Legg Mason 2019 Annual Report

Highlights

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Key Highlights

AUM by asset class
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AUM by client domicile
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Revenue by asset class
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Financial Highlights (Dollars in thousands, except per share amounts)

  Years Ended March 31,
  2019 2018 2017 2016 2015
Operating results
Operating revenues $ 2,903,259 3,140,322 2,886,902 2,660,844 2,819,106
Operating income (loss) 103,102 324,001 422,243 50,831 498,219
Income (loss) before income tax provision (benefit) 28,495 233,840 370,878 (25,218) 367,993
Net income (loss) attributable to Legg Mason, Inc. (28,508) 285,075 227,256 (25,032) 237,080
Per share
Net income (loss) attributable to Legg Mason, Inc. shareholders, diluted $ (0.38) 3.01 2.18 (0.25) 2.04
Dividends declared 1.36 1.12 0.88 0.80 0.64
Book value 42.78 45.20 41.61 39.37 40.23
Financial condition
Total assets $ 7,794,122 8,152,534 8,290,415 7,520,446 7,064,834
Total stockholders’ equity attributable to Legg Mason, Inc. 3,659,755 3,824,405 3,983,374 4,213,563 4,484,901
Adjusted EBITDA1 622,224 637,228 560,240 561,432 658,262
1 Adjusted EBITDA represents a liquidity measure that is based on a methodology other than generally accepted accounting principles ("non-GAAP"). For more information regarding this non-GAAP measure, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal year 2019 Annual Report on Form 10-K.

Total Return Performance (Dollars)

    Years Ended March 31,
    2014 2015 2016 2017 2018 2019
Index
Legg Mason, Inc. $ 100.00 113.98 113.98 78.06 90.36 63.70
S&P 500 Index 100.00 112.73 114.74 134.45 153.26 167.81
SNL Asset Manager Index 100.00 109.04 90.28 100.74 124.18 109.71
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The graph compares the cumulative total stockholder return on Legg Mason’s common stock for the last five fiscal years to the cumulative total return of the S&P 500 Stock Index and the SNL Asset Manager Index over the same period (assuming the investment of $100 in each on March 31, 2014). The SNL Asset Manager Index consists of 42 asset management firms.
Prepared by S&P Global Market Intelligence, a division of S&P Global Inc.

Letter from CEO

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Dear Clients and Fellow Shareholders,

Over the past year, our employees around the world have taken new steps to build a better Legg Mason. We are proud of our accomplishments, all of which support four key drivers of value creation:

  • To further leverage centralized retail distribution to grow,
  • To capitalize on our investments and M&A agenda, and expand investor choice,
  • To more effectively control our costs to improve profitability, and
  • To prudently manage the company’s balance sheet, with thoughtful capital return.

As our industry continues to evolve, we at Legg Mason are working together with an intensified spirit of collaboration to better serve our clients.

In a practical sense, this means diversifying our business across strategies, vehicles and distribution access points, while continually developing the potential of our investments and acquisitions.

Combining the world-class investment expertise of our affiliates with Legg Mason’s product design and technological innovations can be quite powerful. And we believe that this approach, in addition to the execution of our key value creation drivers, will help position us to succeed for the long term.

Leveraging Retail Distribution to Grow

Around the world, regulatory, economic and commercial factors are prompting investors to move away from individual mutual fund investments to more holistic and bespoke investment solutions. Our breadth of investment capabilities and our expertise in building tailored products uniquely suits us to take advantage of this industry shift. The simplicity and efficiency of our investment strategies in off-the-shelf products will continue to be important, even as we anticipate increased demand for customized options.

Our focus on investor needs enables us to provide our clients with the depth and breadth of choice they expect and promotes enduring business relationships.

For example, as a result of the collaborative product development by our distribution teams and our investment management affiliates, a large European asset manager chose Legg Mason as the sub-advisor for a new flexible bond fund earlier this year. We co-developed a multi-asset credit solution that met the client’s investment requirements, as well as its commercial needs, and tailored client servicing requirements. Using underlying strategies from Western Asset, the fund will be made available to the manager’s external distribution network, which includes 15 local banks, through its fund-of-fund platform.

Our global distribution scale helps to both diversify and grow our business.

In December 2018, Legg Mason Global Distribution worked with Royce & Associates to launch the Legg Mason Global Premier Small-Cap Equity Fund, the manager’s first product to be made available to retail investors in Japan.

This product launch builds on Royce’s 15-year track record of managing small-cap strategies for non-U.S. investors through Legg Mason. In addition, it exemplifies the collaborative type of development work we do for our clients in Japan as we continue to further penetrate four different channels in that market: retail, quasi-institutional, pension and insurance.

Capitalizing on Our Investments

As part of our effort to build a better Legg Mason, we work closely with our affiliates to capitalize on new opportunities, and our recent work with Clarion Partners, which became a Legg Mason affiliate in 2016, is a great example.

We collaborated with and supported Clarion with its May 2019 acquisition of a majority stake in Gramercy Europe, a real estate manager specializing in pan-European logistics and industrial assets. Gramercy is a strong strategic addition to Clarion, which adds to the company’s already robust $16 billion, 700-property portfolio of logistics assets. Over the long term, Clarion expects Gramercy to help expand its new European platform with new products and clients.

We are also helping Clarion reach more clients across the globe by launching a bespoke fund structure in multiple countries in Asia and Switzerland with a global private banking client. Additionally, we are developing a real estate-related product that will be available in the U.S. retail market later this year.

Just as we’ve curated a diverse slate of independent asset managers with expertise across the spectrum of equity, fixed income, liquidity and alternative investments, we’ve broadened the range of vehicles we offer from mutual funds to include separately managed accounts, cross-border funds, ETFs and more.

In 2016, we acquired a minority stake in Precidian Investments, focused on market structure and financial vehicle innovation. In May of this year, Precidian Investments’ semi-transparent ETF structure, ActiveShares®, was granted exemptive relief by the U.S. Securities and Exchange Commission (SEC).

Following approval for listing on a national exchange, investors will for the first time be able to access actively managed ETFs that are not required to disclose holdings on a daily basis but trade and operate similar to any other ETF. In effect, Precidian’s solution provides a 2019 update to a 1940 Act structure while maintaining appropriate investor protections.

Precidian is seeing very strong interest in this methodology from an impressive array of asset managers and companies that have already licensed this technology, representing approximately 24% of the addressable active equity mutual fund market captured by their strategies.

ClearBridge plans to offer its first active ETF utilizing the ActiveShares methodology later this year, subject to SEC and exchange listing approval.

Another opportunity in Asia — and a great example of how we are extending the scope of distribution — involves our investment in new digital distribution technologies. In June 2018, we announced a minority investment in Quantifeed Holdings Limited, a leading provider of digital wealth management solutions.

Quantifeed is attracting interest from banks, insurers and advisors in Australia, Japan and China, as well as other areas in the Asia Pacific region where our clients are looking for differentiated customer experiences that can keep pace with ever-changing consumer expectations. One financial institution in particular plans to utilize the platform to offer its customers an income investing model developed by QS Investors and may add other affiliates as fulfillment managers over time.

Whether investment strategy, product and vehicle options or distribution access, we are capitalizing on our investments to meet evolving investor needs by expanding client choice.

Identifying Efficiencies and Thoughtfully Allocating Capital

After more than 20 years at Legg Mason, I continually think about how to create value in a company founded 120 years ago, in 1899.

Further leveraging our centralized retail distribution capabilities and doing all we can to maximize the potential of our investments are two important elements of our strategy.

But building a better Legg Mason requires more than that — we must effectively manage costs to operate more efficiently while prudently managing our balance sheet.

We recently launched a strategic restructuring at Legg Mason’s corporate center earlier this year to improve profitability and to facilitate the investment of additional capital in our business for future growth.

We are focused on making our existing global business platform more efficient and effective and have committed to achieving $100 million or more in run-rate savings within two years.

Specifically, we expect to achieve 35% of targeted savings on a run-rate basis by the end of June 2019, and 75% or more of targeted run-rate savings by the fiscal year end next March.

We recognize that thoughtful capital allocation is critical to value creation. This year we were pleased to see S&P Global Ratings raise our ratings outlook to positive from stable, while affirming our BBB senior debt rating as we prepare to pay off $250 million in senior notes maturing in July.

Finally, we continue to return capital to our shareholders as our Board of Directors approved an 18% increase in our annual dividend to $1.60 per share. This marks our 10th straight year of dividend increases.

We will continue to thoughtfully allocate our capital as we go forward.

Embracing Change

Today, the asset management industry is facing rapidly evolving global regulatory landscapes.

Technology is reshaping every facet of our business.

Relentless competition and extreme pricing pressure show few signs of abating.

As our clients’ needs evolve, so must we.

Our mission of Investing to Improve Lives™ is at the center of how we do business, and this principle has guided our evolution from a regional equity broker-dealer to a broker dealer with a collection of exceptional asset managers to the global, pure-play asset manager we are today.

At every step along the way, we’ve confronted difficult challenges while maintaining our keen focus on delivering investment excellence to our clients in support of our mission.

Today, Legg Mason continues to embrace change and the opportunity it presents.

We welcome Trian Partners’ return as a significant shareholder and the addition of Nelson Peltz and Ed Garden to our Board of Directors, and we look forward to working with them to increase the value of Legg Mason to our clients and for our shareholders.

Going forward, we will continue to challenge ourselves to be more efficient and effective through innovation. We will continue to collaborate in more, new and different ways. And, we will continue to allocate resources to those areas that will enable us to differentiate ourselves in the eyes of our clients.

Each of these commitments is critical as we seek to build a better Legg Mason for our clients and our shareholders.

My best to you always,

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Joseph A. Sullivan
Chairman & Chief Executive Officer

Affiliates

Independent Investment Expertise

Legg Mason’s nine investment affiliates have investment autonomy, an independent perspective and specialized expertise across asset classes and geographies. With this model, clients benefit from access to a broad spectrum of powerful, award-winning financial solutions across the equity, fixed-income and alternative asset classes. Investing with Legg Mason gives our clients the confidence of dealing with a leading asset manager while, at the same time, providing them with the specialized focus of a boutique investor.

Affiliate Details

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Acting with conviction and discipline, Brandywine Global looks beyond short-term, conventional thinking to rigorously pursue long-term value across differentiated fixed income, equity and alternative solutions.

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Clarion Partners has been a leading pure-play real estate investment manager since 1982. Headquartered in New York, the firm maintains offices across the U.S. and in Europe, managing a broad range of real estate strategies across the risk/return spectrum for global investors.

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With a legacy dating back over 50 years, ClearBridge Investments is a leading global equity manager committed to delivering differentiated long-term results through authentic active management.

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EnTrust Global is one of the world’s largest alternative solutions providers. With deep industry knowledge, expertise, scale and resources, the firm manages alternative strategies (through customized portfolios, co-investments, real asset investments and established funds) with comprehensive risk management, rigorous due diligence and a diversified selection of investment partners.

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Martin Currie builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships.

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QS Investors is a quantitative asset manager that provides multi-asset class and global equity solutions. Their approach unites intellectual and academic precision with the power of data and technology in their quest to elevate the certainty of outcomes they deliver.

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RARE is a specialized investment manager focused exclusively on global listed infrastructure. Established in 2006, RARE offers expertise across the infrastructure spectrum and aims to identify and invest in high-quality listed infrastructure assets with the goal of delivering strong absolute returns over an investment cycle.

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Royce & Associates specializes in small-cap investing, managing both U.S. and international portfolios for individual investors, financial advisors and institutions. The firm is generally regarded as a pioneer in small-cap investing and has focused on this distinctive asset class for more than 40 years, leading to unparalleled domain knowledge of the smaller-company investment universe.

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ESG Investing

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Committed to Responsible Investing

ESG factors are increasingly recognized by investors as being not only important to aligning investment decisions with core values, but also in identifying quality companies. By examining ESG practices alongside financial factors as part of the investment process, we can form a more holistic understanding of the ways businesses impact the world around us and potentially provide superior client outcomes over the long term.

ESG investment principles can be applied across any asset class. In public equities, our affiliates promote best practices and vote in favor of proposals around matters such as better board governance, carbon emissions and water consumption. When meeting with sovereign bond issuers, our affiliates make ESG-related initiatives a focal point, looking beyond social and governance concerns to address the impact of environmental changes when appropriate. And when looking at commercial real estate, we consider the property’s carbon footprint and how green energy is leveraged.

In short, our affiliates engage with companies to drive improvements — a natural extension of our commitment to active investing. As of March 31, 2019, approximately $298 billion of our long-term AUM is in investment strategies that examine ESG factors.

Our shared legacy in ESG investing began when ClearBridge Investments launched a dedicated program in 1987. Today, all nine affiliates have signed the United Nations-supported Principles for Responsible Investment (PRI), joining more than 2,000 organizations globally that have also publicly demonstrated their commitment to this important issue.

Leadership

Executive Committee

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Joseph A. Sullivan Chairman and Chief Executive Officer

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Frances L. Cashman Head of Global Marketing and Communications

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Thomas K. Hoops Head of Business Development

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Terence A. Johnson Head of Global Distribution

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John D. Kenney Global Head of Affiliate Strategic Initiatives

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Patricia Lattin Chief Human Resources Officer

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Thomas C. Merchant General Counsel

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Peter H. Nachtwey Chief Financial Officer

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Ursula A. Schliessler Chief Administrative Officer

Board of Directors

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Robert E. Angelica Private Investor; Former Chairman and CEO, AT&T Investment Management Corporation (Chairman of Risk Committee)

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Carol Anthony (“John”) Davidson Private Investor; Former Controller and Chief Accounting Officer, Tyco International, Ltd.

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Ed P. Garden Chief Investment Officer and Founding Partner of Trian Fund Management, L.P.

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Michelle J. Goldberg Partner, Ignition Partners

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Barry W. Huff Former Vice Chairman, Deloitte (Chairman of Audit Committee)

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John V. Murphy Former CEO, OppenheimerFunds Inc.
(Lead Independent Director & Chairman of Compensation Committee)

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Nelson Peltz Chief Executive and Founding Partner of Trian Fund Management, L.P.

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Alison A. Quirk Senior Advisor and Consultant;
Former Global Human Resources Executive,
State Street Corporation

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W. Allen Reed Private Investor; Former CEO,
GM Asset Management Corporation
(Chairman of Finance Committee)

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Margaret Milner Richardson Private Consultant and Investor;
Former U.S. Commissioner of Internal Revenue

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Kurt L. Schmoke President, University of Baltimore; Former Mayor, City of Baltimore
(Chairman of Nominating & Corporate Governance Committee)

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Joseph A. Sullivan Chairman and Chief Executive Officer, Legg Mason, Inc.