Legg Mason's decision to divide its mutual fund complex into four distinct brands seems to buck the brand consolidation trend, but analysts say the Baltimore fund company may be able to increase distribution and assets by separating itself from the legacy Citi brand.
Mark R. Fetting, a senior executive vice president at Legg Mason, said as part of its integration of the asset management business acquired last year from Citigroup Inc. the company will market its mutual funds as Legg Mason Partners Funds, equity and fixed-income portfolios; Legg Mason Funds, focused equity and other funds for retail investors; Royce Funds, small-cap equity portfolios; and Western Asset Funds, fixed-income strategies for institutional investors.
The decision to create fund families under four separate brands is "the most significant step" Legg Mason has taken strategically since the Citigroup deal, Mr. Fetting said.
"This deal made us one of the largest global managers, with more than $868 billion in assets under management," he said, "but we don't just want to be the biggest, we want to be the best. And by growing small and specialized fund families, rather than just one large fund family, we think we can grow."
"We have, at this point, acquired our way into a market-leading position," he added. "Now we have to earn our way to stay there. We intend to grow this business by using several smaller brands."
Matt Snowling, an analyst at Friedman, Billings, Ramsey & Co. Inc. who covers Legg Mason, said the decision to change its brand structure is very strategic. Part of the reason that Citi sold its fund complex, he noted, was that brokers at the wire houses were reluctant to sell Citi's products.
"Citi-branded funds had some performance issues, and some wire houses were just reluctant to sell a competitor's product," he said. "Now that these are Legg funds, there is an opportunity for these funds to really grow now that they are no longer weighed by the Citi brand."
Most of the funds acquired from Citigroup have been rebranded as Legg Mason Partners Funds, he said. Two other fund families - Western Asset Funds and Royce Funds - are legacy Legg Mason brands that have been among its top performers.
Michael Hecht, an analyst at Banc of America Securities who covers Legg Mason, said in a research note last month that Western, with its fixed-income products for institutional investors, would remain one of the fund company's biggest growth drivers. Western has had $40 billion of organic inflows in the past 12 months. Royce also continues to see strong asset growth, he wrote in the note.
Mr. Snowling said, "By rolling legacy Citi products into premier brands like Western and Royce and into existing funds that have had better performance, Legg Mason should be able to really increase distribution."
Richard X. Bove, an analyst at Punk, Ziegel & Co., agreed that the new strategy could work.
"If they had a brand like GM or Fidelity, maybe sticking with one brand would make sense," he said. "But when you are looking to reach institutional investors, wealthy investors, and retail investors, you may want different fund families for each market segment."
Mr. Bove said Legg has been working diligently since the deal with Citigroup in December to streamline its mutual fund complex and become more nimble. "It is easier to market more effectively when you can sell products with different names to different market segments," he said.
By merging some funds and liquidating others, Legg said on Wednesday, it expects to reduce its total of open-end funds to 119, from 166.
Once the realignment is approved and complete, the former Citigroup Asset Management open-end mutual fund product set will become a focused offering consisting of 28 equity portfolios, 28 fixed-income funds, 22 money market funds, and 23 variable annuity portfolios, Legg said.
Mr. Fetting said that, as part of the deal with Citigroup, Legg Mason agreed not to use Citi's mutual fund brand names - including Smith Barney, Salomon Brothers, and Citigroup Asset Management - for more than a year. Legg wants to create smaller, specialized fund families with distinct brand orientations, he said.
"When we get all of the marketers together," Mr. Fetting said, "a lot prefer that single brand. Everyone wants to be that Amex or Coke. But on the other hand, we feel that in the investment services industry, packaged goods have to be more thoughtful."
"At the end of the day, investment professionals don't want to come to work for 'Legg Mason,' " he added. "They want to work for a specialized affiliate."
The decision to segment funds under different brands has precedents, Mr. Fetting said. Many successful companies have several fund families, each with a distinct brand. For example, he said, after Franklin Investments bought Templeton Investments in the mid-1990s, it kept the Templeton Funds family branded separately for wealthy investors.
"Franklin is a competitor that we want to beat but we respect," he said. "When they bought Templeton, they kept both brands, and we thought that that was a very smart strategy. It makes sense to maintain that differentiation."
Legg has no plan to develop additional, specialized fund families domestically, Mr. Fetting said, though it is developing an offshore equity fund family and, since the purchase of the London hedge fund manager Permal Group in June 2005, also an offshore hedge fund family.
He said Legg Mason wants to continue accumulating assets under management by expanding its distribution. To this end, he said, the company will increase its advertising and marketing around the new fund families in order to "grow and compete successfully."
"Near term, as we continue to get through these fund mergers, we know that some assets will fall off and we will pick up some other assets," he said. "After we get though this transition period, we want to grow forcefully and impressively and develop new products and new assets."
