MASON PAVES WAY TO HIGHER STOCK VALUE: STREET IS BUYING BROKER’S ASSET MANAGER IMAGE

At a recent meeting with stock analysts in New York, Raymond “Chip” Mason, chairman of Legg Mason Inc., touted a figure that competing brokerages are loathe to disclose:

His company earned $108 of recurring fees for every $100 of fixed costs last year, while his top competitors, according to analysts, make just $80 for every $100 of fixed costs.

Such data hint at how well his company has done at translating asset management into profits compared to Wall Street’s brokerage behemoths.

No ordinary broker, he has fashioned his firm as an asset management play and the market agrees. In early April his stock traded in a range of $59 to $62, at 20.2 times estimated 1998 earnings, in between brokerage stocks’ average price/earnings ratio of 17.8 and asset managers’ average of 25.6.

The company earned $69.8 million on $795.4 million in revenues at the end of last year, up 23% from the previous year.

The key to his success: 16 years of methodically cobbling together asset management companies around the country that cater to wealthy individuals and institutional clients, in addition to building his in-house family of funds from his Baltimore base.

Mr. Mason’s goal: to boost assets under management to $100 billion in three or four years. Assets today stand at $68.4 billion, including $7.3 billion-asset Brandywine Asset Management Inc., which he bought in January. On the retail investor front, he’s trying to build his in-house family of funds by selling them through 1,100 financial advisers in offices throughout the Mid-Atlantic.

Mr. Mason is determined to build a stream of fee-based revenues from managing money that will even out the erratic commission-driven earnings associated with the traditional brokerage business. Through acquisitions and internal growth, Mr. Mason has beefed up assets under management by nearly 700% since 1990’s figure of $8.6 billion.

“For a brokerage, they are way ahead of the curve at capturing large portions of the household balance sheet,” notes Bruce R. Brewington, a securities analyst at PLT Group, an investment banking firm in San Francisco.

Sounds like an airtight strategy, but there are a few notable gaps: Only 34% of Legg Mason’s assets under management are invested in stocks. The rest are in lower margin fixed-income funds. And high valuations of fund companies might deter Mr. Mason from making acquisitions in the near term.

And in investment banking, Mr. Mason’s scope is limited to real estate investment trusts and health care.

What’s more, at age 61, Mr. Mason says he’d like to retire soon, yet he admits he hasn’t selected a successor.

Mr. Mason’s aspirations are not limited to asset management. He’s also trying to build up a private bank-type clientele by training brokers to offer financial planning and trust services. On the commercial banking front, he’s providing mortgages, investment banking and even real estate consulting.

Companies like his — regional brokerages sandwiched between small niche players and large national franchises — are under intense pressure from the leviathans, which themselves keep growing through acquisition. He has to compete against new mega-competitors like a combined Citicorp-Travelers Group — a deal announced last week — and Merrill Lynch & Co., which purchased Mercury Asset Management, the largest money manager in Britain, last November.

Closer to home both geographically and in scale, it competes with regional brokerage Wheat First Butcher Singer of Richmond, Va., which was bought by First Union Corp. of Charlotte, N.C., and Alex. Brown & Sons Inc. in Baltimore, which was snatched up by Bankers Trust New York Corp. Such deals make Legg Mason the Mid-Atlantic’s last remaining independent regional brokerage of any significance and some think that while Mr. Mason is unlikely to sell out, it’s only a matter of time before Legg Mason succumbs to a rich suitor.

“To keep up with technology and services other companies are coming out with at a lower cost is a challenge,” says Robert Hoban, a debt analyst at Standard & Poor’s Credit Rating Service in New York.

Mr. Mason isn’t sweating bullets. He’s unlikely to sell in the immediate future. Wheat First and Alex. Brown sold out for capital to underwrite securities overseas, Mr. Mason says, but he’s not interested in taking that route. “I don’t know why a merger with a bank would help us,” he says.

Analysts agree. But they expect Mr. Mason’s grip on the company to loosen as mergers become common and shareholders turn up the heat.

in the genes

Mr. Mason takes comfort in his belief that banks are far more worried about him than the other way around. That’s why they’re so interested in acquiring regional brokerages, he says.

“You’re going to get everything through your brokerage account, so what do you need a bank for?” he asks.

Low-key and thoughtful, Mr. Mason has taken calculated yet bold steps that others doubted would work, say analysts. “Everybody thought he was crazy for what he was paying for money managers,” says Bruce McEver, president of Berkshire Capital Corp., an investment banker in New York. “Now look at him.”

Mr. Mason boasts five funds with healthy risk-adjusted return ratings of four or five stars from Morningstar Inc. Legg Mason Value Trust, a growth fund, has beaten the Standard & Poor’s 500 stock index every year for seven years.

Mr. Mason comes by his financial acumen at least partly through heredity. He began his career as a stockbroker for his uncle’s firm in Lynchburg, Va., and then set up Mason & Co. in 1962 at 26, an age, he says, when you “have no fears, and you believe everything you think of will work. The bad thing is you have no fears, and you believe everything you think of will work.”

In 1970 he merged the firm with Legg & Co., a brokerage with roots back to 1899.

Mr. Mason began buying money managers in 1982 with the purchase of Western Asset Management Co., a mainly institutional fixed-income shop in Los Angeles. The move

puzzled much of Wall Street. “Most firms just sort of looked at it and said ‘we wonder why they’re doing it,’ ” he says.

And in 1986, he pioneered funds with annual level loads, rather than relying only on front-end sales charges. “They had never seen anything like it before,” he says of the Securities and Exchange Commission. “It took forever to get out of there.”

job isn’t finished

Mr. Mason’s approach to acquisition also breaks from tradition. He meets with principals himself instead of sending underlings to investigate would-be targets.

“There’s no other chief executive in the world who would do that,” says Mr. McEver.

Indeed, Cincinnati-based Bart-lett & Co., a money manager for wealthy individuals, was impressed by Mr. Mason’s understanding of a money manager’s concerns, such as making back-office operations more efficient.

“We talked to a bunch of firms before Bartlett was acquired,” says Jim Miller, Bartlett’s chief executive, “and because of the people, we went with Legg Mason even though they had the third-highest bid.” The highest, which came from a Midwestern bank, exceeded Mason’s by 14%.

Mr. Mason acknowledges that his job isn’t finished. He has a search on for a successor. “My goal is to have this worked out over the next two years,” he says.

He’s busy but still takes time out for his beloved Baltimore Orioles. He continues his tradition of taking off on opening day of the baseball season. And with Oriole Park at Camden Yards only three and a half blocks from his office, he says: “I can go over and watch a few innings and come back.”