legg Mason reported net income of approximately $76 million or $0.54 per diluted share. Adjusted income, which adds back certain noncash and other charges, was approximately $124 million or $0.88 a share. In the quarter, we realized the remaining savings related to our completed streamlining initiatives. Our distribution team successfully completed the launch of the Legg Mason BW Global Income Opportunities closed-end fund, raising approximately $459 million. The costs related to this successful launch for the quarter were $0.04 a share. We ended the year with a cash position of approximately $1.4 billion, with $155 million remaining of our $1 billion share repurchase authorization, which Pete will discuss later on. Long-term outflows improved 35% from the December '11 quarter.

Slide 6 shows assets by asset class. AUM was up to $643 billion driven by market appreciation. As of the March quarter, equity as a percent of those total assets rose to 26%, fixed income was 55% and liquidity, 19%. And average AUM was also up 2% for the quarter as compared with December, which contributed to improved revenues.

Slide 7 shows net flows for the quarter. Importantly, fixed income flows continued to improve with the sequential reduction in outflows each quarter since September. In fact, fixed income flows improved throughout the quarter, culminating in positive flows for the month of March despite continued outflows from the global sovereign mandate we've highlighted in the past. This outcome reflects positive trends at both Brandywine and Western.

Equity outflows were flat from the prior quarter, reflecting continued industry-wide challenges for active equity managers, and we had inflows in liquidity assets. As we have discussed in the past, the final transfer of sweep assets to Morgan Stanley for offshore funds will occur at the beginning of May and the beginning of July. This will affect approximately $6 billion in liquidity AUM. We feel good about the improving trends we saw in the quarter and in the direction of our pipeline for the current quarter. However, there will continue to be some near-term choppiness in month-to-month flows. In the month of April, there were some known redemptions, including a previously announced $1 billion equity redemption from a public pension fund and a couple of fixed-income mandates that were partially offset by inflows in other categories.

Slide 8 shows assets under management by affiliate in order of their pre-tax contribution earnings for fiscal '12. First is Western Asset at $446 billion, up approximately 1% from last quarter driven by market appreciation, reduced long-term outflows and liquidity inflows.

We will go into greater detail in the next slide. However, performance, particularly in the 3-year timeframe remains strong, while the 1-, 5- and 10-year performance also improved from last quarter.

Western is seeking continued demand and is seeing continued demand in specialized mandates particularly global credit, emerging markets and high yield. Overall, trends at Western are strengthening and the pipeline is growing.

Second is Royce at nearly $40 billion, up 11% from the prior quarter driven by market appreciation. Royce experienced modest net outflows reflecting negative sentiment in the U.S. around equities including small cap. Outside the U.S., Royce is seeing continued interest in the funds they sub-advise for Legg Mason.

Third is Permal, with over $18 billion up slightly from the prior quarter primarily driven by market appreciation as performance across their key funds continues to beat hedge fund indices. Gross for the quarter were slightly positive. Permal made outstanding progress with institutions, with net inflows of $340 million in the quarter primarily from U.S. institutions and sovereign wealth funds, which more than offset softness across the industry in their legacy high-net-worth channels.

Fourth is ClearBridge at $56 billion, with improved AUM driven by market appreciation. ClearBridge is working through headwinds faced by many equity managers in terms of bringing retail demand back to equity products. However, they are beginning to build interest in income solutions strategies where they had net inflows for those products for the quarter. They've also built a won-but-not-funded pipeline of $600 million. This institutional effort has been building since 2010 and reflects focused differentiation around income solutions, low volatility and alpha generation. Early results are showing promise, with 7 finals presentations in the current quarter.

Fifth is Batterymarch at $18 billion driven by market appreciation. Some institutions allocated money away from Batterymarch and from active mandates. This was partially offset by a small cap win at a large 401(k) platform. This mandate was in conjunction with the Legg Mason distribution team. In the quarter, Batterymarch also successfully rolled out the next generation of leadership towards investment in sales organization.

Next is Brandywine at $37 billion, up 12% for the quarter driven equally by market appreciation and inflows of approximately $2 billion. In addition to the closed-end funds and other funds sponsored by Legg Mason, Brandywine saw strong inflows from sovereign wealth funds. Their won-but-not-funded pipeline is approximately $1.2 billion. And Brandywine is adding salespeople to help turn performance momentum into an even better flow story.

Higher performance fees in the quarter reflect those strong performance in several accounts in which the annual performance fee is paid in the first calendar quarter of the year.

And seventh is Legg Mason Capital Management at approximately $8 billion. On April 30, Sam Peters completed the transition as lead manager of the Value Trust.

Slide 9 shows an update of Western Asset. The upper left-hand corner shows assets by mandate. As we've indicated for several quarters, they continue to see the greatest demand in specialized mandates, which represents 44% of the total. The upper right-hand corner shows composite performance against benchmarks, and that continues to be strong over most timeframes, but importantly, 91% is beating their benchmarks in the 3-year period, up from last quarter's level. There was also improved performance from last quarter against composites for the 1-, 5-, and 10-year timeframes as well. On the bottom, we show long-term net flow trends. We continue to see improvement over the past several quarters. In fact, x the global sovereign mandate, the full year-over-year improvement is 64%. In particular, outflows from Core and Core Plus mandates have slowed year-over-year and this quarter.

Western's won-but-not-funded pipeline for the quarter ended March 31 is nearly $4 billion, with the vast majority of that attributable to specialized mandates. RFP activity is significantly up from last quarter and from the prior year March quarter. In addition, our fund board has approved the addition of retail share classes to Western funds, which should occur in the current quarter and provide us with an opportunity to leverage those fund's strong track record. And finally, Western opened an office in Dubai to serve existing clients and take advantage of the opportunities that they see in that region.

Slide 10 shows investment performance across the complex. Here we show the performance in 2 ways, by marketed composite versus their benchmarks and long-term U.S. fund assets versus the Lipper category averages.

We are pleased that performance continues to compare well across most periods, in particular, the critical 3-year time period. In fact, the 1-, 5- and 10-year performance versus benchmark and versus Lipper category average all improved this quarter from last quarter.

Slide 11 provides an overview of our global distribution franchise. With offices in the U.S., Canada, Europe, Asia, Australia and Japan. At $220 billion, this represents over 1/3 of Legg Mason's total assets under management. Here you also see our quarterly flow trends for the entire distribution platform, both domestic and international. Net flows were positive for the quarter marking the sixth quarter in the last 9 where we've seen positive net flows from the global distribution team. International was the larger contributors to those flows, and while they had their, 13th straight quarter of inflows, they were down from prior quarters reflecting a slowdown in demand in Japan for some of the cross-border mandates.

On the U.S. side, outflows improved as overall gross sales were up 26% versus the prior quarter and redemption rates came down to 22% from 26% last quarter.

Moving forward, there is significant opportunity for specialized products like emerging market debt in the sub-advisory channel as well as global bonds and equity income solutions. Now let me turn it to Pete.

Peter H. Nachtwey

Thanks, Mark. As Mark noted, we closed the fiscal year having completed our streamlining plan and realizing a full $35 million of cost saves in our fourth fiscal quarter. This quarter also saw an expected decline in transition-related cost to $2 million from $42 million last quarter as we completed all of our streamlining activities. This will be our last quarter reporting transition related costs.

For the period, a number of other factors impacted our results. These included higher average AUM, higher equity AUM as a percentage of the total, which helped to increase our effective yield, both of which contributed to the increased advisory fee revenues. Our performance fees came in better than last quarter but still below last year's level. We also incurred $9.4 million in expenses related to Bwine's successful closed-end fund launch this quarter. These costs were more than offset by 2 one-time events where we realized a $7.5 million gain on the sale of a small wealth manager and an $8.6 million gain related to the resolution of a bankruptcy claim.

Finally, there are a couple of tax items this quarter that resulted in a net benefit of $5 million or $0.03 per share. On the balance sheet front, we ended the fiscal year with $1.4 million in cash, with over $1 billion available to invest in the business or return to shareholders.

On Slide 12, we provide a snapshot of the fiscal year. On the revenue front, lower average AUM and lower performance fees of $47 million drove the 4% decline in revenues, while operating expenses declined 3% despite higher transition related costs. Earnings per share was down 6% for the fiscal year despite a 13% decline in net income due to the lower share count resulting from our stock buyback program. And finally, this year's effective tax rate benefited from a 2% decline in the U.K. corporate tax rate in fiscal 2012, which allowed us to revalue all of our deferred tax liabilities in the U.K.

Turning to Slide 13, our fiscal fourth quarter 2012 net income of $76 million yielded $0.54 in earnings per diluted share. Operating revenues were up 3% compared to the prior quarter due to a $13 billion or 2% increase in average AUM, a slightly higher advisory fee yield reflecting a pickup in average equity AUM and a $9 million increase in performance fees. The $15 million in performance fees earned this quarter were largely driven by fixed-income mandates at Brandywine and Western Asset. The improvement in performance fees was principally due to annual performance fees earned at Brandywine this quarter.

While difficult to predict with precision, we anticipate the next quarter's performance fees to likely be better than the December quarter but not quite as strong as the March quarter. Operating expenses were up 2% reflecting volume driven costs from the 3% increase in operating revenues, the closed-end fund cost of $9.4 million, an increase mark-to-market gains on deferred comp and SIV [ph] investments, which are offset in other nonoperating income and expense. Partially offsetting these cost increases were lower transition related costs this quarter.

Adjusted income, which excludes certain noncash and other items, but includes transition related expenses, was $124 million for the quarter or $0.88 per diluted share.

Moving on to Slide 14, the only other item to highlight here is our effective income tax rate, which was 30% on a GAAP basis compared with our targeted rate of the low to mid-30s. The lower rate reflected both a one-time credit and year-end adjustments. The tax outlook for fiscal '13 and beyond is for an effective GAAP tax run rate ranging from 34% to 36%. But we do expect fiscal '13 to benefit from another U.K. tax rate reduction of 2%, which will likely incur in the fiscal second quarter as it has for the last several years.

Slide 15 is a roll forward from fiscal Q3's EPS of $0.20 to this quarter's earnings per share of $0.54. Lower transition related costs and streamlining savings contributed a combined $0.23 of improvement, while higher net revenues and performance fees and other nonoperating income contributed $0.15 to the improved earnings per share. Finally, the closed-end fund launch this quarter cost $0.04 a share.

Turning to Slide 16, you can see that the advisory fee yield increased this quarter from 34 to 35 basis points, driven by an improved asset mix, specifically higher average equity AUM in the quarter.

Turning to 17. Operating expenses for the quarter increased primarily due to higher compensation and benefits, which I'll address on the next slide. Other factors impacting operating expenses were higher distribution and servicing costs reflecting both the closed-end fund launch this quarter and the higher average AUM and revenues, along with decreased technology and occupancy expenses reflecting the impact of last quarter's transition related costs. Finally, other expenses decreased due to an assessment fee refund, lower fund related costs as well as lower advertising and professional fees.

Turning to Slide 18, total comp and benefits were up from last quarter reflecting higher deferred comp and SIV [ph] investment-related expenses and due to higher net revenues. These increases were partially offset by lower transition-related and severance costs. Excluding the deferred comp and SIV [ph] investment offset and transition related costs, the comp and benefit to net revenue ratio was 55%. This was up from the prior quarter reflecting expenses related to the closed-end fund launch, which had a 1% impact on the comp ratio. In addition, seasonal benefit costs and commissions related to increased sales contributed to the higher comp ratio. And as a reminder, last quarter's compensation ratio was low by approximately 1% due to higher noncomp expenses in revenue share affiliates that were offset in compensation.

On Slide 19, the operating margin as adjusted is in line with last quarter as the approximately 2.5% improvement from the streamlining and increased, revenue was offset by the closed-end fund launch and seasonable -- seasonal and variable compensation costs

On Slide 20, you can see that our fiscal '13 tax rate is projected to be approximately 35%, over 2/3 of which is noncash. This is an area we will continue to highlight, as we believe many investors don't fully appreciate the significantly reduced level of cash taxes that we pay. This lower level of cash taxes results from our NOL carry forward and our ability to amortize our goodwill and indefinite live intangibles for tax purposes. When you translate our effective cash tax rate into dollars on the right-hand side of the schedule, you see that we will have a cash tax benefit related to these favorable tax attributes of $1.5 billion. But to be clear, our tax shield will save us prospectively $1.5 billion in actual cash taxes paid.

Now turning to Slide 21. Despite continued market volatility, the ability of the Legg Mason operating model to generate substantial cash remained intact. During the quarter, our total cash increased from $1.2 billion as of December 31, to $1.4 billion as of our fiscal year-end. Over $1 billion of that is in excess cash, in excess of our operating needs.

And over the past 12 months, we've repurchased 400 million of stock and paid out $44 million in dividends while maintaining cash levels substantially the same as March 31, 2011.

On the stock repurchase front, our ending share count remains at around 140 million shares after cumulative repurchases of 28.2 million shares, or 17% of shares outstanding since the board authorization in May 2010. It is our expectation that we will deploy the remaining $155 million of the authorization in fiscal 2013. Thanks for your time and your attention. And now Mark, back to you.

Mark Raymond Fetting

Thanks, Pete. Slide 22 shows the diversity and scale of our business across asset classes, client profile and revenues.

As the gross revenue pie at the bottom of the page illustrates, Legg Mason does have significant diversity across equity, fixed income and alternatives. As we've stated, we intend to continue to seek balance across geographies, asset classes and channels and we'll look to do that by investing in our affiliate franchises and through selected bolt-on and lift-out acquisitions.

Slide 23 shows our progress on various initiatives and performance metrics that we believe are positioning us for earnings leverage. The chart at the top left highlights the persistency of our operating income as adjusted. This quarter's results can also be adjusted for our closed-end fund cost. We remain confident that if current trends hold, including ongoing volatility, this chart will likely hold up well. As Pete just covered, we plan to use the remaining $155 million in share repurchase authorization during fiscal '13. And we are continually evaluating capital allocation. As you can see from the chart, the vast majority of the capital we have deployed is in the form of share repurchases and to a lesser extent, dividends. Going forward, the board has approved a 38% increase on our dividend to shareholders. As you can see on the lower left, we have now completed our streamlining and we've generated annualized cost savings of more than $140 million effective this quarter.

Finally, we focused on performance in client service and out-performance in the critical 3-year time period remains strong. We are pleased that flow trends improved this quarter, and are certainly working hard to build on our momentum over the long term.

With our streamlining in the rearview mirror, Slide 24 lays out our roadmap for revenue and EPS growth. Our competitive strengths include our multi-manager model, which brings together some of the top investors in the industry, with recognized expertise and respected brands. Another advantage is our scale. With over $640 billion in assets, we are one of the largest asset managers globally. Of that $640 billion in assets, 37% is for clients outside the U.S. And other $2.7 billion in gross revenues, 44% comes from equity, 36% from fixed income, 14% from alternatives and 6% from liquidity. We will seek to strengthen this diversification with greater presence in international equity and alternatives.

And finally, our global distribution franchise is a key competitive advantage with over $220 billion in assets. It is very leverageable and has the ability to be a significant contributor [Audio Gap] profitable growth as sales and flow trends improve. And as you saw on the previous chart, we have generated over $900 million in operating income as adjusted over the past 2 years.

So on a go-forward basis, we plan to further diversify and grow earnings by executing on 3 key priorities. First, organic growth. Our strong performance achievements will guide affiliate-led institutional expansion and LM's global retail momentum. Continued success in product development will target differentiated solutions to better meet client needs. And second, we will work with our affiliates on selected bolt-on and lift-out opportunities as well as targeted acquisitions to fill product gaps. And finally, we will continue to return capital to shareholders through both share repurchases and dividends. As a management team, we are excited to be executing on this growth agenda. And with that, we'll open the line for questions, and I thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Michael Kim with Sandler O'Neill.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

First, can you just talk a little bit about some of your initiatives on the distribution side to work with your affiliates to help them build out their retail footprint? So aside from kind of ongoing closed-end fund offerings, what are some of the specific ways that you're maybe able to leverage your capabilities?

Mark Raymond Fetting

Yes, Michael, thank you. I really kind of go affiliate-by-affiliate if I can, starting with Western. Western has a very good and broad product line in both the U.S. and international. We work closely with them on existing products like the top-ranked Core, Core Plus funds from the Western family as well as specific funds in international markets like Japan. We work closely with them to launch new funds and to work hard in expanding their share. So if you take the Core and Core Plus category, this new initiative is to add share classes to those existing funds and make them more available to financial intermediaries regardless of how you want to buy the fund. So that's a key one. As it relates to ClearBridge on the equity side, this income solutions suite of products is getting a lot of momentum both at the fund side but also the separate account. There's a bit of a resurgence going on in intermediary land around retail separate accounts that are really conducive to this kind of market environment in terms of investors coming back. Permal, we're working with them on this 1099 fund, which will be quite an innovation, 1099 benefit to the investor, not K-1, and with their strong track record and LMG distribution, one of our distribution partners kind of referenced in a meeting last week, that's a powerful combination. Brandywine, what we've done on the closed-end side most recently is indicative of leveraging their global capability. As you could see I can go on. With Royce, we work with them on a kind of a niche basis, where they have a legacy coverage in, let's say, certain areas like the RIA community where we supplement what they've done historically, but in the kind of traditional FA mutual fund suite program, we've been able to add some new momentum. Obviously, SIV [ph] is important in our ability to work with the affiliates and launch new products and, where appropriate, to put some SIV [ph] capital to get them going, I think has been mutually beneficial.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Okay, that's helpful. And then second, just given the level of excess cash that you talked about on the balance sheet, how much of an issue is the money market fund business when it comes to the rating -- ratings agencies? And if it is somewhat of an issue, if you will, and just given kind of ongoing regulatory scrutiny of money market funds and fee waivers, do you consider it a core business for you? Or how do you think about it from a strategic standpoint going forward?

Mark Raymond Fetting

Yes, just in terms of the money fund business broadly, given there's a lot of kind of discourse on this, let me say that we believe that money funds have been strengthened considerably coming out of the lessons learned from the crisis of '07, '08. They were stress tested in Europe in the second half of '11, and we believe and support the industry's view that what we have now should only be changed with careful cost benefit analysis in terms of the incremental costs to key stakeholders like the issuers, like the investors, retail and institutional, against the benefit of even more risk control in the systemic situation. Having said that, we've said, we have optionality, if some of these measures on an extreme basis are enacted, it might cause us to reconsider. But we like the business. It's additive. And then Pete can speak specifically to the conversations with rating agencies.

Peter H. Nachtwey

Yes, Michael, on the rating agency side, we certainly have discussions about this along with a host of other things with the agencies and our focus there has been much more on kind of risk management and how we've improved that both at the Legg Mason level and the Western Asset level. So the dialogue is much more about risk management as opposed to capital set asides for that business.

Operator

Our next question is from the line of Michael Carrier with Deutsche Bank.

Michael Carrier - Deutsche Bank AG, Research Division

Just on the expense side, so if we look at it on an adjusted basis, it looks like -- and this should be adjusting for the mark-to-market comp, the closed-end fund launch, you're at around like a $535 million run rate or so. So when I think about that going forward, and the focus on some of the new initiatives, we've kind of been for the past year or 2, on the streamlining, so when I think going forward, in terms of investment spend on your core kind of expense run rate, what should we be expecting at this point, given some of the growth initiatives offset by still a challenging environment?

Mark Raymond Fetting

Yes, I think that, really, the key of acknowledging that the streamlining is in the rearview mirror but continued vigilance against cost and improving margin is still a priority. We want to do that by really focusing on growing and leveraging the investments that we have at hand. So what we see is organic growth. As you see, kind of the pipeline's probably never been as strong, certainly since -- over the last several years across most of the managers. The ability to leverage that where appropriate through retail, where we get the incremental operating leverage, is valuable. So we see, subject to delivery, improving on flow improvements and getting into positive flows, getting the mix continued to improve, that we can then leverage and we can both improve margin with minimal incremental investment in some of these key distribution and corporate areas. Pete

Peter H. Nachtwey

Yes. I'd echo Michael, what Mark just said. We think with the streamlining in the rearview mirror that we've got a very leverageable model at both corporate, where we don't need the increase expenses there to any significant degree to take on additional AUM, and then a pretty big chunk of our internal distribution costs are fixed or semi-fixed. So I think we've said in the past, for every dollar of revenue share we get from our affiliates, we'll be taking over $0.90 on those dollars to the bottom line going forward.

Michael Carrier - Deutsche Bank AG, Research Division

Okay, that's helpful. And then just as a follow-up, you mentioned the pipeline for Western. And then you mentioned a few of the items in April, just on the equity side, the $1 billion redemption. And then you mentioned some kind of ins and outs on the fixed-income side. Just any granularity on that in April like, just because we kind of have the components in terms of the pipeline in the equity side, but it sounded like the fixed income in ins and outs in April were a little blurry. So any color there?

Mark Raymond Fetting

Yes, I guess what I was trying to do is allow you to, on the one hand, step back, see kind of the forest from the trees. And the forest is continued improvement across the flow story, particularly in fixed income, particularly in alternatives and in some areas of equity. However, there will continue to be the trees, the month-to-month. We had a terrific March as you can back into and we affirm today. On the other hand, we do see a couple of known redemptions coming in April, but that doesn't offset our encouragement above the overall and it's the pipeline numbers that allow for that. Western it's $4 billion. Permal at approximately $400 million. ClearBridge at $600 million. Brandywine at $1.2 billion. These are one business that's not yet funded. And then if you look at the pipeline, to see RFP pipeline at Western for example, that volume is up 30% sequentially, quarter-over-quarter and up 40% year-over-year, and it's registering approximately $12 billion of potential business. Now all of these things are very encouraging. On the other hand, we do reference, there's continued to be choppy markets, you've heard that from other firms reporting in the past couple of weeks. And -- but what we see and are most confident about is improved performance across the board, real momentum in activity at patch [ph] and getting back to normalized win rates in most of our managers. And so this is all subject to work to be done but we're net-net encouraged.

Operator

[Operator Instructions] Our next question is coming from the line of Cynthia Mayer, Bank of America.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Question on Permal. Seems like it's net flow positive now, but the wins are more institutional, the losses are more high net worth. Can you just talk about how that mix shift impacts revenues? And when you net the 2 out, is it growing revenues or just holding it's own at this point?

Mark Raymond Fetting

Yes, Cynthia. The overall clear growth areas right now are on that institutional side in Asia, particularly in China, and in the U.S., with some wins in Europe. On the high net worth side, the momentum we're developing on U.S. retail and U.S. high net worth is very encouraging. So we see continued growth in revenues in aggregate and as we've said before, the institutional fees are somewhat lower on an ongoing basis but the performance fee potential is higher. So, so long as you perform, you're actually pretty comparable. I would say, going back to actually a question you asked last time in terms of where we're growing is where the world is growing at Permal. In Asia, in U.S., et cetera. The Euro specific is really just about 10% of that business, a little more in retail, a little less in institutional, but euros specifically, going back to your question of last quarter, has not that's been that material a drag.

Operator

Our next question will be from the line of Daniel Fannon of Jefferies & Company.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I guess, following up on Permal and just looking at the performance year-to-date and you guys gave some metrics to think about their high water marks and thinking about their performance fee capabilities. Can you update on that and how that's looking for this year?

Peter H. Nachtwey

Yes, Dan. So Permal is just one of the places that we get performance fees and we obviously had a nice rebound this past quarter due to some help from the markets and help from an annual fee lock at one of our key affiliates. So as we look forward in the next quarter, and just given what markets are doing right now, we would expect to be probably better than December but not quite as good as the March quarter. It's a little tough to predict with any precision, as you can imagine, so. Then the high watermark fund, we got one large -- one of the larger funds at Permal that we've been talking about kind of returning to a high water mark around mid-year. And just given where markets have gone frankly in the last months since the of the quarter, we'd expand that out probably to more like late summer.

Operator

[Operator Instructions]

Our next question is from the line of Bill Katz of Citigroup.

William R. Katz - Citigroup Inc, Research Division

I had a couple of questions, but I guess just sort of coming back to free cash flow, certainly it seems like you're indicating now less appetite to buyback stock. I'm just curious given what appears to be a [indiscernible] acceleration of flows, why not step up the buyback? And I guess related to that, if you're not going to return the capital to investors, is it fair to really look at the deferred tax asset at this point?

Mark Raymond Fetting

Thanks Bill. Actually, thanks for clarifying that because our current plan is to repurchase the additional 155 under the existing authorization. As long as market conditions remain attractive for buybacks, as they certainly are now, we'll consider utilizing that more quickly. We'll also continue to review our capital plans with the Board on a regular basis, and also work with the rating agencies on capital plans, which include discussions with them on share repurchase and additional authorizations. So really, I want to sharpen the message that I was attempting to deliver that we have affirmed our philosophy going forward as 1 of our 3 priorities when conditions are appropriate. And you've seen that we've done that philosophy and practice over the past 2 years with the buyback that we've done. So we would expect it to continue, but the specific authorization will be done with continued discussions with the Board and, to a certain extent, with the rating agencies.

Operator

Our next question is from the line of Matthew Kelly of Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

So, you gave some color on your strategy in the ETF business, and I know you have a sub-advise product in your -- on hold with the SEC. So just curious in terms of the SEC discussion, how long you think that may take to play out in? And if you are approved along with some of your peers for active ETFs, what sort of opportunities you have there, how big opportunity could be?

Mark Raymond Fetting

Well we're encouraged around the active ETF space, and I would say Western's most recent development with another provider, WisdomTree, was a classic example, leveraging Western's emerging market debt capability with an ETF by a known carrier generated some interesting business, approximately $60 million in the first month or so. And so we see our ability to leverage our respected brands in places either under our brand or others to exploit active ETF growth, both U.S. and international, is something we're going to pursue. And so, we're encouraged.

Operator

Our next question is from Craig Siegenthaler of Credit Suisse Group.

Craig Siegenthaler - Crédit Suisse AG, Research Division

I just want to hit on the adjusted operating margin one more time. When you initially released this plan probably about a year and a half ago and this question really maybe should go to CJ Daley, not Pete, but when you set it up, you established an adjusted operating long-term target of around 30%. You're still pretty far from there. I'm just wondering, what are some of the reasons you're still below that target and besides growing flows pretty aggressively and markets rallying, is there any other way to get there?

Peter H. Nachtwey

Yes, Craig, good question. There have been a number of things that have happened since that margin target would have been set out there. We can certainly get CJ back but I think I can do a credible job. We did have the impact of the WAV -- the WAM SIV reimbursement that we've talked about in the past. But beyond that, performance fees clearly were down significantly from where they were in the prior year because of the markets and that can come back, to a certain extent, at any point in time. But the reality from here on out, market mix and flows are going to be the key things that are going to drive us. And while we don't control the market, we certainly like the general direction. And then mix and flows, we have a fair ability to impact that in terms of where we choose to play. As one example, with Western going after more specialized product business. So as we go forward, we think the corporate platform is very leverageable from a cross [ph] standpoint. But it's a little difficult to predict with precision when we get to exactly that historical target.

Operator

Our next question will be from the line of Jeff Hopson with Stifel Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

In terms of April, are you seeing on the retail equity side, sounds like things became a little bit more tepid I guess in April. And then on the comp ratio, any change in, kind of that, I guess, 53% number that you've talked about before?

Peter H. Nachtwey

Yes. Well, in terms of the comp ratio, keep in mind last quarter was understated a little bit because of some noncompensation expenses at our affiliates, that are on web share. So it was understated a bit. And then this quarter is a bit higher by a combination of the closed-end fund launch where we got internal commissions that are paid, bit higher level of sales and then also, some seasonal benefit costs, FICA rates, 401(k) matches, et cetera. So we're still looking to be in that kind of 53%, 54% zone other than when we have special factors like a closed-end fund launch.

Mark Raymond Fetting

And Jeff, on the flow story in April, you can see this from your own sources on U.S. mutual fund data, it's actually been a nice pickup in the fixed-income side, both at the Western, Brandywine, the muni side. I would say the tepid piece is probably relevant on the equity. But more not a pickup specifically in Royce and small-cap, kind of about the same as prior months. So maybe a little more encouraging than you're referencing.

Peter H. Nachtwey

While the flows may have been tepid, keep in mind market increase last quarter was about $17 billion on the equity front, which did help our mix.

Operator

Our next question is coming from the line of Roger Freeman with Barclays Capital.

Roger A. Freeman - Barclays Capital, Research Division

Just on the won-but-not-funded $4 billion that you mentioned on Western. Could you give us a sense of, given that it's mostly specialized, you talked about the higher management fee rates on that just blended, what that $4 billion might look like? And then, is the -- fair to say that April flows in Western are still positive based on what you just said on the prior question?

Mark Raymond Fetting

So on the -- it's interesting, let me start with the first part of your question, Roger. EMD, Global Credit, U.S. Core and Core Plus actually net positive, which is an interesting development, where we're starting to get some nice wins in the Core, Core Plus. That's less in demand than we've -- as we've seen in the past. But we're now a favored provider. So we are winning, and that's -- the amount of winning is greater than the reductions against that strategy. So on the fee rate, you'll continue to see that to improve. We haven't given any specific metrics there but be clear that an emerging market debt mandate, even at a reasonable level, is a meaningful amount higher than a Core, Core Plus at the same level. And what's encouraging by the way, is a couple of the wins that we've been getting recently on the specialized side are higher than what we've seen in the past. So that picks up and helps.

Operator

Our next question is coming from the line of Marc Irizarry with Goldman Sachs.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Pete, can you just help us understand a little bit the incremental profitability by asset class. You mentioned that $1 should drop through at $0.90, but you had a nice $17 billion gain in sort of the equity bucket as you described it. But it looks like the marginal profitability if you look at the operating margin in the sort of flow-through, so can you give maybe a little bit of either by affiliate or by asset class, what the sort of incremental profitability looks like?

Peter H. Nachtwey

Well, we don't disclose our fee rates by asset class for competitive reasons. Ditto on the rev share from affiliates. But it's a combination of those 2 things that are going to impact profitability the most going forward. So equity rates clearly double or triple what fixed income rates are. We've also got liquidity, fee waivers, that's another kind of call option on higher interest rates down the road, which we haven't talked about a lot, but could well -- will significantly improve the margin when we get there. So again, as we look at the business going forward, we're focused on increasing combination of equity and alternatives and specialized products and fixed income as the best ways that we can impact profitability going forward.

Operator

Our next question is from the line of Robert Lee of Keefe, Bruyette & Woods.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

This is actually maybe a kind of a follow-up to the last question. Instead of thinking of the contribution by asset class, I mean, how should I -- is there a way to think about, as the relative contribution from different affiliates change, that some have a greater or lesser impact on the earnings? For example, Brandywine seems to have a lot of momentum compared to, say, Batterymarch. So if we start seeing that kind of move up in terms of its relative contribution, is there kind of an outsized benefit to Legg for some affiliates doing better, meaning maybe ClearBridge? I'm just trying to get some sense if that's something we should be thinking about.

Mark Raymond Fetting

Rob, I would kind of -- from an asset class standpoint, the more we do in equities in aggregate, the more we do in alternatives in aggregate is going to be additive to margin improvement. That's both a function of kind of fee and margin on the underlying business. As it relates to fixed income, the more that's in the specialized area will be additive regardless of manager, and the more that's in kind of a global capability like Brandywine's can be additive as well. And then -- and hence strategically, what we're talking about is building on that momentum and further strengthening the diversity of the mix that we have. And so long as we deliver on those initiatives, which are both at the affiliate level and the LM level working together, that should lead to a continued improvement in the margin.

Operator

Ladies and gentlemen, we have reached the end of our conference call today. I would like to turn the floor back to Mr. Mark Fetting for any further closing comments.

Mark Raymond Fetting

Well, I sense that there are a lot of questions and next time, I think we'll make sure we provide more time. But I think we covered the key ones. And on behalf of the management team, we are very appreciative of your interest in Legg Mason. And as you can see, we're very enthusiastic about moving from streamlining to growing the business and delivering on these key priorities of organic growth, filling in product gaps and continuing to return capital to shareholders and diversify the mix as appropriate. So we thank you very much.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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