THE HEDGEYE EDGE
A recent speaker’s series call with a leading pension fund consultant relayed that “at funded” U.S. corporate pensions are now de-risking from equities and are shifting asset allocation into fixed income and alternatives.
The biggest exposure to institutional fixed income of the public asset managers is at Legg Mason with 71% of the company’s business within institutional mandates with the majority of that in bonds.
Separately we estimate that as the Fed starts to taper and come off of the bond curve that rates will actually decline and not increase because a reduction in quantitative easing will slow growth. This will also benefit leading bond managers.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
With 11% short interest (the second highest in the group) and the lowest ranked stock of the big 6 public asset managers (with only 3 buys in coverage by 18 analysts) even just marginally improved trends should send the stock to the lows 50 per share range.
LONG-TERM (TAIL) (the next 3 years or less)
Within this pension de-risking theme we estimate that up to $500 billion should come into leading fixed income managers and up to $1 trillion should be redeemed within core S&P 500 institutional equity mandates. If this theme materializes Legg should see a disproportionate amount of inflow versus other managers which would lead to substantial earnings power above Street estimates.
We think the company can earn $3.50 next year, 10% above Street estimates, which at an industry multiple would translate into a fair value of $60 for the stock.