- Brandywine Global benefited from these market dynamics, winning global fixed-income mandates.
- The Permal Group continued to perform well, benefiting from increased interest in non-US and alternative investment products, especially fixed-income solutions.

Equity flows were off $9.6 billion, because the firm had a loss of a 529 plan which had been announced.

- In addition, there was a realignment of a major fund that was going to a much broader platform resulting in equity losses of $2 billion and $1 billion in debt.
- However, there are some signs of improvement and the market’s increased bias to growth should help benefit the company as it now has a lot of growth-oriented managers.
- In the UK, long-term fixed income has now shown marked improvement over the past quarters. The appetite for investments internationally remains high. However, non-U.S. investors sold a record amount of U.S. assets during the month of August. Assets under management clients domiciled outside of the U.S. continued to grow.

The board authorized up to 5 million shares in July and the firm repurchased 1.1 million shares in line with the goal of creating shareholder value

- A four-person committee of the board has been established to search for a CEO and it is utilizing the assistance of an executive search firm. No deadline has been announced as yet, but progress has been made.
- The 529 plan loss in the retirement plan restructuring cost the firm $3 billion in equity AUM rather than $2 million as previously reported, with the $1 billion difference emanating from the fixed income space which would be in both the long-term fixed income bucket as well as the managed account area.
- In the revenue stream performance fees were identical to last year, and included an annual fee, which will be realised in 2008. There are eight subsidiaries that have products with some level of performance fee and all were lower.

Macroeconomic Overview:

The markets remained shaky as the global credit issues were large and constant. The Fed cut the discount rate and the Fed funds rate and projections are that there will be more to come. The spreads have tightened in most sectors.

The ABCP (asset-backed commercial paper) market has improved though volatility in the equity markets remains. The DOW has fluctuated plus or minus 1% for 23 out of the 63 days in the quarter.

Business Developments:

- Investment managers continue to extend their strategies into new product lines, and also to develop alpha-oriented and alternative offerings, in order to meet clients’ increasing demand for new sources of performance that work in complex market conditions and provide long-term growth opportunities.
- Royce & Associates expanded its leading suite of small cap equity products to include a global small cap offering, meeting investors’ desire for non-U.S. strategies, while Western Asset Management’s pipeline looks strong, with 30% in non-US product.
- The Permal Group continued to have growth in assets from client flows and market appreciation and has seen strong demand in its global fixed-income alternative strategies.

Batterymarch Financial Management is launching a 130/30 long-short strategy fund. A market neutral strategy is being developed by the emerging markets equity manager, Legg Mason International Equities.

- Finally, ClearBridge Advisors has also created a 130/30 strategy that utilizes its fundamental research approach.
- In the domestic retail market, the firm is pursuing strong capability in new, expanded distribution among National Broker Dealers (NBD) and independent advisors, along with the existing institutional channels.
- Since January, there are over 4,100 new NBD financial advisors who are using the firm to manage money for their clients and it is also doing business with over 3,800 new independent advisors.
- Outside the U.S., business in markets as diverse as Japan and Poland continues to experience AUM growth.
- Japan business has grown its assets by 24% and was recently rated number one in Overall Assessment and Service & Support by a major Japanese rating agency.

Key questions and answers from the second quarter earnings call conducted by Legg Mason Inc. on October 24, 2007.

Tom Gallagher (Credit Suisse): Despite the fact that long credit trade has not worked out in the short term, the credit story is still resonating clients on the sales side?

Chip Mason: Western has done their usual good job of getting in front of their clients, reminding them how they run money and what they have done. All of their long-term portfolios remain intact.

Tom Gallagher (Credit Suisse): Can you comment on the change in the distribution relationship with Citi?

Chip Mason: Smith Barney was anxious to make sure they had some form of an exclusive arrangement with the Value Trust. The parameters of that were widened giving us a broader ability to distribute the product on a much wider base. The retention issue is a Smith Barney issue, not ours. It does open up new areas for us to sell the funds, though.

William Katz (Buckingham Research): What is happening in the liquidity business?

Chip Mason: This is a newer business to us, and we were a tiny player up until the Citi acquisition. We are still on learning curves on this. We are not out broadly on a marketing basis in the business other than through the Citibank channel.

William Katz (Buckingham Research): On the institutional business, what is the pipeline like?