Legg Mason, Inc. F1Q09 (Qtr. End 06/30/08) Earnings Call Transcript

Jul.25.08 | About: Legg Mason (LM)

Legg Mason, Inc. (NYSE:LM)

Q1 FY09 Earnings Call

July 25, 2008, 10:00 AM ET

Executives

Timothy F. Munoz - Sr. VP, Head of Corporate Marketing and Communications

Mark R. Fetting - President and CEO

F. Barry Bilson - Sr. VP

Charles J. Daley, Jr. - Sr. VP, CFO and Treasurer

Analysts

Prashant Bhatia - Citigroup

William R. Katz - Buckingham Research

Jeffery Hopson - Stifel Nicolaus & Company

Hojoon Lee - Morgan Stanley

Craig Siegenthaler - Credit Suisse

Cynthia Mayer - Merrill Lynch

Michael Hecht - Banc of America Securities

Robert Lee - Keefe, Bruyette & Woods

Jeffrey Hopson - Stifel Nicolaus

Operator

Good day, ladies and gentlemen and welcome to the Legg Mason Quarterly Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Tim Munoz. Sir you may begin.

Timothy F. Munoz - Senior Vice President, Head of Corporate Marketing and Communications

Thank you and good morning and on behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2009 first quarter ended June 30, 2008.

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 statement.

For a discussion of these risks and uncertainties, please see the risk factors and the 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, 2008, and management's discussion and analysis of financial conditions and results of operations in the company's quarterly reports on Form 10-Q.

This morning's call will include remarks from the following speakers; Mr. Mark Fetting, President and CEO; Mr. C. J. Daley, CFO; and Mr. Barry Bilson, Senior Vice President of Finance. These gentlemen will discuss Legg Mason's financial results for the quarter. In addition, following a review of the quarter, we will then open the call up to Q and A.

Now, I'd like to turn this call over to Mr. Mark Fetting.

Mark R. Fetting - President and Chief Executive Officer

Thank you, and good morning. I particularly appreciate everyone joining us this morning at the end of another volatile week in the market and it's a busy time for all of you. So we appreciate your joining in.

As we reported earlier this morning, you can understand our disappointment in reporting another loss, albeit, considerably smaller than the prior quarter.

As you know the result was really driven by the liquidity support that we announced at the end of June at $1.09 per share, the non-cash charge, and really represents an unrealized loss that's about half the level of the prior quarter.

During this quarter, we had very good contributions from a number of our managers particularly Permal, Royce, Batterymarch and Western in certain areas. Legg Mason remains challenged on the other hand as we continue to have equity underperformance and outflows in certain managers and some fixed income underperformance in certain strategies.

We should point out that just in the last couple of weeks things do bode well for some of this equity underperformance. As an example of Legg Mason capital management, American leading companies registered first percentile performance on a month-to-date basis and value trust their flagship fund gain 600 basis points against the S&P, since July 15th.

So to the extent, the anticipated market leadership shifting would go from the momentum strategies and stocks to fundamentally driven strategies; it would bode well for Capital Management among other managers at Legg Mason. And even though Capital Management represents just under 5% of our assets, it would certainly be well received across the board.

The markets across the quarter, certainly worked against the asset management space generally in Legg Mason as well global credit issues continue and it's clear that we are not out of the woods of these headwinds.

Equity markets were up 5.9% during April and May and then declined 8.6% in June. If we take a look at our financial results, I'll hit some highlights. The revenues at $1.054 billion when compared against the prior year quarter which was June '07 which by the way was Legg Mason's best quarter ever, in terms of revenues, net income, and earnings per share, that $1.054 billion in revenues compares 1% off sequentially and 13% against the prior year.

Our GAAP earnings were $0.22, a loss of $0.22 per share. This of course includes the liquidity support of $1.09. So if you backed that out you are at core earnings of $0.87 on a diluted basis. That compares 4% off sequentially and just over a third off against the prior year.

Our cash earnings as adjusted are $1.15 which is 8% off sequentially and 30% off the prior year. This cash income as adjusted really does show the true earning power and totaled a $163 million for the quarter. And as you saw earlier this week, our Board maintained our dividend of $0.24 a share.

Assets under management totaled $923 billion for the quarter off sequentially 3% and 7% against prior year. If we take a look at the key flow metrics, equity flows, outflows of $11.6 billion were down significantly from the $17.2 billion in the sequential quarter.

Fixed income flows of 10.9... outflows of $10.9 billion actually a bit more than the $7.2 billion the prior quarter. When you dive into that a little bit you will see that we should let you know that some of that is less inflow from good performing managers like Permal and Brandywine and some is due to outflows in Western. The outflows in Western tend to be in their core, core plus in the international area. But they are offset by very strong results in emerging market, munis, high yield and bank loan products.

Liquidity for the quarter was a positive $4.1 billion. So our total outflow of $18.4 billion was actually a bit below the $19 billion out in the prior quarter. This reflects performance in certain areas that continues to be below expectations; rest assured we are focused on this, working with our managers and they with their clients and we are particularly mindful and appreciate that our long-term record remains quite strong, 84% of our long-term U.S. domestic mutual fund assets beat their liquid [ph]... category average for the trailing 10 years.

On some other fronts, domestic or U.S. distribution, we added 3,300 new FAS or financial advisors who were outside of the Smith Barney system, which is where we are targeting growth in the open architecture environment that we are embracing. At 3,300 new FAS, allows us to report almost 11,000 new FAS to Legg Mason products over the past 12 months, all outside the Smith Barney or Citi systems.

We are working hard, building and maintaining relationships both at the key account area as well as out in the field. From an international standpoint, we had been moving aggressively to take advantage of the increased demand for global equities. Batterymarch, our Asian equity team in Singapore and emerging market equity team in London continued to grow nicely and this quarter we also announced the formation of Global Currents, the new manager formally with Brandywine. This allows us to have more of a energy around the global equity's area which we are hopeful of capturing greater business with.

On the liquidity front you can see our commitment to the business continues. We provided additional support. The key issue on the liquidity front is that there are no new issues. No new discovery. We're working with a pipeline of issues that have been identified for several quarters and we're working to reduce our exposure. In this quarter we ended with $176 billion in liquidity assets. We have 2.4% exposure in our fund, two SIVs, 0.4% are bank sponsored and 2% are non-bank sponsored. Here again these charges are non-cash charges. And the level of support this quarter is a half the level that we provided the prior quarter.

We got a number of questions about the Chainei [ph] transaction and I wanted to touch on this explicitly. As you know, sometime last week, a long anticipated restructuring occurred coordinated by Goldman Sachs through an auction process. Holders of about 20% of the senior debt took the cash option and it was reported that this cash option was priced at about $44, plus a $6 cash distribution entitlement. This result we are very pleased with. It reflects a far better result and anticipated in what is truly a distressed price not reflective of the ongoing fair market value. The fact that it was done at... for about $1.2 billion of Chainei [ph] paper, that's about 20%, the prior... as we keep monitoring, you couldn't get anything close to this price nor could you do it at this size. So we see this as indicative of improvement, we like the remainder of the 80% elected to receive a new placement security, thereby allowing us to continue to monitor the right time to distinguish our position.

In the meantime, we get regular monthly cash flow and we have an option to take an in-kind distribution of underlying collateral on at least a quarterly basis.

Another issue that we want to point out is that the underlying paper that we and others are valuing, basically reflect what we think is a very extreme scenario. It's factoring in about 70%... at 70% of the underlying loans with default and 60% loss on each of these loans. If you look at current reality, it's far, far less extreme than that. Indeed right now our evaluations and the market evaluations are reflecting housing price declines of around 35% nationally whereas the current number is actually 18%.

From a strategic initiative standpoint in light of the market conditions, in our own issues that we've discussed, we have initiated our management team here at Legg Mason several key initiatives. One, we want to preserve our profit margins, so we are looking at our cost and making sure we're getting our efficiencies across the board. We are seeking secondly to leverage our shared services whether it's distribution, ops and technology to be as efficient and effective as possible. We're reaching out to our affiliates and we're closely on all fronts. We are accelerating our global growth and product initiatives particularly in the international markets.

I'd like to close this portion and then I will turn it Barry and then we'll turn to CJ and come back to... open it up for Q and A with some general thoughts.

I want you to know that Legg Mason is focused on growing the business as we work through these issues and as we work through these market conditions particularly focused on expanding our open-architecture distribution partnerships both in the U.S. and internationally and launching products as appropriate.

We are working hard to make sure we continue to reduce our SIV exposure and we will do that judicially and from a sound investment standpoint with the strength of strong capital, which CJ will you update you on.

From a diversification standpoint, a key part of our strategy will look to continue to do that in products across clients, across geography and across distribution channel... channels. In sum, in spite of the constantly changing market dynamics and challenges we currently face, I and our management team are confident in our ability to continue to be a franchise firm in this very attractive business called asset management. With that I would like to turn it to Barry.

F. Barry Bilson - Senior Vice President

Thanks Mark. Good morning everyone. I suspect on a high level by and large there is nothing in the numbers that is dramatically variant from what you would have in your model. Actually [ph] folks have different. Assumptions relative to flows but they are really big picture or no anomalies other than actually the additional support, mark-to-market, unrealized loss on the money funds and the SIV supports.

But just in fact have some time to fill, let me go through some specifics with you. Realization rate is one I think may pleasantly surprise this quarter, is at 37.4 last quarter

36.9 despite the mix obviously on balance shifting to lower yielding assets, liquidity fixed income versus equities.

As we've stated several times in other calls, as folks are trying to do forecast in basis point realization with the diversification, across asset classes, investor profiles and even within those classes, it will be a rare event when the core advisory realization rate alters significantly in sequential quarters overtime and certainly as we rebuilt the equity base to a larger portion of total AUM, it will escalate but you should not see dramatic variances in any one or two quarter timeline.

Couple of dynamics of what's supported and in fact grows it from last quarter is the mix within the equity space, the small cap which tends to be a little higher yielding, was a greater portion of the total, the fund to funds space which tends to be high fee levels as well is a greater proportion of the total with some of the others shrinking and that space growing. Additionally, there were some fee waivers, did... we will cycle on and off over time in both liquidity space and actually some insurance annuity programs in the equity space that did not exist this quarter. But again somewhere around 37, 38 type level ought to be a number that works for you in multiple quarters, things start rocking and rolling market wise or with their flows and it may move as much as a full basis point on an annualized basis sequentially but you're not generally... I cannot envision you're going to see it jump more than that.

The other thing that would sort of flag some of the support there is if you look at the detail in the earnings release, you will see that there was a meaningful shrinkage in the separate account advisory fee space sequentially of about 7% whereas the fund side was actually up 2%; again the fund side as you all know tends to be slightly higher fees.

Performance fees I looked out and gave guidance last quarter that was reasonable. Again that is a number difficult to forecast as you would envision. It does not have and I know I am repeating myself but folks invariably recycle the same question on this, but it does not have significant profitability variant from just a pure vanilla advisory fees.

It is not a large piece of the total generally the structures across multiple managers and such, it should not hit these homeruns of doubling and tripling quarter-to-quarter. The $10 million was a level that I thought was reasonable in the tight environment we're in. I don't know what environment. I liked the past couple of days or prior to yesterday more than yesterday; I would hold it about that tight level. It was broad-based in I think three or four different managers actually had an uptick in their performance fees but as you know the Permal has the greatest percentage albeit still not a dominant force in their total revenue stream.

Distribution and service fee revenue is down, distribution and servicing fee expense is up. I am not going to go through that dialogue again, I will spare you. But if you look at it the way it really mechanically executes, if you relate that expense to the sum of the distribution fee revenue and the fund advisory fees because there's a portion of that that is certainly paid through to the distributors where there's not a unique distribution fee. That number should hold fairly static across multiple quarters and in fact it did 42.6% this quarter, 42.5% last quarter, 42.3% last year. Again the only way I am going to get that metric to work for you is if you related against the two buckets that are the drivers for that disperse.

The other revenue of 40% sequentially to the $2 million or $3 million, the lighter commission revenue stream and something around a $5 million level's roughly normal.

Let's go to the expense side of life briefly. Let me do the easiest one first and that would be the non-comp expenses which over the past several quarters have held and in fact have shrunk. We have made a deliberate effort to control our costs and to trend back where we could in some of the discretionary spend, and this quarter certainly bears that rule as well.

And the non-comp expense for this quarter is $139 billion, last quarter it was $149 billion, and in fact it's down relative to even last year of $146 billion. But year-over-year, it's principally driven by the decreased level of intangible amortization; if you recall we had the impairment charge last quarter, and that was certainly a portion of what has dropped this about $4 million a quarter; the $9.6 million is a good run level.

When you look at the other pieces aggregating, the decrease is about $5 million, communications and technology was down a couple of million, occupancy up $1 million, and the other operating expense was down about $4.5 million. I would benchmark of about a 140 level. So our pieces in every category did have some one-off to both the good and the bad in the quarter. But I think a 140 level is certainly an acceptable place to be at this point.

Continuing on, let's do the tougher one, compensation and benefits, and I know this one's driving you nuts because of the support activities and the impact in your calculations. You'll recall last quarter as reported it was a relative to net revenue, total revenue less distribution and servicing expense was at $42.8 million. We've been running around $50 million level on net revenue and that's about the level you ought to be forecasting.

On an adjusted basis last quarter, that would have been at a level of around 48.8% [ph] million and with the final true-ups at year-end and some of the incentive comp pools that actually would have probably calped [ph] through much more like 49.5%.

You are looking at this quarter at 50.6%. There are a couple uptick in that percentage, but by and large it normalizes out at around a 50% level. Again with some of the support and the incentive comp adjustments, that impacts it as well as your favorite topic with these funded deferred compensation plans, which sequential quarter there was a meaningful reduction in the level of depreciation, negative in the other non-operating revenue last quarter, a much smaller negative this quarter that was also driving off [ph] effectively an inflation against that percentage sequentially.

Payroll taxes relative to bonus cycles tend to wallop this quarter a little heavier; about three-tenth of a percent. Additionally, with vestings on new restricted stock awards, annual review cycles, there is the biz net revenue base, another four-tenth of a percent or so. Net revenue was down 2.4 or so percent. So, obviously that's also going to impact on that. I know that's a lot of gibberish but I need to get the factoids for you. So, I can really explain on follow-on call, but I would still bogey a normalized period at a 50% level comp and benefits relative to net revenue. If net revenue grows, obviously the percentage will go down and vice versa.

Interest revenue and expense should be in line with what you were looking to the increase in the net number is driven by the new capital raise where obviously we currently have a negative spread. So, I don't think there's anything there that really is going to be a variant to your expectation.

On the SIV front the 8-K and press release filing is virtually a copy job within $1 million pre-tax net of what the indication was at the point we did the 8-K on June 30. Tax rate is on an adjusted basis is sitting at around 38.5% level, again with a last quarter with some of the mix of business, a little heavier than the guidance I provided. At this juncture, I would use about a 38%, but it could be plus or minus two or three-tenth of a percent depending on the mix of the business and its respective geography.

Keep in mind that despite the challenges that the quarter is very similar in most respects to last quarter when normalized. Also, recall that last year this was the best quarter in the history of the firm. From the vantage point, we sit today the average AUM versus the end of quarter AUM is like 2.7% higher. So all else equal, there would be pressure on the revenue stream and obviously the profits next quarter and as we get some positive flow and/or market appreciation.

And with that in mind, I'm sure I have skipped something that will be of interest or concern. But I believe that's it at the high point. The final point, recall is that when you do earnings per share, if you have a loss, you don't use your diluted share count. You have to use your basic share count; obviously it would be anti-diluted otherwise. And hopefully next quarter, we will be using the diluted share count in the EPS count [ph].

And with that, let me pause, flip it over to CJ, and he will update you on his balance sheet and overall the SIV situation.

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

Thanks Barry. As you know we raised additional capital during the quarter, $1.15 billion, of mandatory equity... convertible equity units were issued. As a result of that additional capital, our cash position at June 30th is approximately $4.1 billion. This includes cash, restricted cash and cash equivalents. Those assets were financed primarily by debt of $3.9 billion. So on a net cash basis, which is cash less our long-term debt, we have a positive cash position of approximately $200 million.

Shortly after quarter end, we utilized $425 million of cash to repay the senior notes which were issued back in 2001 and became due. That reduced our debt to $3.5 billion and on a pro-forma basis; our debt to total capital is 35% after repayment of that debt.

We are often asked, how do we intend to utilize our cash. And as I mentioned before, we really think about our cash in three categories: operating cash, which accounts for approximately $250 million of the $4.1 billion; foreign cash is approximately $350 million of the $4.1 billion. Both operating and foreign cash are required to be kept on the balance sheet for working capital or regulatory purposes and are not available for discretionary needs.

The final bucket, which is our discretionary corporate cash, approximately $3.5 billion at June 30th. As previously stated, discretionary cash is generally available for core corporate purposes, and does include the cash that we've set aside and restricted for collateral, for money fund support issues.

In addition to being available for the money fund support issues, discretionary cash is also available for repayment of debt, as evidenced by our repayment of the senior notes on July 2nd. It's available for acquisitions and stock repurchase. We stated before that the number one priority for our discretionary cash remains supported by money funds. The supportive arrangements that we have in place expire, beginning in November of 2008 and those expirations extend through March 2009.

While there's hope... our hope that the entirety of our existing cash will not be required to be deployed in support of our funds, it's possible that we may chose to acquire certain securities when the support arrangements expire so that we are not forced to liquidate at prior sales prices. Therefore, while we have ample cash in our balance sheet to support these arrangements, we are not in a position to begin to utilize the cash that we have available for purposes other than money fund support at this time.

Moving onto our SIV exposure. At June 30th, our liquidity business had approximately $176 billion of assets under management. That number has growing to approximately $189 billion as of July 23rd and therefore the percentage of SIVs and other conduits that remain in our funds, largely supported by us represent about 2.2% of total assets at July 23rd. The total exposure to SIVs and other similar conduits on a per value basis, is approximately $5.3 billion. We have support arrangements on $4.7 billion of that $5.3 billion or 89% of our stated exposure.

After reducing that or to reflect the SIVs that have been publicly supported by their bank sponsors our remaining exposure as we view it is about $3.5 billion. If you think back, we have cash available of about $3.1 billion or coverage of 89% of our remaining exposure. I want to note that supporting SIVs through repurchase or pulling out of the funds is the most onerous option from a cash perspective and not our only option.

Therefore, it would be our intention if needed to utilize other options such as total return swaps, if the requirement to remove the security from the funds is determined. So really the key message here is that we believe that we have the cash available on hand to support our existing arrangements and do not foresee the requirement to raise any additional capital.

In closing the May capital raised provided us the financial strength to continue to weather the difficult market conditions and we remain committed to be thoughtful, deliberate and prudent in our use of shareholder capital to support our funds.

Mark R. Fetting - President and Chief Executive Officer

Okay, thank you Barry and CJ and at this point we'd be happy to open it up for questions.

Question And Answer

Operator

Thank you, sir. [Operator Instructions].

Our first question is from Prashant Bhatia of Citi. Your question please.

Prashant Bhatia - Citigroup

Hi, I guess so far the cost to support the western money funds has been about $875 million. Assuming there is no more support, how much of that $875 million you think Western can end up paying back the Legg Mason shareholder, over time?

Mark R. Fetting - President and Chief Executive Officer

Thanks for that question. We have had several instances over our history where we supported our managers in various ways, for various reasons. And in all those cases we've worked it out overtime such that they... we the Legg Mason, Inc. and Legg Mason, Inc. shareholder recover up to the full amount of our regular revenue share arrangement.

And we would expect that to happen here as well. We are working closely with Western to make sure we do that in a way that they continue to build a very valuable business, a very successful business and a clear leader in the marketplace.

Prashant Bhatia - Citigroup

Okay, great. So over time you can potentially recover the entire amount?

Mark R. Fetting - President and Chief Executive Officer

The entire amount of... that would be reflected in their share of the basic revenues we get off the business.

Prashant Bhatia - Citigroup

Absolutely, okay. And then of the equity outflows of about $11 billion, it looks like $2.5 billion were from mutual funds. Could you provide some detail on where the remaining $8.5 billion of outflows were from maybe by an entity... on an entity level?

Mark R. Fetting - President and Chief Executive Officer

Well, I think as we said in the past that there are three entities. If they tend to be meaningful contributors to that number, it'd be Capital Management, Private Capital and ClearBridge. And that breakout kind of reflects whose got the most institutional business and that concludes by the way the separate account, would include ClearBridge's retail managed account side. And if you take a look at it that way, you'll probably see it somewhat evenly distributed and if you look at it from a trend standpoint, there's actually been a modest reduction in the level of outflow in each of the three managers.

Prashant Bhatia - Citigroup

Okay, thank you. That's very helpful.

Operator

Your next question is from William Katz of Buckingham Research. Your question please?

William R. Katz - Buckingham Research

Okay, thank you. Good morning. Before I ask my question, just to qualify, I was writing quickly but I may not have taken down exactly. CJ you said these credit support agreements are in place till March of '09?

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

That's correct.

William R. Katz - Buckingham Research

Okay. Mark, my question for you is, so you started out by saying that you are looking to enhance profit margins a little bit. That's why you've given the structure of the organization. I am just kind of wondering, could you help to mention what you might be doing and what type of potential savings there could be?

Mark R. Fetting - President and Chief Executive Officer

Yes. Bill we've talked about providing some guidance on that and at this stage we're just uncomfortable but I can tell you kind of a general approach, we as a management team are looking across the company most directly as the Legg Mason expenses and they tend to be in the service areas of distribution, option technology and other functional shared services.

At the same time, the affiliates themselves, to the extent it's a revenue share, we're protected in terms of preserving the margin by the basic revenue share and then to the extent affiliates... investment affiliates are not, we're working with them to make sure we are as efficient as we can on all of their expenses.

To the extent that becomes a meaningful number we'd provide an update but at the moment I think it is in a series of initiatives that does not contemplate any across the board headcount reduction a measure that one always has to keep in their back pocket in difficult market conditions but we at Legg Mason had been able to stay close to these expenses and not have to pursue that and at the moment that's our intention.

William R. Katz - Buckingham Research

Okay, terrific. And then so just a follow-up question as it relates to the fixed income business, just sort of wondering if you could... is there anything else beyond just sort of the tactical issue of the performance and the SIV overhang that's one thing the ability to grow the business or is there any more of a... more secular shift coming from fixed income. So look around some of the peers who have already reported and the fixed income has actually been usually strong although a bit slower than where its been, so just sort of wondering where we might be in terms of the fixed income cycle?

Mark R. Fetting - President and Chief Executive Officer

Yes, I think our principal manager of course Western is very encouraged by the opportunities out there and while they do work with some performance issues in the core strategy and the liquidity business on the SIV, elsewhere has been particularly in certain international markets been very strong, Brazil. And so I would say internationally we see good opportunities subject to working through some performance challenges and they continue to work very closely and with excellent results working with clients in retention. Brandywine also had a strong global fixed income capability and that's been additive to things and I think that should continue.

William R. Katz - Buckingham Research

Okay, thank you very much.

Operator

Our nest question is from Jeff Hopson of Stifel Nicolaus. Your question please. Jeff your line is open, you may want to check your mute button.

Jeffery Hopson - Stifel Nicolaus & Company

Hello?

Operator

Yes Jeff did you have [indiscernible].

Okay, we will move on to the next. Our next question is from Hojoon Lee of Morgan Stanley. Your question please.

Hojoon Lee - Morgan Stanley

Good morning. Could you provide some color on trends you are seeing in the fund to hedge fund space and more specifically for Permal we know industry-wide flows seemed to have weakened quite a bit this year and also could you give us an update on Permal's assets under management and some sense of flows and performance if possible?

Mark R. Fetting - President and Chief Executive Officer

Yes. In terms of the trends in the business, you're correct that growth as measured by flows coming into the business have been tempered for sure. Permal continues to do quite well on a relative basis and then talking with Isaac Souede and the team there, he would characterize it as in a more robust environment based on their relative performance advantage which is quite strong across their core... all of their funds. They would be seeing flows in the $1 billion range or perhaps on a monthly basis and now they are seeing it in the $300 million to $400 million range still positive and yet they continue to... I think gain share in that business and so it's been quite good. On the basic assets, I think we'd have to make sure they disclose that number. Barry?

F. Barry Bilson - Senior Vice President

Yes, their number is the highest it's ever been and they are just a little over $39 billion at present.

Hojoon Lee - Morgan Stanley

Great, thanks. And could you remind me what the retail versus institutional mix is for the business?

Mark R. Fetting - President and Chief Executive Officer

It continues to be predominately... when you say retail you have to be cautious because obviously their clients are more of the well high networth and ultra high networth and so the levels or institutional caliber levels. But that continues to be the dominant. Having said that the growth they are seeing on the institutional side is very appealing and that is the area in the U.S. where they're seeing their best traction.

Hojoon Lee - Morgan Stanley

Great, thanks. And just as a follow-up. In terms of your SIV exposure, just curious to know what drove the charges in the second quarter, was this determined based on kind of cash flow modeling or on a comparable transaction basis?

Mark R. Fetting - President and Chief Executive Officer

Yes. In the quarter ending 6/30 we drove it; as I said first and foremost there were no new issues, there were no new securities that we were tracking or restructured et cetera. It was the same group that we've been monitoring for some time and the incremental charges were really in two parts; one, was just the increase of support required for some existing securities we're doing with some existing funds and then an additional level of support for the same securities but they were held in other funds that we weren't following... supporting. We've just made a policy decision that in this kind of an environment trying to be fair to the shareholders across the board that if we covered all the securities, it would make sense. And so that led to the charge which as we said was half the level of the prior quarter.

Hojoon Lee - Morgan Stanley

Sure that's helpful. And just last question. I just wanted to get a better sense of what drove the outflows in fixed income, long term fixed income products maybe in terms of the type of product, was it more rate driven products and between investor type U.S. versus overseas?

Mark R. Fetting - President and Chief Executive Officer

Yes, I think as we said an interesting aspect of it was that some of the so called outflow was that in couple of our managers who were getting inflows on the fixed side that would be Permal and Brandywine, that level of inflow kind of was reduced just we think as a result of market condition. On the other hand, the Western piece is somewhat evenly divided across U.S. and international and tends to be in their core, core plus strategies and similar. As I said, they have a very strong performance on other areas such as emerging markets and munis, et cetera.

Hojoon Lee - Morgan Stanley

Great. Thank you very much.

Operator

Our next question is from Craig Siegenthaler of Credit Suisse. Your question please.

Craig Siegenthaler - Credit Suisse

Thanks, and good morning.

Mark R. Fetting - President and Chief Executive Officer

Good morning.

F. Barry Bilson - Senior Vice President

Good morning.

Craig Siegenthaler - Credit Suisse

Just first a question, another question on the SIV and asset backed commercial paper exposure. Did the $3.5 billion you mentioned which is SIVs owned by Legg Mason's money market funds and I guess on the balance sheet, did that include the Sigma SIV because I believe that's the bank supported number and also does that include some of the assets held by Barclay's?

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

I don't think people would list Sigma as a bank supported, just as a matter of technical definition. But we don't have any holdings in Sigma in the fund numbers that... we don't have any exposure to this thing.

Craig Siegenthaler - Credit Suisse

Okay. And the numbers you quoted that's core value or is that net after impairments?

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

That's part of value, pre mark-to-market.

Craig Siegenthaler - Credit Suisse

And is there... if you look at the total exposure, can you give us a break-up by what's actually owned on the balance sheet and what's owned in the funds?

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

I think we've actually given some disclosure pretty clear on that in the 8-K. But let me highlight it. I think its better that you go offline with that on the 8-K if you haven't had time to review that. But let me be very clear here that the support that we provide is fundamentally and majority of it is poor investments held in the fund. We have very little on our balance sheet and any support that we provide unlike other institutions that are showing write-downs et cetera is not because we hold it and we have to do it. It's because we are making an election to do this and to provide support and to do it in as efficient a way as possible for us as a company, but also key support of the shareholders.

So, this current support, but you should know relative to your question, is the vast majority of it remains in the funds. And we'll provide it on various ways of support. We've done one total return swap, which is done through a Barclay's sponsored vehicle and we continue to look at various approaches.

Craig Siegenthaler - Credit Suisse

Got it. And just one question on the M&A front. Is Legg Mason still looking at gaining global distribution or another distribution channel for some of yours product? And is that... would that be a major priority and would that come actually before both well I guess supporting your money market funds as your number party of cash but is this second buyback due to where the value of the stock is here or would second actually looking at acquisitions?

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

Well, we are certainly mindful of those issues. But we are very committed to our build and buy strategy. Hence, we are keeping an eye on and actively working a pipeline of opportunities. To the extent we do that it would benefit us we believe to have more clarity around the SIV situation. And we are also mindful of where the stock is and the Board continues to be mindful of that. At the moment, I think our priorities would continue to be what they have been, which is kind of near-term supporting our existing products and what not. And then looking to grow... by providing capital to existing affiliates on certain growth initiatives as well as possible acquisitions. As we have done buybacks in the past, we'll continue to think about it but within those priorities.

Craig Siegenthaler - Credit Suisse

Great. Thanks for taking my questions.

Operator

The next question is from Cynthia Mayer of Merrill Lynch. Your question please.

Cynthia Mayer - Merrill Lynch

Hi, good morning.

Mark R. Fetting - President and Chief Executive Officer

Good morning.

Cynthia Mayer - Merrill Lynch

This maybe similar to one that you already answered. But in terms of the flows, it looks like that the category of assets which declined the fastest was wealth management. And I assume a lot of that is Private Capital Management. But I'm wondering if you could just give us an update on performance there, and also I think you were making an effort to build out more of a service platform?

Mark R. Fetting - President and Chief Executive Officer

Right. The wealth management piece is comprised of Private Capital, Permal and then LMIC, our counseling and trust business. I think you're probably right, we will see the biggest contributor would be the Private Capital. I will say they too are a beneficiary of these past couple of weeks. And to the extent this shifts from a momentum market to a value driven market that would bode well for them in their strategy and the clients that they are working with are aware of that.

On that... building out the service platform, Cynthia, we remain very committed to that. One of the big opportunities I have is stepping in and looking at things with a fresh perspective, is trying to optimize this collaboration between what we Legg Mason do and what the affiliates do, and trying to work together to do that as efficiently as we can. And we're very much engaged in that.

Cynthia Mayer - Merrill Lynch

Okay. And on the fixed income side, I guess that outflows picked up this quarter. But how do you think about the lag time between performance and flows in the institutional fixed income channel? How quickly did you see that reaction to the core and core plus under performance and how quickly would you expect to see improvement if performance improves?

Mark R. Fetting - President and Chief Executive Officer

That's a very good question. And in terms of straight talk here, I think you've got to acknowledge that it will take some time that when you go through these kinds of periods and competitive as a businesses that it is, it will take sometime both in terms of getting back into the pipeline and getting back into the win rates that Western typically has.

Having said that, there are much more diversified firm now as a result of the strategies we've been following and Western has been following. And so that should be helpful. Also, the fact that they have this predictive element of their strategy as an investment organization whereby it's typical that they would underperform at the beginning to kind of middle periods of the dislocation. The fact that this dislocation is extending the way it is, is making a little more difficult.

So just take an example. In April and May, Western's outperformance was extremely strong. In fact, for the core fund, their best months ever over its 18 year history was in April of '08. They took... they added 284 basis points of outperformance in that month. Now, on the other hand their worst month ever in over these 18 year period and this is the core fund which Morningstar branch is one of the best funds and won some awards over the years, was they lost ground by about 280 basis points. So that's reflecting kind of the extended and volatile nature of the markets which are unprecedented. But it also reinforces that Western tends to come out of these strong. Then, I believe just tracking flows over the years as I have that you tend to have an ability to pick up quicker and fixed income than you do in equity. I hope that's helpful because I covered a lot of ground there Cynthia.

Cynthia Mayer - Merrill Lynch

Yes. That's a big help, thanks. And I guess last question is just some... on Royce, which is doing so well. I just want to be reminded; you guys have a revenue sharing agreement there, right? So that even if the realization rate were to pick up some of that would then cede into expenses?

Mark R. Fetting - President and Chief Executive Officer

That's correct. We do have a revenue share there. But given they do specialize as you know in small and micro cap, their average fees are somewhere in the close to 100 basis points and so that is helpful.

Cynthia Mayer - Merrill Lynch

Great. Thanks a lot.

Operator

Our next question is from Michael Hecht of Banc of America. Your question, please.

Michael Hecht - Banc of America Securities

Hey guys. Good morning. How are you doing?

Mark R. Fetting - President and Chief Executive Officer

Good morning.

Michael Hecht - Banc of America Securities

I just wanted to get a little more color on the money fund flow trends, you guys are seeing. I mean the $4 billion you saw on the quarter, and I think you guys said so far in July, it's another 13 billion or so coming to finance. So I mean just where you are kind of seeing the inflows coming? Is it more institutional versus retail, U.S. versus non-U.S. I mean is it kind of functional pricing or any few waivers you guys are seeing?

Mark R. Fetting - President and Chief Executive Officer

I think the split is... there is probably a bit more on the institutional side which you would expect in these volatile markets and depending on the clients, I'd say we're seeing at both international and U.S., and we would expect that to continue. As Barry alluded, we have been able across the board and this comes with a kind of our joint effort on looking for margin preservation; we've been able to kind of revisit few waivers and where we can reduce the waiver while still deliver good performance to the client we've taken that and that includes in the money fund here.

Michael Hecht - Banc of America Securities

Okay.

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

But do keep in mind, Mike, it tends to be a lumpy business. There are some large accounts, dominant non-U.S. institutional sovereign nation. So, yes, we'll take the assets but they do tend to jump up and down a bit, but actually the buyer says is positive. But the trend in this institutional and large institution sovereign nation space tend not to follow the trends nearly as much as the retail side.

Michael Hecht - Banc of America Securities

Okay. That make sense, but now that seems like it's more the kind of risk aversion that's driving the flows versus anything that you guys can see as far as the rate cycle or --?

Mark R. Fetting - President and Chief Executive Officer

Yes. I think that would be right.

Michael Hecht - Banc of America Securities

Okay. And then just one follow-up on Western. I mean any color on the RFP backlog and then the weaker performance you guys talk about in core and core plus? I mean, as far as you can tell that impacted your relationships with any of the institutional consultant? I mean did you guys have sidelined or watchlisted by anyone?

Mark R. Fetting - President and Chief Executive Officer

I think we've continued... Western has always had very deep and active discussions with consultants. They've been keeping them posted. I think it's less of a watchlist kind of situation than just a more closely monitored situation in certain strategies. And, I think you would expect that in particularly the institutional space.

Michael Hecht - Banc of America Securities

Okay. Any color on RFP backlog?

Mark R. Fetting - President and Chief Executive Officer

I think that's probably... it's been good not as strong but I think the RFP backlog's been closer to normal than not, it's just the win rate that would have some differences to it.

Michael Hecht - Banc of America Securities

Sure. Okay, thanks.

Operator

Our next question is a follow-up from William Katz of Buckingham Research.

William R. Katz - Buckingham Research

Okay, thanks. Just first one is, Mark you sort of said that fixed income could bounce back a little more quickly than equity. Just given the depth of underperformance in some of the bigger equity shops; when would it be conceivable I think or how much will they have to recover in performance before you might see more decisive snapback. And then I apologize, the audio cut out a little bit, did you say that fee waivers were or were not part of some of the growth in more recent money markets?

Mark R. Fetting - President and Chief Executive Officer

When you say growth, I think Barry just said, they are actually in several of the fund areas which included some fixed income, we were able to reduce some fee waivers.

William R. Katz - Buckingham Research

Okay. I didn't hear that. I apologize.

Mark R. Fetting - President and Chief Executive Officer

Okay. Going back, can you hit that question again, Bill your first one?

William R. Katz - Buckingham Research

Earlier you said that... you thought that fixed income flows might snap back more quickly in answering a prior question. And so curious on the equity side, given the volatile and deep underperformance of some of the flagship funds, how much outperformance would be necessary to really rejuvenate some of those flows? And what kind of timeframe might we be thinking about before you could see a more decisive upturn in equity flows?

Mark R. Fetting - President and Chief Executive Officer

Right. Well, I have to take that in two parts. The first would be that to the extent there is a rotation of market leadership towards valuation strategy. I think that might be the bigger driver than any individual and that would be helpful to these managers, Capital Management, Private Capital... Legg Mason Capital Management, Private Capital Management. And we have the fundamental value team in ClearBridge.

I think, to the extent individually there is recovery, I think, for those that have been able to keep their longer clients, you're going to get quicker return because in some cases what clients have been doing, particularly on the institutional side, out of respect for the managers, they haven't been withdrawing all their money. They might say we need to kind of allocate half. And so that bodes well I think.

I should point out, because this has come up a couple of times that as we talk about, we've strategically, very purposely diversified the business such that ten years ago we had essentially two core managers, today we have nine. And the diversity of contribution is pretty strong. So that on the equity side, no single manager contributes more than 10% of our core operating results. And that's a very purposeful strategy that reflects some best-in-class managers that are... as we like to say generally not bumping up no bumps, not bumping up to each other in the marketplace, et cetera. Okay?

William R. Katz - Buckingham Research

Okay. Thank you very much. That's helpful.

Operator

The next question is from Robert Lee from KBW. Your question please.

Robert Lee - Keefe, Bruyette & Woods

Thanks. Good morning, everyone. Couple of questions. I mean the first... I'm just curious Mark, I mean as you look at and I guess maybe about thinking of Private Capital Management and some others. You look at some of the subsidiaries and you have a wide variety. I mean clearly some of them are fairly small at this point in size and then I guess private capitals maybe gone from north of 30 to the best I can tell from 10-K maybe somewhere around the $12 billion or so range.

I mean do you ever... does it mean to point if you are looking at... given their desired to grow this business globally kind of leverage distribution where we can in some kind of shared platform? That doesn't make sense to even have some of these affiliates to maybe you need to kind of rethink the relationship with them because maybe just around the same leverage points to growth it going forward?

Mark R. Fetting - President and Chief Executive Officer

Robert, we view managers like PCM as core managers and not just on the metric of AUM but the contribution, the differentiated space they might have in either the investment style and/or the kind of client segment that they serve.

Now, when you are talking about much smaller situations, you have seen us recent... over the last couple of years, to take actions so that we did sell-off the Bingham Lake situation. In Chile, the domestic business based on the restructuring that occurred seemed like a good time there and with Berkshire capital in Wilkes-Barre, Pennsylvania.

The other thing is particularly as we start to have more success in the alternative space, as you know, there again AUM alone isn't the best metric. So, with for now, which was $17 billion when we acquired them, they have grown, and as a percent of AUM or still maybe about 5% or so, but they have made a significant contribution and as well as extending strategically into an attractive area.

Robert Lee - Keefe, Bruyette & Woods

Okay. And I'm just curious of the new global equities group that you are putting together. Is that going to... are we are going to see or is there going to be any kind of noticeable need to spend on infrastructure? One of the things I guess in trying to figure out is since all your affiliates, at least on the institutional side, pretty much take care their own or largely take care their own distribution I should say. So you have to build the distribution capability for them or is there someone else they could leverage off of?

Mark R. Fetting - President and Chief Executive Officer

No. I think on the distribution front, both... just strategically, we have I think very good leverage upside on distribution because what we've established in the U.S. what we have in the international. And so we see to the extent a combination of market improvement and performance improvement that we should get some real leverage upside on that. Specifically, with global currents there was some modest expenses that were kind of one-off on that but nothing significant.

Robert Lee - Keefe, Bruyette & Woods

Okay. And a little question for... one last question I guess for Barry. Looking at the tax deferral add-back to get the cash net income, it tends to bounce around for you guys quarter-to-quarter. I mean, if I look at one of your competitors who has sort of a similar add-back, it tends to be pretty stable period-to-period. Could you... is the 29 odd million in this quarter kind of indicative of the run-rate and maybe kind of what is causing that to move around?

F. Barry Bilson - Senior Vice President

Yes. It does have some big... remember we ended up with some acceleration of write-offs relative to the impairment charge. Last quarter, we had some disposition that we were dealing within this quarter relative to intangibles, relative to the private portfolio group. We have some annual imputed interest dynamics. So the short answer, Rob, is around this 30 level is probably pretty good. It could move up one, two maybe.

Robert Lee - Keefe, Bruyette & Woods

All right, great. Thank you very much.

F. Barry Bilson - Senior Vice President

Yes.

Operator

And our final question is from Jeff Hopson of Stifel Nicolaus. Your question please.

Jeffrey Hopson - Stifel Nicolaus

Okay. Great, thank you. I figured it out how to use my phone here.

F. Barry Bilson - Senior Vice President

Congratulations.

Jeffrey Hopson - Stifel Nicolaus

In terms of ClearBridge, can you breakdown perhaps what's going on there with flows between Smith Barney and institutional and then new retail open architecture situations? And then, Mark, just to hit this cash flow, future cash flow, irrespective of SIVs, sounds like it's more for long-term strategic versus immediate shareholder benefit. Is that fair?

Mark R. Fetting - President and Chief Executive Officer

Let me hit you in the order as you asked it. On the ClearBridge situation, the... you were looking for the composition?

Jeffrey Hopson - Stifel Nicolaus

Yes. Composition and/or trends of those three different buckets I guess.

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

You are trying to get a sense of the assets and the flows and the Smith Barney channel?

[Multiple Speakers].

Jeffrey Hopson - Stifel Nicolaus

Got it, got it, got it.

Charles J. Daley, Jr. - Senior Vice President, Chief Financial Officer and Treasurer

We are with you.

Jeffrey Hopson - Stifel Nicolaus

Okay.

Mark R. Fetting - President and Chief Executive Officer

This is an area we've made considerable progress on. And in aggregate, our retail business is I would say we have turned the corner where the greater number of assets are coming outside of the Smith Barney city channels and we've been working purposely toward that. Now, when you look at ClearBridge specifically; there is still a good relationship but we're diversifying there as well and the reason is because of the capabilities there have some good differentiation. You have Hirsch Cohen's appreciation strategy with very strong performance in a very good conservative style for these kinds of markets. And then improvement in fundamental value side as well as with Richie Freeman's aggressive growth fund.

So that has helped us to get into some other channels and it's also helped us win some sub-advisory relationship and expand it, particularly, actually in one of our core strategies that Michael Kagan runs. So, I think we are very pleased with that and we'll continue to diversify while still preserving a great relationship with Smith Barney.

On the capital deployment front, I think I've just got to say that our priorities at CJ laid out and as I've talked about, we'll continue to follow. I do say that when appropriate, we have done the stock buyback, that's the Board decision and we need to continue to monitor it.

Jeffrey Hopson - Stifel Nicolaus

Okay. What about paying down debt versus share repurchase?

Mark R. Fetting - President and Chief Executive Officer

Well, the debt is... we were always going to want to keep a conservative balance sheet at a 35% debt-to-capital ratio that's certainly in that zone. But where there's an advantage we take... we pursue it. But at the moment, we're comfortable meeting the payments as they are laid out.

Jeffrey Hopson - Stifel Nicolaus

Okay, great. Thank you.

Mark R. Fetting - President and Chief Executive Officer

I think, is that... was that the last question, sir?

Operator

Yes. At this time there's no further questions.

Mark R. Fetting - President and Chief Executive Officer

Okay, great. Well, on behalf of the management team and all of the employees at Legg Mason, I want to thank everyone for their questions and I want to reiterate our commitment to deliver a stronger return as we can for our shareholders. These are difficult times and we have some specific issues. But we are very confident of our ability to deliver going forward. I want to particularly thank all of my colleagues at Legg Masson, both the affiliates and at the firm for their efforts. And I thank you all very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.

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