Legg Mason's fiscal year 2016 was a year of significant accomplishment, as we continue to strategically build a better Legg Mason.
We believe that the actions we have undertaken this year, and over the past few years, will benefit Legg Mason's clients, shareholders, communities and employees, as we accept the challenge to evolve and change as our clients expect.
With the addition of RARE Infrastructure and our minority investment in Precidian Investments and the announcement of two additional transactions in Clarion Partners and the combination of EnTrust Capital with Permal, we made substantive progress executing against our strategy of providing global investors with more diversified choices of investment strategies, products, vehicles and access.
While we are pleased with this essential repositioning during a time of meaningful industry pressure and change, we clearly recognize the need now to convert the opportunity we have created into sustained growth: we need to deliver the results that you and our other stakeholders expect.
Executing our long-term strategy in fiscal year 2016 was challenging, as we navigated our legacy business through short-term market turbulence. Market volatility, concerns over global growth and interest rates, as well as geopolitical instability pressured client flows, our AUM, revenues and operating margins. This difficult environment certainly reinforced our ongoing commitment to carefully calibrate our costs in line with revenues.
And while we are disappointed with our financial results for the fiscal year, we are pleased to have been able to continue returning capital to shareholders through our share repurchase program and our dividend, a 10% increase in which we just announced.
Ours is an industry that is in the early stages of significant disruption. This disruption means that change, for Legg Mason and for the industry, is not an option, but a necessity.
The greatest risk we face is the implication of doing nothing and perpetuating the status quo.
We are not willing to take that risk.
Asset management industry at an inflection point
Powerful forces are driving significant industry change.
The globalization of markets, persistently anemic global growth and low interest rates (and expectations for more of the same!), massive shifts in demographics, significant increases in regulation across jurisdictions, and the relentless push from innovation and technology all serve to alter the landscape of our industry.
Being "global," in mind and capability, has never been more important. Investing solely in one's home country neither effectively diversifies risk nor appropriately capitalizes on the opportunities that are abundant globally.
Investors need to expand their investment world, and our own research indicates a willingness on their part to do so. Exposure to global and unconstrained fixed income and equity, real estate, infrastructure, and alternatives, on the one hand, as well as volatility-mitigation strategies on the other, can help investors achieve their desired investment goals.
We are now well-positioned to offer this.
But investing globally naturally results in more complexity for investors and requires more from the industry. Asset managers who can simultaneously offer global investment capabilities, while providing local client engagement, will be best positioned for success.
We are among them.
New investors in the emerging middle class around the world have very different investment requirements than those in mature economies who have invested for decades. These demographically diverging investment needs, driven in particular by retirement regimes that are in a dramatic phase of evolution, are creating a massive opportunity for those firms with scale, a broad investment capability and a global footprint.
We have established just such a footprint.
Regulation across the globe is increasing significantly. While designed to protect investors and rebuild confidence in the integrity of markets, this dramatic expansion of regulatory reach and compliance requirements clearly adds to the industry complexity. The costs associated with regulatory compliance requirements across multiple geographic regimes necessitates that firms be of an appropriate size and scale.
Embracing regulatory client protection is entirely consistent with our core values and mission.
Lastly, innovation, driven significantly by technology advancement, has created the ability to serve investors in more and better ways. Be it the ongoing evolution of ETFs, the extension of classic active investment capabilities into "next generation" products, or as technology-enabled advice gains acceptance, innovation is transforming the investment opportunities for our clients and redefining consumer expectations for capabilities, access and service.
Innovation is central to our corporate DNA.
Clients want and expect greater choice in all aspects of their lives, and that is no less true in our business.
Higher client expectations and shifting investor preferences, combined with the profound forces of change noted above, create both challenges and opportunities for our industry.
Consequently, we expect to see more industry combinations and consolidations, and there will clearly be fewer winners in this increasingly competitive market.
We intend to be one of them.
With our eyes focused on the future, Legg Mason has diversified our investment capabilities and our product and vehicle options over the past three years, efforts that significantly intensified this year. And while we expect to continue to add unique and differentiated investment capabilities, products and vehicles, we also expect to diversify the access to this expanded lineup of offerings through multiple distribution portals.
We believe that thoughtful diversification expands client choice and drives growth.
That growth, in turn, should benefit the investors and other stakeholders in Legg Mason.
New investment capabilities
With the evolution of the industry in mind, we continued this past year to pursue an aggressive strategic M&A agenda to reposition Legg Mason.
We added investment capability in equity liquid alternatives with the October 2015 acquisition of a 75% majority equity interest in RARE Infrastructure, a pioneer in global listedinfrastructure investing. We see significant long-term growth ahead for infrastructure investing. We are encouraged by the interest this relatively new asset class has drawn and in our ability to bring RARE to market globally.
In April 2016, we purchased an 82% majority equity interest in Clarion Partners, a leading real estate investment management firm, concluding a long search to add world class real estate investing to our broader capabilities. With diverse offerings in private equity real estate, Clarion Partners has a long history of delivering attractive risk- adjusted returns for clients, and it will help to diversify and stabilize our revenue and earnings stream. And again, we believe that we can bring Clarion Partners' investment capabilities to clients in the retail market to address their needs for income and growth in a broader way.
The transaction to combine EnTrust Capital with The Permal Group to create one of the largest global alternative investment managers closed in May 2016, with Legg Mason retaining a 65% stake in the newly-combined firm.
The new EnTrustPermal invests with over 180 individual hedge fund managers, on behalf of 730 institutional investors around the world, while also managing several direct lending, opportunistic, co-investment and other differentiated standalone strategies. EnTrustPermal is one of the most highly diversified global players in the alternatives and hedge fund space, and we are excited about their growth prospects.
And finally, we continued to commercialize new and existing strategies with Martin Currie and QS Investors, the two firms that we acquired in the previous fiscal year.
Our new acquisitions have been structured with a management-retained component of affiliate-level equity to maximize alignment with Legg Mason. In pursuit of similar alignment with our legacy affiliates, we have continued to introduce new Management Equity Plans, including one for Royce & Associates this year.
To fund our acquisitions and investments, we are pleased to have efficiently deployed a combination of cash and debt, successfully issuing $700 million in public bonds during the year, at what remain historically low rates.
New products and vehicles
In December 2015, we launched our first exchange-traded fund (ETF) vehicles with four smart beta strategies managed by QS Investors, that leverage long institutional track records and should deliver attractive, diversified results within a systematic style of investing. The initial performance of these ETFs, launched in a very volatile market, has been strong.
We're also pleased with a minority interest investment we made in Precidian Investments in January 2016, bringing a product innovation capability to help us create more diverse investment vehicle choices for investors.
The team at Precidian specializes in solving market structure issues for ETFs, which is consistent with our intention, not just to enter the ETF market, but to be an innovation leader.
We expect to work with our affiliates to launch additional differentiated product offerings in the ETF wrapper throughout the coming year.
We have also continued to reshape and evolve our product lineup, with one-third of our strategies now classified as next generation active, including outcome-oriented, volatility-managed, multi-asset class, unconstrained and alternative products managed by our investment affiliates.
Increased client access
During an extremely difficult period for the retail distribution business, our global retail platform had nearly flat net sales for the fiscal year on gross sales of just over $70 billion. In the midst of such a challenging market, we're pleased to have expanded our market share in the U.S. retail, insurance and RIA channels, and in our-cross border fund ranges across several geographies.
But this performance reinforces the importance of continuing to diversify our retail business by investment product, asset class, channel and geography, with both new and existing affiliates, positioning us to win long-term and over market cycles.
We also announced a modest investment in iVEZT to expand retirement product access to employees of small businesses, and we continue to pursue creating more choice by exploring opportunities in digital distribution to provide our partners with technology-enabled advice.
Guided by a consequential mission
We aspire to be a great global company that, through investing, meaningfully impacts the lives of all the constituents with whom we interact.
And we believe that building a better, more consequential company for our clients is the foundation for building the best possible company for each of our stakeholders.
Investing to Improve LivesSM is our mission, our internal compass, reinforced by a culture of doing the right thing, always. This culture has been protected, passionately and without compromise, throughout many challenging market environments in our history, and it remains so today.
We recognize that this mission is meaningful only if we deliver on our strategy, and we embrace the accountability necessary to succeed.
Designed for What You Imagine
Legg Mason has always been a company designed with our clients in mind, and that client-focused creation continues today. Providing choices today that weave the fabric of solutions for our clients' future needs, we are laying the foundation for a successful and enduring asset management firm.
Thoughtfully and intentionally constructed, it is incumbent on us to deliver what our clients want, and how they want it, in order to help them achieve what they imagine.
Our design combines nine independent investment managers, with a diversity of perspectives and specialized expertise across asset classes, with a centralized global distribution and shared services platform. Our investment strategies may be utilized as single investment threads or woven together, to deliver the investment tapestry imagined by our clients.
Our design provides our investment capabilities through varied products and vehicles and via multiple points of access: the choices necessary to satisfy changing client preferences, and which are necessary for growth.
We believe deeply that by providing investors with more choice, we can become their firm of choice, and in the process, create greater long-term shareholder value.
Choice for our clients,
Growth for our shareholders, and
Investing to improve the lives of our many constituents.
We are designed for what you imagine.
We thank you for joining us on this journey, and we look forward to continuing to earn your trust and confidence, every day.
Joseph A. Sullivan,
Chairman & Chief Executive Officer