Legg Mason's (LM) CEO Joe Sullivan on Q4 2015 Results - Earnings Call Transcript

May 01, 2015 2:29 PM ETLegg Mason, Inc. (LM)
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Legg Mason, Inc (NYSE:LM) Q4 2015 Earnings Conference Call May 1, 2015 8:00 AM ET

Executives

Alan Magleby - Head, IR & Corporate Communications

Joe Sullivan - Chairman & CEO

Pete Nachtwey - CFO

Analysts

Chris Harris - Wells Fargo

Bill Katz - Citi

Dan Fannon - Jefferies

Michael Carrier - Bank of America Merrill Lynch

Michael Kim - Sandler O'Neill

Glenn Schorr - Evercore ISI

Operator

Welcome to the Legg Mason Fourth Quarter and Fiscal 2015 Year-End Earnings Call. [Operator Instructions]. 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 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 2015 fourth quarter and the fiscal year ended March 31, 2015.

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, 2014 and in the company's subsequent filings with the Securities and Exchange Commission.

During the call today we may also discuss non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures can be found in the press release that we issued this morning which is available in the Investor Relations section of our website.

The company undertakes no obligation to update the information contained in this presentation to reflect subsequently occurring events or circumstances. This morning's call will include remarks from Mr. Joe Sullivan, Legg Mason's Chairman and CEO and Mr. Pete Nachtwey, Legg Mason's CFO, who will discuss our financial results.

In addition, following a 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. Joe Sullivan.

Joe Sullivan

Thank you, Alan. Good morning, everyone. As always, I appreciate your interest in Legg Mason. I welcome you to our fourth fiscal quarter and full FY '15 earnings call.

Before we start this morning, I would like to thank the many of you who have reached out to us with expressions of support and offers to help during these difficult days for Baltimore. It has meant a great deal to me personally and to all of Legg Mason to know that during such challenging times, our industry colleagues see the bigger picture and focus on the most important issues.

I want you to know that while what has happened in our city has been profoundly disturbing, we believe in Baltimore and are committed to joining with the city to work through our challenges and come through this better and stronger. Baltimore is a strong, tough town that will heal and will get better. And we intend to stand shoulder to shoulder to help make that happen. Again, please accept my deep appreciation for your concern and your support.

So as we enter our new fiscal year energized by significant progress and clear growth momentum and significant opportunities to address the meaningful challenges our clients face, I am proud to say that the company has largely delivered on the key strategic initiatives that we have outlined over the past few years. And this positions us to grow in the short term while strengthening our foundation for the long term.

Over the past couple of years we have tightened up our cost structure and improved our operating efficiency, while significantly modifying our affiliate portfolio to better leverage our global distribution platform. We have expanded our line-up of client-relevant products, invested further in our global distribution platform, significantly improved our capital structure. And we have achieved all of this while leading the industry in our rate of returning capital to shareholders.

And I'm pleased to report that we have declared a dividend of $0.20 per share, up 25% over last year. And perhaps most importantly we have returned to organic growth, generating nearly $17 billion in positive long term flows in actively managed products. We have achieved this flow turnaround at a time when industry active managed strategies have been challenged, due this large part to high correlations across most asset classes.

In my closing remarks this morning I will highlight five key takeaways that we believe are critical to understanding Legg Mason today and our broader strategy for tomorrow. But for now, suffice it to say that I believe Legg Mason to be in the early innings of a compelling long term growth story.

Our return to positive long term flows underscores the power of our multi-affiliate model. It is the diversity of our offerings that best serves the needs of our investor clients. That same diversity of investment capabilities of clients, geography and affiliates will deliver for our shareholders with multiple sources of growth and across a wide range of revenue streams. Our clients face many challenges globally, including persistently low interest rates, volatility in the commodity and currency markets and global geopolitical turmoil.

These and other factors, have impacted economic activity and the potential for earnings growth. However, we believe these are macro trends that can offer thoughtful investors substantial opportunity.

Around the world, demographic factors combined with lower economic growth rates, especially in developed countries, are creating challenges for governments, businesses and retirement systems as more individuals move towards retirement. The significant need for and demand for both growth and income solutions is an enduring global phenomena that we can help solve.

Even amidst many current challenges, we see investment opportunities expanding dramatically across multiple asset classes and sectors, including energy, technology, biotech and infrastructure, among others. Therefore, it's an exciting time for those who can identify and manage these opportunities.

We remain convinced that having a truly global perspective, a diversity of high-performing investment capabilities and product solutions and highly effective ways to bring these capabilities to market is critical. This is what Legg Mason offers. It defines us.

And now, let's discuss the quarter and fiscal year. Slide 2 slows the quarterly financial highlights for the company. In brief, my takeaway. We have delivered another solid quarter of financial and strategic improvement, our fourth consecutive quarter of positive long term flows and reinforce this improvement with the 25% increase in our dividend that I referenced earlier. I am very pleased with this continued progress.

Now, Slide 3 shows assets under management at each of our affiliates. As I will discuss more on the next slide, my perspective is simply, we have a solid foundation for growth with these affiliates, both in the capabilities and products that they have today and new products we're launching with an active ongoing development pipeline.

Slide 4 provides a snapshot of our affiliates, highlighting their flows and unfunded wins. As I look at our affiliate portfolio, I see three broad categories. First, high-quality affiliate franchises whose investment styles are currently out of favor. Permal and Royce fall into this category.

Both are strong franchises and strategically important and both will be long term growth stories for Legg Mason. In the case of Permal, whose flows were basically flat for the year, the eventual return to a normalized, less correlated market should benefit their business greatly. In the case of Royce which experienced meaningful outflows during the year, the eventual return to a normalized market should reward the high-quality company investment bias for which Royce has long been known.

QS and Martin Currie are in the second affiliate category. Both firms have filled important investment capability gaps for us and have demonstrated excellent short- and long term prospects. Broadly speaking, we're still in the process of commercializing the investment capabilities of Martin Currie. And while we have experienced some early small wins together, those of you in the business know product creation work among vehicles and across jurisdictions simply takes time.

As for QS which will be celebrating it's one-year anniversary with Legg Mason in June, we're beginning to see the power of our global distribution capabilities in tandem with the investment capabilities at QS. As of March 31, QS had $1.5 billion in unfunded wins, underscoring continued strong industry demand for multi-asset class solutions and early success, leveraging our Legg Mason distribution team specifically within the sub advisory channel.

In April, QS was awarded an additional $2.9 billion sub-advisory mandate which will fund in July. These unfunded wins, now totaling $4.4 billion at QS, are completely incremental to the platform wins that I referenced last quarter. Those platform wins which start from a small asset base, have the potential for significant asset growth over time.

Finally, our three remaining affiliates; Brandywine, ClearBridge and Western which are the engines of our current growth. Brandywine achieved strong inflows this fiscal year across all their product categories, including fixed income, multi-asset class and equity. And their pipeline remains robust.

Performance at Brandywine is broadly strong in equities and exceptional in fixed income across all time periods and since inception for their strategies. The bottom line for Brandywine is this; they are engaged in very active product development, they are delivering strong investment performance and they are experiencing meaningful growth momentum in both retail and institutional channels. In fact, 18 of Brandywine's investment strategies, representing 98% of the company's AUM, have been positive net flows for the fiscal year.

Now ClearBridge, against an industry narrative that has questioned the ability of active managers to deliver alpha, that's a narrative to which we do not subscribe, by the way, investment performance at ClearBridge is strong, particularly in the three and five year periods.

10 ClearBridge funds have share classes that are rated four or five stars by Morningstar, demonstrating the breadth and quality of the ClearBridge product line-up. 16 discrete and differentiated strategies, representing almost 75% of ClearBridge's AUM, have positive net flows for the fiscal year. Now, I'm not sure this is well-known or appreciated outside of Legg Mason, but ClearBridge has a remarkably successful history of creating new investment franchises within their business.

ClearBridge was among the first movers in two categories that today are considered mainstream; dividend income and MLPs. Today, ClearBridge is expanding both its ESG franchise and continuing the build-out of its institutional business.

And finally, Western Asset. Western has returned to growth and continues to deliver very strong performance, with more than 90% of strategy AUM, outperforming benchmarks in the three- and five-year period, a powerful record. That performance has recently earned the company prestigious awards from both Morningstar and Institutional Investor, among others. As a result of Western's investment performance and continued progress on risk management, consultant ratings, critical to the institutional business, have significantly improved which is exciting for Western's prospects.

Just this past fiscal year 5 of 15 top consultants upgraded Western, while 7 others raised their outlook. Western's return to positive long term flows over the past several quarters reflects the money-in-motion phenomena that we've discussed, but equally important, the strong interest in both their legacy credit strategies and unconstrained and specialized strategies which we believe positions them very well into the eventuality of a rising rate environment.

Slide 5 shows some of the many awards won by Legg Mason and our affiliates during the year. I am certainly very proud of my Legg Mason and affiliate colleagues for the hard work and high-quality results that such public recognition represents. Congratulations to all of you.

Slide 6 highlights the significant momentum we've seen this year in global distribution. Our record gross and net sales reflect in part the investments we made in distribution over the last several years which are now paying off.

As pleased as we're with distribution's performance this past year, we believe that we're positioned to accelerate its performance from here for three reasons; our diversification of products, clients and geographies will work for us. Our continued investment in distribution will work for us. And our momentum in the marketplace will work for us.

So let me be a bit more specific. First, the diversification inherent in our business by client type, geography, product and strategy provides us with ample opportunities to grow our business. We're not beholden to or dependent upon a single or small group of products or client channels or geographies.

For example, the concentration of our gross sales in the U.S. among our top three selling funds is only just over one-third of our total sales, according to a well-known industry consultant who has done analytical work for us. This means that almost two-thirds of our mutual fund sales in the U.S. are in products other than from our top three selling products.

Of the 50 firms of all sizes surveyed by that consultant, 40 have higher concentrations of sales in top three products than Legg Mason. Additionally, every one of our six global distribution regions is in positive net flows and with the expectation of Royce, all of our affiliates are in positive net flow within our retail distribution platform. This is exactly the kind of diversification that we intend to build out further.

Second, we have invested in our distribution platform by hiring nearly 50 client-facing staff whose impact is largely yet to come. We're enhancing our sales teams' effectiveness through global sales training, increasing the air cover for them in the field with robust marketing initiatives and creative publicity campaigns and increasing the efficiency of our sales teams by introducing predictive analytics to help pinpoint investor need and opportunity.

And finally, we start the fiscal year with significant momentum in the retail channel globally, with improvement in gross sales of 26% year over year, up from 15% growth the previous two years. Don't underestimate the power of momentum within a sales organization and in the marketplace with clients.

We expect to continue to capitalize on that momentum, reflecting a deep partnership with both our global distribution partners and affiliates which is paying off with a meaningful increase in sales, net flows and market share gains. Underscoring that momentum, Legg Mason has moved up 11 positions year over year to number 12 in our quarterly U.S. retail market sales ranking for active funds.

And in U.S. taxable fixed income, our share of gross sales has doubled year over year, again according to our industry consultant. In retail SMAs, we're the number two provider in the industry with $48 billion in assets.

And finally, our cross-border market share has also increased significantly year over year which we expect to continue as we commercialize products, especially with our newer affiliates. These are all testaments to the investments that we have made, the great work by our teams and speak directly to why we believe this platform has significant momentum and quite a lot more room to run.

Slide 7 shows the expansion of our investment capabilities which, together with our distribution platform, is a key driver of growth. We define the market as having three broad opportunity sets in product development; classic active, next-generation active and passive.

Traditional classic active is defined as style box, benchmark-oriented strategies that are broadly losing share to passive strategies. Here, we're growing by taking a bigger slice of a shrinking, albeit enormously large, market opportunity.

Winning in the classic active space is a take-share gain, driven by strong investment performance and effective distribution capabilities. We have both. With the expectation of some of our small cap strategies, the strength we enjoy in high active share and income products when combined with strong distribution alpha is driving robust sales for many of our affiliates.

Now while the classic active products are broadly an outflow within the industry, next-generation active products such as flexible alternative and outcome-oriented strategies are receiving strong investor demand. And we're extremely active in next-gen product development and distribution.

In fact, in just under three years we have more than doubled AUM in next-gen active products. And we're accelerating that effort. We can continue to expand our list of next-gen active products, both organically and through M&A. As can you can see on the slide, building on the 23 products that we launched last year. Recall we also through acquisitions of Martin Currie and QS Investors, added significant new investment capabilities which have yet to be fully commercialized into retail products.

And then finally the passive space. We certainly see an evolution of a market which has been dominated by cap-weighted index strategies, a commoditized and highly competitive segment largely driven by price. The evolution in passive strategies is a migration of interest to smart beta strategies which seek to correct or overcome the limitations associated with pure cap-weighted indexed products.

We have existing smart beta capabilities with QS and a number of our other managers are also evaluating the strategies against their own investment capabilities. We view smart beta to be an opportunity to compete for flows that have been moving to index products for some time.

We also see the continued expansion of the ETF as a compelling investment vehicle for some investors and therefore another growth opportunity for Legg Mason. We believe that there are opportunities to use the ETF wrapper to translate our affiliates' investment expertise into innovative products. While this is certainly a multi-year initiative for us, we're extremely excited about the addition of our new ETF team, giving us the potential for extensions of existing products and the creation of new products in ETF wrappers.

Slide 8 shows our investment performance. While the one-year number dipped a bit, we have seen before that it can bounce around. That said, I'm very pleased to say that performance remains broadly strong across most time periods. And with that, Pete, now I'll turn it over to you.

Pete Nachtwey

Thanks, Joe. Turning to Slide 9. As Joe noted, we delivered another quarter of solid earnings, with net income of $83 million or $0.73 per share. This is our first quarter in some time where we have no integration or other initiative costs. So a clean quarter that we have all been looking forward to. At a high level, our revenues decreased, primarily due to two fewer days in the quarter and lower performance fees. On the expense side, the majority of the decline was related to comp and benefits driven by the reduction in revenues.

Adjusted income was $118 million for the quarter or $1.03 per share. Average long term AUM was up a net 1% from the prior quarter, with average fixed income up 2% and equity down 1%. This quarter's performance fees of $24 million came from a diverse of our affiliates, specifically Brandywine, Martin Currie, Permal and Western. These were better than forecasted as a result of strong performance at both Brandywine and Martin Currie. While impossible to predict with any precision, we estimate that next quarter's performance fees could be in the range of $10 million to $20 million.

In terms of capital deployment, this quarter we repurchased an additional 1.6 million shares and ended the fiscal year with only $14 million left on our previous authorization. We have fully deployed that amount in April and are already acting on our new $1 billion authorization, continuing at our usual $90 million quarterly pace, subject as always to markets and any alternative capital uses.

Moving onto Slide 10. The only additional item to highlight here is our GAAP effective tax rate of 34%. This quarter's lower than typical rate resulted from true-ups in our final return filings for FY '14, as well as changes in our valuation reserves on deferred tax assets due to final income apportionment across our various taxing jurisdictions.

These combine to increase our earnings per share by $0.03 this quarter. Next quarter we're anticipating that our tax rate will be favorably impacted by a recently legislated change in the New York City apportionment rules that will reduce our fiscal Q1 taxes by approximately $10 million to $20 million.

Excluding this item, we expect our GAAP tax rate for the full fiscal year to be between 35% and 37%. And, as we have consistently highlighted, our actual cash tax rate continues to run at a substantially lower level than our GAAP rate. Specifically for this quarter, we were at 6%. And for next fiscal year we expect a cash tax rate of 4% to 5%, as you can see on page 21 in the appendix.

Turning to Slide 11, our assets under management were down 1% compared to the prior quarter, driven primarily by a $15 billion decline in liquidity AUM. This more than offset a 2% increase in long term AUM and a $2.7 billion favorable market impact in the quarter which was net of $6.3 billion of unfavorable foreign exchange impacts.

Long term flows on Slide 12 were a positive $6.2 billion and represented our fourth straight quarter of positive long term inflows. Fixed income inflows of $7.6 billion reflected continued strong performance combined with high market demand across a variety of our strategies and products.

Equity flows were negative, with small cap being the primary driver, while U.S. large cap and income-oriented products continued to generate strong inflows. Looking ahead, our April flows will likely be negative based on what we know at the moment, given they will be impacted by a $1.9 billion redemption at Western that arose from a client diversifying managers and was unrelated to performance.

But as we have said in the past, any one month does not make a trend, especially in the lumpy world of institutional flows. And to that point, we're also aware our May flows will benefit from the $1.5 billion of equity wins at QS which Joe mentioned earlier.

Given the higher fees on these equity wins versus the lower fees on the fixed income redemption, the net result of this activity will actually be revenue accretive. Advisory fees on Slide 13 show our average quarterly AUM along with the advisory fee trend, with this quarter's higher rate primarily reflecting the growth in retail assets at Western and ClearBridge which were partially offset by the challenges at Royce.

Operating expenses on Slide 14 decreased by $27 million or 4%, to $573 million. I will discuss comp and benefits on the next slide, but looking at the other line items, D&S expense decreased, reflecting two fewer days in the quarter. Occupancy expense decreased $7 million, as last quarter's number included the QS integration lease charge.

Communication and technology expense increased $2 million, reflecting additional costs at affiliates that were offset in compensation and benefits. And, finally, other expenses decreased $2 million, as last quarter's expenses included costs related to the Martin Currie acquisition and the disposition of LMIC.

Turning to Slide 15, salary and incentives decreased by $17 million. The decrease was primarily due to lower revenues resulting from the two fewer days in the quarter and lower performance fees. These more than offset the increase in benefits and payroll taxes due to seasonal factors.

Transition costs and severance decreased, as last quarter included QS integration costs and costs related to the LMIC sale. The compensation and benefits ratio came in at 54%, at the higher end of our expected range, due to the usual seasonal factors which will also affect our next fiscal quarter.

Slide 16 highlights the operating margin as adjusted which increased to 23.8% from last quarter's 21.4%. The prior quarter's lower margin was primarily due to the QS integration costs, as well as costs related to M&A activity in the quarter. The combination of these factors serve to reduce fiscal Q3's operating margin by 3.3%.

Slide 17 is a roll-forward from fiscal Q3's GAAP earnings per share of $0.67 to this quarter's $0.73 per share. Fiscal Q3 included QS integration costs as well as expenses related to the purchase of Martin Currie and the sale of LMIC. These were partially offset by a reduction in tax reserves and the capital gain on LMIC, all of which combine to reduce last quarter's earnings by share by $0.06.

This quarter, the combination of lower revenues from the two fewer days, lower performance fees, seasonally higher benefits and payroll taxes which were all slightly offset by a lower share count reduced EPS by $0.05. Higher mark-to-market on our seed investments increased EPS by $0.02. Also in fiscal Q4, as I previously noted, year-end tax items increased earnings per share by $0.03.

I will wrap up on Slide 18 which highlights our quarterly cash position, as well as our consistent and balanced approach to capital deployment. In the upper left, you can see that we have steadily reduced our share count by 52 million shares or 32% since March 2010.

In the upper right, we have highlighted the change in our quarterly dividend over this same timeframe. We now have six straight years of increased annual dividends, representing virtually a six-fold increase since 2010.

While not shown here, our rate of returning capital to shareholders, reflecting both our stock buyback program and our regular quarterly dividends, was industry-leading over the last year and has been nearly double the peer average over the past four years. On the bottom left you can see our cash position which stands at $670 million as of March 31, up slightly from December 31. Finally on the bottom right, we highlight our current seed investments of $391 million across a diversified portfolio by asset class. This is a $17 million increase from Q3 as we continue to support our new product development efforts.

In summary, this was a very solid quarter for Legg Mason. And as always, we have complemented our growth with a capital deployment strategy that highlights consistent dividends and share repurchases, along with significant investments in growth initiatives both organically and through acquisition. So thanks for your time and your interest in Legg Mason. And now I'll turn it back to Joe.

Joe Sullivan

Thanks, Pete. And now we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Chris Harris from Wells Fargo.

Chris Harris

Your short term equity performance has slipped a little bit. Joe, I know you highlighted that. We know it's volatile. Wondering if you could elaborate a little on what the driver might be? And then related to that, are you guys seeing any slowdown at ClearBridge as a result?

Joe Sullivan

I would say no to question number two. As you know, most clients, both institutional and retail, look at the threes and fives for performance and don't focus really as much on the one-year because it can be bumpy.

Typically it's your larger funds that if they are underperforming a little bit in the short run will have a magnified impact. You can look at some of our larger funds and you can see that they were off a little bit vis-a-vis the benchmark and they will have a disproportionate impact on that short term performance. Again, clients really look at three-year and five-year performance for decisions on purchasing.

Chris Harris

My follow-up would be just a quick one on the margin. You guys had a really nice year for margin expansion. Wondering if you can comment. If we look back at what the drivers were, would you away affiliate mix was the biggest contributor? How should we be thinking about the opportunity for market expansion in this fiscal year?

Pete Nachtwey

Certainly affiliate mix is a big component. As we've talked about, really three key things that are going to impact that for us. One being growth and markets overall. The second is that mix factor and that one gets a bit more complicated. And then last but definitely not least that we shouldn't forget about is our management equity plans where we put a couple of those in place and we're already starting to see the benefit of the tiered rev share that we have put in there.

When you look at mix, it's really five different factors. It's a combination of what affiliates, what products, what asset classes, what geography and what clients. And so I think it was a combination of all of those things that helped to drive the margin. But as we look forward, it's really about growing the bottom line. So we're focused on bottom line growing the top line.

The margin will be an outcome. But a lot of that, again, is based on the mix. But we're very bullish with normal markets going forward that given the scalability and the leverage in the model that the margin should be going up from here.

Operator

Our next question is from Bill Katz from Citi.

Bill Katz

Just staying on that for a second, sort of curious, just given your evolution of the business model, your expansion globally and the acceleration of the core business, how do you think about your comp ratio? I know it's a little bit of a fallout based on your rev shares.

How do you think of that going forward? Obviously you mentioned some taxable headwinds into next quarter from seasonable perspective. But looking longer term, what is the right range we should be thinking about now?

Pete Nachtwey

Yes, I think this is a trend we really started seeing probably a year ago is that the mix of where we're getting business from our affiliates and then also the tight cost controls at the parent have dropped the long term kind of range for us more the 53%, 54% range. And as you indicated, we will have another quarter or partial quarter of seasonal costs which will kind of work their way through in the June quarter.

And after that we definitely see it falling from where it is today. And long term it's a bit difficult to predict just because of the - again, it's heavily dependent on the mix of the affiliates. For the time being, we see it being in that in the 53% to 54% on an annualized basis.

Bill Katz

And then Joe, maybe one for you. Just as a follow-up on your comments about passive and sort of the minus sign there on there on your one slide and your focus on smart beta. When you think about that, you had made some provocative comments about maybe transparency is not that big of an issue. How do you think about the pros and cons of transparency versus the non-transparent alternatives that out there as you think about growing that part of your business?

Joe Sullivan

Sure, Bill. My views on that are not really any different than they've been for a while. First of all, I think this whole notion, this whole discussion about transparency/non-transparency, I think the jury is still way out on this. We, to be clear are far from convinced that transparency is a huge issue for our PMs. In fact, we know for sure with some of our PMs they have no issue with transparency.

Now that said, to be clear, there could be some strategies, there may be markets where non-transparent ETFs make sense. But I don't think a blanket statement saying transparency is a problem, we would disagree with that.

Obviously, the adoption of what are now sort of these non-transparency ETFs in the marketplace, it's not been particularly robust. We're going to continue to monitor and evaluate it. But there is really no rush on our part to get there.

What we haven't really talked a lot about, Bill, but we're excited about, is obviously we do think two things. We think ETFs, the broad appetite of ETFs and being able to bring our some of our existing strategies into ETFs or create new strategies in the ETF vehicles, clearly there is demand for that vehicle and that structure. Obviously, we hired a team during the quarter to really build out that effort for us.

Secondly, the opportunity in smart beta. You kind of referenced smart beta. We see this as an evolving opportunity to capture flows that have been going into passive. We' excited about both smart beta and the opportunity to commercialize some of our strategies in ETFs. So it's an evolving discussion. We think both of which provide opportunities for growth for us.

Operator

Our next question is from Dan Fannon from Jefferies.

Dan Fannon

If we could expand a little bit on the fixed income market broadly. Last quarter there was a lot of discussion about assets in motion and the potential benefit you guys had. You saw it in some of your numbers last quarter.

Wondering how much you think you saw maybe this quarter and really the longer-term opportunity institutionally. Your unfunded wins look good. I'm just - wanted to get an update of your view around the opportunity for market share gains has changed at all as kind of time has over the last few months?

Joe Sullivan

Sure. So if you think back to the previous quarter, we had $7.6 billion of net fixed income flows. We estimate only $1.1 billion of that was related to the money in motion phenomena. With that being said, $6.5 billion of our fixed income flows for this previous quarter are what I would consider to be kind of our ongoing organic growth in fixed income. Now, if you look back to the December quarter, we had $9.9 billion in fixed income flows, but two-thirds of those were really related to the money in motion. So we see this as a positive.

We see this as affirming the fact that our - we have been building and growing our fixed income business, both retail and institutional, for some time now. So the money in motion opportunities are going to be largely institutional going forward, are going to be long and lumpy processes. We think both Western and Brandywine are well positioned to grow there from the money in motion. Also and really maybe more importantly, from their organic growth opportunities.

What we're seeing right now broadly in terms of client mix is that we're continuing to get good flows in both the U.S. and outside of the U.S., both in retail and institutional. So if you look back over the last quarter, our fixed income business was split basically 63% or so retail, 37% institutional. And then 50/50 U.S. and international. So really nice balance. Really nice diversification.

We're seeing in the money in motion a lot of that is really what we would call the classic active. A lot of those flows are going into core and core-plus because that's kind of a like-for-like where they are leaving a certain type of strategy and coming to a similar strategy, core or core-plus.

In the more organic growth that we have been experiencing for some time, more of that is really in the next-generation active products. Things like macro ops, global sovereign strategies, absolute return, etcetera, etcetera. So we're really excited about the momentum we have. We've still got a lot of - our pipeline remains fairly robust. We're seeing a lot of opportunities. Again, the intuitional piece, going to be long and lumpy. The money in motion, piece long and lumpy. We're getting good business, institutional, retail; U.S., international. We feel pretty good about it.

Dan Fannon

And then just thinking about the fee rate going forward in that mix of business, Pete, that you mentioned and the benefit this quarter. I guess the one area, money markets continue to drift lower. Maybe if you could give us an update on how that factors into that. And maybe an outlook for kind of asset levels within that category, given the changes that are occurring there?

Pete Nachtwey

Yes. Well, the money market really didn't have much of an impact on us yet because we need to see a reasonably sizable increase in the - at the short end of the curve. But I think you guys read the press just as much as we do and follow the Fed. It's certainly a lot closer today around the timeframe for that increase.

But if you look at what we're doing in that space right now with the impending regulatory change which is a 1.5 years off, but nonetheless clients are very aggressively looking at what they are going to do with their liquidity monies going forward. That's where Western is spending a time.

The other key at the end of the day is what kind of products are they looking for? We have already got a pretty good suite of other liquidity-like products, things that are longer duration than 90 days.

But still clients today are using those for liquidity money where they are willing to give up a stable NAV already and go out a little longer on the duration curve. So we're cautiously optimistic that the combination of factors that include the new bank capital rules, where the banks aren't looking for significant increases in terms of the positives, that that's a bullish sign for us long term. A combination of as those regs come into play and as rates go up, that's going to be a more interesting business for us.

Operator

Our next question is from Michael Carrier from Bank of America.

Michael Carrier

Joe, just one question on just growth outlook. The flows on the fixed income side have been strong. And I think you highlighted some of the strategies you needed to improve the equity side of the business.

Just want to get a sense. When you look at what is going on with QS, Martin Currie and then offsetting maybe some of the challenges at Royce, just where do you see that momentum or like the pace of build where you feel like you can kind of break through into the positive territory on the equity side?

It seems like the ingredients are there. I mean, you laid out the different strategies to try to get there. But I just want to get some sense on, based on everything that you guys are working on, when you think you're going to see the pick-up in sales in some of these newer initiatives?

Joe Sullivan

A couple of things. Let me maybe frame it for you. We were actually sitting around talking yesterday about kind of looking forward from here and how we feel about our flow and our business activity. And I got to tell you, the team feels very, very positive about it.

One of the things, if you think about it, we reported our unfunded pipeline at the end of March at being $7.6 billion. At the end of this month or at the end of April, our unfunded pipeline is $10.1 billion. That's the highest number any of us can remember. I don't know if it's a record or not, but it's the highest number any of us can remember.

Here is what's interesting. It's almost 60% equity. We have been having very robust activity in the fixed income side which is terrific and we still have it. Obviously, 40%, 41% or thereabouts of our April 30 unfunded pipeline, 40% or 41% is fixed income and that's largely specialized. The good news about that is it's higher fee.

On the equity side, almost 60% is in equity and that's really across the board. That's ClearBridge, that's Martin Currie that is QS, that is Brandywine. And so we're getting good breadth. So look, we've talked about Royce. Royce has been challenged. They are going to be challenged for a while. We know that.

But the diversity of our model with a - between asset classes and even within asset classes, is pretty powerful. And we're getting a lot of looks in here right now. So we feel pretty good about it.

Michael Carrier

And Pete, just on the margin. You got a couple questions and you hit on it. I guess can you frame and I know this is tough because you got the market and then you got the affiliates. But can you frame, when you start - when you are seeing these inflows and you get like a normal market backdrop, like what the, maybe the incremental margin range can be going forward?

Pete Nachtwey

Again just due to all the complexity factors in that mix, it's difficult to give you kind of a straight line as to where the margin will go. What we do feel very positive about is the things we can control at the parent level.

As you have heard me say before, roughly 75% of our costs at the parent level are kind of quasi-fixed in nature. They will go up by inflation. We don't need to add a lot of costs to add - managing a lot of AUM. So there is only about 25% of our costs at the parent that vary based on the level of sales and the levels of AUM and those are primarily commission-based salespeople. They pay for themselves.

But the other thing to keep in mind, we have had record sales over the last two years coming out of retail global distribution. And we eat the full upfront costs of those commissions in the first year. Yet we keep those assets for four to five years.

That's another thing that kind of gives us some real bullish sentiment around the margin over the next couple of years, because we're not going to - we're going to have assets that we raised in the last several that aren't going to be costing us anything from a commission standpoint. General, again cautiously bullish on the margin going up from here.

It will be bumpy just because of all the mix things. The main underlying pillars are the leverage at the parent and then this persistency of assets that we only pay for once upfront on the retail side. That make sense?

Operator

Our next question is from Michael Kim from Sandler O'Neill.

Michael Kim

First, just in terms of the global distribution platform, could you maybe give us sort of a lay of the land, if you will, as it relates to where you see the greatest opportunities in the near term, from both a product standpoint as well as by region? And then where you think you might be not as well penetrated and some of the initiatives there to make get better penetration across some of those markets?

Joe Sullivan

I don't mean to say we have opportunity everywhere, but we sort of do. If you think about it in the U.S. and I referenced some statistics in my prepared remarks about the improvement in terms of our positioning relative to other fund complexes in terms of sales. I think that's very powerful. We made significant progress this past year. The opportunity in fixed income, particularly in the U.S., remains.

Now, it's going to be slow and it's going to be kind of a slow build in organic. But with Western being named Morningstar's Fixed Income Manager of the Year, boy, that gives you a lot of tailwind.

If rates rise which we've been talking to people about we're actually looking forward to rates rising because obviously that ultimately makes fixed income more attractive. Both Western and Brandywine we think perform well or will perform well, in a rising rate environment. We feel well positioned for that. We think we can continue to capture share in the retail space in fixed income in the U.S..

What's exciting for us is internationally we have always done a good job and frankly punched above our weight as it relates to fixed income and even U.S. equities, but we have never really had solutions, managed vol-type things which is what QS does or the non-U.S. equity strategies which obviously Martin Currie does. We're seeing some good traction and some good activity with Martin Currie Australia.

Now, Martin Currie Australia is our legacy Australian equity business that we combined with Martin Currie. That's gone very well. It's been a good combination. We're seeing good traction with Martin Currie Australia, particularly in Asia.

But we think we can continue to grow internationally very, very much with many of Martin Currie's strategies once we get them into our cross-border vehicles. So things like Asia, long term unconstrained, European long/short. They have got some strategies that we think are very compelling. They are also very much next-generation strategies.

And then we can continue to combine them with our U.S. equity strategies in fixed income, where we're still getting good action internationally. So I hate to sound like we can grow everywhere, but we kind of can.

Michael Kim

And then just one quick modeling question for Pete. You called out the uptick in interest expense this quarter related to what sounds like sort of an adjustment to an earn-out payment. So can you just maybe walk through that adjustment a bit more? And then is this sort of an exercise that you will go through every year or so? We could see some further adjustments down the road?

Pete Nachtwey

It was really just a one-timer on the contingent payment on Martin Currie and adjusting the rate differential there between [indiscernible] and U.S. dollar. We don't see that one repeating. But for that, the rest of our interest expense is pretty steady state. Keep in mind, we did swap the five-year tranche of our long term debt to floating. That has actually been a great trade for us. I think we're up about $5 million or $6 million on that derivative. But the rest of our public data is all fixed. So it should be pretty steady from here.

Operator

We have a question from Glenn Schorr from Evercore ISI.

Glenn Schorr

Quick question, I guess Royce just renamed two of the small cap funds. It looks like it opened up the investment policy a little bit. I'm curious on how a client or a consultant deals with that in terms of style drift. But I am guessing it's meant to give better flexibility to the portfolio manager to adapt to the environment? Is that--

Joe Sullivan

I think that's right, Glenn. And they're also just looking to manage their fund line-up appropriately. There is no concern that I have heard and I wouldn't even imagine about style drift for Royce.

Look, as I mentioned, they are clearly under some pressure and that's going to continue for some time. But they have a clearly a solid reputation. They perform very well over the long term. Their process is consistent. Their philosophy and their process is currently out of favor. But there is really no, I think, concern or worry at all about them changing or chasing performance. They have a well-earned reputation for selecting high-quality companies. That's just a style that's currently out of favor. But there is not going to be any drift there.

Glenn Schorr

And then maybe follow-up on your comments earlier on the upgrades on the consultant side that Western was getting. I was just curious for a little more color on how often they evaluate that and how impactful that is and maybe specifically upgraded from what to what? It sounds like a big move up?

Joe Sullivan

Well, it is. It's very impactful. So there is sort of generally regarded 15 top consultants. Of those 15, we had 2 already that were a buy on Western. We had one that was a hold. Of the remaining, what, 12 from there, 5 over the course of the year, upgraded them. And the remaining seven changed their outlook from sort of hold to positive.

So those are all important indicators of how the consultant community and let's face it, the intuitional business is very reliant upon the consultant community. Look, I think that reflects the fact that clearly they have improved risk management, clearly their performance warrants it.

And so I think it's a very good indicator for Western going forward. I think we have all acknowledged they were a little bit in the penalty box for a while. Clearly they have been emerged from that and I think are gaining the support of more and more consultants. That portends well for them long term in the institutional business.

Operator

That was our final question. I will turn the call back over to Joe for closing remarks.

Joe Sullivan

Great. Thank you, operator. Appreciate it. Look, this morning I would like to leave you all with what I consider to be the five key takeaways that we believe are critical to understanding Legg Mason and our long term opportunities.

First, with nearly $17 billion in long term flows and a 3% organic growth rate, Legg Mason is definitely back in growth mode. And we look forward to building upon that momentum as we bring QS Investors and Martin Currie more fully online, while we continue to leverage our legacy affiliate growth engines.

Secondly, the diversification in our model is a key competitive advantage, as our varied affiliates balance one another to the benefit of clients and shareholders over different market cycles.

Third, Legg Mason's global distribution platform represents a significant strategic asset for both our affiliates and our shareholders. This year was a record year for distribution in gross and net sales and with the expectation of Royce, net positive flows across all regions and for all affiliates within LMGD.

Fourth, we will remain very focused on improving absolute earnings and margin over time by maintaining a rigorous cost discipline, accelerating our organic growth, working to improve our asset mix and by implementing new management equity plans at our affiliates. Each of these actions can be drivers of improved long term profitability and potential margin expansion.

And finally, we will continue to deploy the significant amount of cash that we generate between investments that expand our investment capabilities and distribution and returning capital to shareholders through dividends and share repurchases.

So thank you for your time today. I would like to congratulate my colleagues at Legg Mason and our affiliates for a good quarter and a strong year and thank you our shareholders for your continued trust and confidence. We look forward to rewarding your investment at Legg Mason again over the next year. And with that, I wish you all a wonderful day and weekend.

Operator

Thank you. This concludes today's teleconference. Thank you for participating. You may now disconnect at this time.

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