| Fair Values of Assets and Liabilities |
3. Fair Values of Assets and Liabilities
The disclosures below include details of Legg Mason's assets and liabilities that are measured at fair value, excluding the assets and liabilities of CIVs. See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.
The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs: | | | | | | | | | | | | | | | | | | | | As of December 31, 2012 | | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total | Assets: | | | | | | | | | Cash equivalents(1): | | | | | | | | | Money market funds | | $ | 513,113 |
| | $ | — |
| | $ | — |
| | $ | 513,113 |
| Time deposits and other | | — |
| | 124,978 |
| | — |
| | 124,978 |
| Total cash equivalents | | 513,113 |
| | 124,978 |
| | — |
| | 638,091 |
| Current investments: | | |
| | |
| | |
| | |
| Trading investments relating to long-term incentive compensation plans(2) | | 100,396 |
| | — |
| | — |
| | 100,396 |
| Trading proprietary fund products and other investments(3) | | 104,261 |
| | 102,680 |
| | — |
| | 206,941 |
| Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5) | | 12,685 |
| | 26,294 |
| | — |
| | 38,979 |
| Total current investments | | 217,342 |
| | 128,974 |
| | — |
| | 346,316 |
| Available-for-sale investment securities(6) | | 2,031 |
| | 10,367 |
| | 12 |
| | 12,410 |
| Investments in partnerships, LLCs and other(6) | | 986 |
| | 2,696 |
| | 27,464 |
| | 31,146 |
| Equity method investments in partnerships and LLCs(4)(6) | | 1,361 |
| | — |
| | 63,236 |
| | 64,597 |
| Derivative assets: | | | | | |
|
| | |
| Currency and market hedges | | 317 |
| | — |
| | — |
| | 317 |
| Other investments(6) | | — |
| | — |
| | 107 |
| | 107 |
| | | $ | 735,150 |
| | $ | 267,015 |
| | $ | 90,819 |
| | $ | 1,092,984 |
| Liabilities: | | | | | | | | | Derivative liabilities: | | | | | | | | | Currency and market hedges | | $ | (744 | ) | | $ | — |
| | $ | — |
| | $ | (744 | ) |
| | | | | | | | | | | | | | | | | | | | As of March 31, 2012 | | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Total | Assets: | | | | | | | | | Cash equivalents(1): | | | | | | | | | Money market funds | | $ | 893,738 |
| | $ | — |
| | $ | — |
| | $ | 893,738 |
| Time deposits | | — |
| | 88,289 |
| | — |
| | 88,289 |
| Total cash equivalents | | 893,738 |
| | 88,289 |
| | — |
| | 982,027 |
| Current investments: | | |
| | |
| | |
| | |
| Trading investments relating to long-term incentive compensation plans(2) | | 111,257 |
| | — |
| | — |
| | 111,257 |
| Trading proprietary fund products and other investments(3) | | 143,002 |
| | 79,583 |
| | — |
| | 222,585 |
| Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5) | | 11,565 |
| | 54,934 |
| | 11,778 |
| | 78,277 |
| Total current investments | | 265,824 |
| | 134,517 |
| | 11,778 |
| | 412,119 |
| Available-for-sale investment securities(6) | | 2,091 |
| | 9,810 |
| | 12 |
| | 11,913 |
| Investments in partnerships, LLCs and other(6) | | 851 |
| | 5,351 |
| | 28,763 |
| | 34,965 |
| Equity method investments in partnerships and LLCs(4)(6) | | 1,415 |
| | 1,348 |
| | 166,438 |
| | 169,201 |
| Derivative assets: | | | | | | | | |
| Currency and market hedges | | 84 |
| | — |
| | — |
| | 84 |
| Other investments(6) | | — |
| | — |
| | 112 |
| | 112 |
| | | $ | 1,164,003 |
| | $ | 239,315 |
| | $ | 207,103 |
| | $ | 1,610,421 |
| Liabilities: | | |
| | |
| | |
| | |
| Derivative liabilities: | | |
| | |
| | |
| | |
| Currency and market hedges | | $ | (886 | ) | | $ | — |
| | $ | — |
| | $ | (886 | ) |
| | (1) | Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value ("NAV") and are classified as Level 1. Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between the purchase of the instrument and its expected realization, and are classified as Level 2. |
| | (2) | Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability. |
| | (3) | Trading proprietary fund products and other investments primarily represent mutual funds that are invested approximately 47% and 53% in equity and debt securities as of December 31, 2012, respectively, and were invested approximately 52% and 48% in equity and debt securities as of March 31, 2012, respectively. |
| | (4) | Substantially all of Legg Mason's equity method investments are investment companies which record their underlying investments at fair value. Fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee. |
| | (5) | Includes investments under the equity method (which approximates fair value) relating to long-term incentive compensation plans of $26,294 and $54,934 as of December 31, 2012 and March 31, 2012, respectively, and proprietary fund products and other investments of $12,685 and $23,343 as of December 31, 2012 and March 31, 2012, respectively, which are classified as Investment securities on the Consolidated Balance Sheets. |
| | (6) | Amounts are included in Other non-current assets on the Consolidated Balance Sheets for each of the periods presented. |
Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the equity method, the cost method, or NAV practical expedient, such that measurement uncertainty has little relevance. The changes in financial assets measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2012 and 2011, are presented in the tables below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Value as of September 30, 2012 | | Purchases | | Sales | | Redemptions/Settlements/ Other | | Transfers Out | | Realized and unrealized gains/(losses), net | | Value as of December 31, 2012 | Assets: | | | | | | | | | | | | | | | Equity method investments in proprietary fund products | | $ | 11,705 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (11,705 | ) | | $ | — |
| | $ | — |
| Investments in partnerships, LLCs and other | | 28,041 |
| | — |
| | (182 | ) | | (46 | ) | | — |
| | (349 | ) | | 27,464 |
| Equity method investments in partnerships and LLCs | | 129,294 |
| | 911 |
| | (1,183 | ) | | (64,513 | ) | | — |
| | (1,273 | ) | | 63,236 |
| Other investments | | 131 |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | 119 |
| | | $ | 169,171 |
| | $ | 911 |
| | $ | (1,365 | ) | | $ | (64,559 | ) | | $ | (11,705 | ) | | $ | (1,634 | ) | | $ | 90,819 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Value as of September 30, 2011 | | Purchases | | Sales | | Redemptions/Settlements/ Other | | Transfers | | Realized and unrealized gains/(losses), net | | Value as of December 31, 2011 | Assets: | | | | | | | | | | | | | | | Trading proprietary fund products and other investments | | $ | 179 |
| | $ | — |
| | $ | (165 | ) | | $ | — |
| | $ | — |
| | $ | (14 | ) | | $ | — |
| Equity method investments in proprietary fund products | | 11,605 |
| | — |
| | — |
| | — |
| | — |
| | (545 | ) | | 11,060 |
| Investments in partnerships, LLCs and other | | 28,469 |
| | — |
| | — |
| | (10 | ) | | — |
| | (219 | ) | | 28,240 |
| Equity method investments in partnerships and LLCs | | 160,662 |
| | 660 |
| | (1,869 | ) | | (1,370 | ) | | — |
| | (7,781 | ) | | 150,302 |
| Other investments | | 133 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 133 |
| | | $ | 201,048 |
| | $ | 660 |
| | $ | (2,034 | ) | | $ | (1,380 | ) | | $ | — |
| | $ | (8,559 | ) | | $ | 189,735 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Value as of March 31, 2012 | | Purchases | | Sales | | Redemptions/ Settlements/ Other | | Transfers Out | | Realized and unrealized gains/(losses), net | | Value as of December 31, 2012 | Assets: | | | | | | | | | | | | | | | Equity method investments in proprietary fund products | | $ | 11,778 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (11,705 | ) | | $ | (73 | ) | | $ | — |
| Investments in partnerships, LLCs and other | | 28,763 |
| | — |
| | (970 | ) | | (612 | ) | | — |
| | 283 |
| | 27,464 |
| Equity method investments in partnerships and LLCs | | 166,438 |
| | 1,123 |
| | (2,025 | ) | | (116,579 | ) | | — |
| | 14,279 |
| | 63,236 |
| Other investments | | 124 |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | 119 |
| | | $ | 207,103 |
| | $ | 1,123 |
| | $ | (2,995 | ) | | $ | (117,191 | ) | | $ | (11,705 | ) | | $ | 14,484 |
| | $ | 90,819 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Value as of March 31, 2011 | | Purchases | | Sales | | Redemptions/Settlements/ Other | | Transfers | | Realized and unrealized gains/(losses), net | | Value as of December 31, 2011 | Assets: | | | | | | | | | | | | | | | Trading proprietary fund products and other investments | | $ | 11,378 |
| | $ | — |
| | $ | (11,906 | ) | | $ | — |
| | $ | — |
| | $ | 528 |
| | $ | — |
| Equity method investments in proprietary fund products | | 12,167 |
| | — |
| | — |
| | — |
| | — |
| | (1,107 | ) | | 11,060 |
| Investments in partnerships, LLCs and other | | 22,167 |
| | 6,932 |
| | — |
| | (119 | ) | | — |
| | (740 | ) | | 28,240 |
| Equity method investments in partnerships and LLCs | | 153,931 |
| | 26,164 |
| | (5,162 | ) | | (14,067 | ) | | — |
| | (10,564 | ) | | 150,302 |
| Other investments | | 282 |
| | — |
| | — |
| | (159 | ) | | — |
| | 10 |
| | 133 |
| | | $ | 199,925 |
| | $ | 33,096 |
| | $ | (17,068 | ) | | $ | (14,345 | ) | | $ | — |
| | $ | (11,873 | ) | | $ | 189,735 |
|
Realized and unrealized gains and losses recorded for Level 3 investments are included in Other Non-Operating Income (Expense) on the Consolidated Statements of Income (Loss). Total unrealized losses for Level 3 investments relating only to those assets still held at the reporting date were $1,632 and $8,521 for the three months ended December 31, 2012 and 2011, respectively. Total unrealized losses for Level 3 investments relating only to those assets still held at the reporting date were $4,150 and $13,940 for the nine months ended December 31, 2012 and 2011, respectively.
There were no material transfers between Level 1 and Level 2 during the three or nine months ended December 31, 2012 and 2011. As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the reporting date. The following table summarizes, as of December 31, 2012, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized: | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Determined Using NAV | | As of December 31, 2012 | Category of Investment | | Investment Strategy | | December 31, 2012 | | March 31, 2012 | | Unfunded Commitments | | Remaining Term | Funds-of-hedge funds | | Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge | | $ | 45,481 |
| (1) | $ | 51,251 |
| (2) | n/a |
| | n/a | Hedge funds | | Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge | | 24,073 |
| | 25,460 |
| | $ | 20,000 |
| | n/a | Private equity funds | | Long/short equity | | 25,591 |
| (3) | 27,927 |
| (3) | 5,218 |
| | Up to 7 years | Private fund(4) | | Fixed income, residential and commercial mortgage-backed securities | | — |
| | 89,323 |
| | n/a |
| | n/a | Other | | Various | | 2,164 |
| | 2,450 |
| | n/a |
| | Various (5) | Total | | | | $ | 97,309 |
| (6 | ) | $ | 196,411 |
| (6 | ) | $ | 25,218 |
| | |
n/a-not applicable | | (1) | 58% monthly redemption; 42% quarterly redemption, of which 38% is subject to two-year lock-up, which expires in June 2013. |
| | (2) | 63% monthly redemption; 37% quarterly redemption, of which 36% is subject to two-year lock-up, which expires in June 2013. |
(3) Liquidations are expected over the remaining term. (4) Legg Mason's investment was fully redeemed in the quarter ended December 31, 2012 upon liquidation of the fund. | | (5) | Of this balance, 3% has a remaining term of less than one year and 97% has a remaining term of 20 years. |
| | (6) | Comprised of approximately 37% and 63% of Level 2 and Level 3 assets, respectively, as of December 31, 2012 and 13% and 87% of Level 2 and Level 3 assets, respectively, as of March 31, 2012. |
There are no current plans to sell any of these investments held as of December 31, 2012. |