4. Investments and 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 September 30, 2013
	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	$	393,951		$	—	$	—		$	393,951
Time deposits and other	—			102,794		—			102,794
Total cash equivalents	393,951			102,794		—			496,745
Current investments:
Trading investments relating to long-term incentive compensation plans⁽²⁾	113,106			—		—			113,106
Trading proprietary fund products and other investments⁽³⁾	216,777			71,741		209			288,727
Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments⁽⁴⁾⁽⁵⁾	12,294			12,707		—			25,001
Total current investments	342,177			84,448		209			426,834
Available-for-sale investment securities⁽⁶⁾	2,033			9,817		12			11,862
Investments in partnerships, LLCs and other⁽⁶⁾	697			2,802		27,189			30,688
Equity method investments in partnerships and LLCs⁽⁴⁾⁽⁶⁾	—			—		63,639			63,639
Derivative assets:
Currency and market hedges	5,191			—		—			5,191
Other investments⁽⁶⁾	—			—		95			95
Total	$	744,049		$	199,861	$	91,144		$	1,035,054
Liabilities:
Contingent consideration liability	$	—		$	—	$	(23,335	)	$	(23,335	)
Derivative liabilities:
Currency and market hedges	(2,064		)	—		—			(2,064		)
Total	$	(2,064	)	$	—	$	(23,335	)	$	(25,399	)



	As of March 31, 2013
	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	$	485,776		$	—	$	—		$	485,776
Time deposits and other	—			177,471		—			177,471
Total cash equivalents	485,776			177,471		—			663,247
Current investments:
Trading investments relating to long-term incentive compensation plans⁽²⁾	86,583			—		—			86,583
Trading proprietary fund products and other investments⁽³⁾	158,846			69,064		246			228,156
Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments⁽⁴⁾⁽⁵⁾	12,600			43,741		—			56,341
Total current investments	258,029			112,805		246			371,080
Available-for-sale investment securities⁽⁶⁾	2,034			10,354		12			12,400
Investments in partnerships, LLCs and other⁽⁶⁾	761			2,620		27,762			31,143
Equity method investments in partnerships and LLCs⁽⁴⁾⁽⁶⁾	1,518			924		66,338			68,780
Derivative assets:
Currency and market hedges	1,939			—		—			1,939
Other investments⁽⁶⁾	—			—		99			99
Total	$	750,057		$	304,174	$	94,457		$	1,148,688
Liabilities:
Contingent consideration liability	$	—		$	—	$	(21,900	)	(21,900		)
Derivative liabilities:
Currency and market hedges	(781		)	—		—			(781		)
Total	$	(781	)	$	—	$	(21,900	)	$	(22,681	)

(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 58% and 42% in equity and debt securities, respectively, as of September 30, 2013, and were invested approximately 49% and 51% in equity and debt securities, respectively, as of March 31, 2013.


(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 approximate fair value) relating to long-term incentive compensation plans of $12,707 and $43,741 as of September 30, 2013 and March 31, 2013, respectively, and proprietary fund products and other investments of $12,294 and $12,600 as of September 30, 2013 and March 31, 2013, 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.

Proprietary fund products include initial cash investments made by Legg Mason to fund new investment strategies and products. The primary purpose of these "seed capital investments" is to generate an investment performance track record in a product in order to attract third-party investors. Legg Mason had investments in numerous proprietary fund products which totaled $363,187 and $304,982, as of September 30, 2013 and March 31, 2013, respectively, which are substantially comprised of investments in 46 funds and 39 funds as of September 30, 2013 and March 31, 2013, respectively, that are individually greater than $1,000 and together comprise over 90% of the seed capital investment total in each period. Legg Mason's initial investment in a new product typically represents 100% of the ownership in that product.

Investments in proprietary fund products are initially consolidated and the individual securities within the portfolio are accounted for as trading investments. Legg Mason consolidates these products as long as it holds a controlling financial interest in the product. Upon deconsolidation, which typically occurs after several years, Legg Mason accounts for its investments in proprietary fund products as equity method investments if its ownership is between 20% and 50%, or it otherwise has the ability to significantly influence the financial and operating policies of the investee. For partnerships and LLCs, where third-party investors may have less ability to influence operations, the equity method of accounting is considered if Legg Mason's ownership is greater than 3%. Changes in the fair value of proprietary fund products classified as trading or equity method investments are recognized in Other non-operating income (expense) on the Consolidated Statements of Income.

Legg Mason generally redeems its investment in proprietary fund products when the related product establishes a sufficient track record, when third-party investments in the related product are sufficient to sustain the strategy, or a decision is made to no longer pursue the strategy. The length of time Legg Mason holds a majority interest in a product varies based on a number of factors, such as market demand, market conditions and investment performance.

See Note 12 for information regarding the determination of whether investments in proprietary fund products represent variable interest entities ("VIEs").

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 discussed below, such that measurement uncertainty has little relevance.

The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended September 30, 2013 and 2012, are presented in the tables below:



	Value as of June 30, 2013			Purchases		Sales			Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Value as of September 30, 2013
Assets:
Trading proprietary fund products and other investments	$	233		$	—	$	—		$	(31	)	$	—	$	7		$	209
Investments in partnerships, LLCs and other	28,018			—		(424		)	1			—		(406		)	27,189
Equity method investments in partnerships and LLCs	63,353			2,570		(437		)	(2,116		)	—		269			63,639
Other investments	105			—		—			—			—		2			107
	$	91,709		$	2,570	$	(861	)	$	(2,146	)	$	—	$	(128	)	$	91,144
Liabilities:
Contingent consideration liability	$	(21,931	)	$	—	$	—		$	—		$	—	$	(1,404	)	$	(23,335	)



	Value as of June 30, 2012		Purchases		Sales			Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net		Value as of September 30, 2012
Assets:
Equity method investments in proprietary fund products	$	11,296	$	—	$	—		$	—		$	—	$	409	$	11,705
Investments in partnerships, LLCs and other	28,513		—		(788		)	(415		)	—		731		28,041
Equity method investments in partnerships and LLCs	160,602		122		(204		)	(45,488		)	—		14,262		129,294
Other investments	128		—		—			—			—		3		131
	$	200,539	$	122	$	(992	)	$	(45,903	)	$	—	$	15,405	$	169,171



	Value as of March 31, 2013			Purchases		Sales			Redemptions/ Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Value as of September 30, 2013
Assets:
Trading proprietary fund products and other investments	$	246		$	—	$	—		$	(44	)	$	—	$	7		$	209
Investments in partnerships, LLCs and other	27,762			800		(617		)	(164		)	—		(592		)	27,189
Equity method investments in partnerships and LLCs	66,338			2,766		(750		)	(5,688		)	—		973			63,639
Other investments	111			—		—			—			—		(4		)	107
	$	94,457		$	3,566	$	(1,367	)	$	(5,896	)	$	—	$	384		$	91,144
Liabilities:
Contingent consideration liability	$	(21,900	)	$	—	$	—		$	—		$	—	$	(1,435	)	$	(23,335	)



	Value as of March 31, 2012		Purchases		Sales			Settlements/ Other			Transfers		Realized and unrealized gains/(losses), net			Value as of September 30, 2012
Assets:
Equity method investments in proprietary fund products	$	11,778	$	—	$	—		$	—		$	—	$	(73	)	$	11,705
Investments in partnerships, LLCs and other	28,763		—		(788		)	(566		)	—		632			28,041
Equity method investments in partnerships and LLCs	166,438		212		(842		)	(52,066		)	—		15,552			129,294
Other investments	124		—		—			—			—		7			131
	$	207,103	$	212	$	(1,630	)	$	(52,632	)	$	—	$	16,118		$	169,171

Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other Non-Operating Income (Expense) on the Consolidated Statements of Income. The change in unrealized gains (losses) for Level 3 investments and liabilities still held at the reporting date was $(2,397) and $15,145 for the three months ended September 30, 2013 and 2012, respectively. The change in unrealized losses for Level 3 investments and liabilities still held at the reporting date was $3,190 and $16,429 for the six months ended September 30, 2013 and 2012, respectively.

There were no significant transfers between Level 1 and Level 2 during the three months ended September 30, 2013 and 2012.

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 respective reporting dates. The following table summarizes 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 September 30, 2013
Category of Investment	Investment Strategy	September 30, 2013				March 31, 2013				Unfunded Commitments		Remaining Term
Funds-of-hedge funds	Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge	$	34,165	(1	)	$	38,811	(1	)	n/a		n/a
Hedge funds	Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge	20,496				24,716				20,000		n/a
Private equity funds	Long/short equity	23,437		(2	)	23,763		(2	)	5,043		Up to 7 years
Other	Various	2,412				2,408				n/a		Various⁽³⁾
Total		$	80,510	(4	)	$	89,698	(4	)	$	25,043

n/a-not applicable


(1)	40% monthly redemption and 60% quarterly redemption as of September 30, 2013. 49% monthly redemption and 51% quarterly redemption as of March 31, 2013. Any remaining lock-up expired in June 2013.

(2) Liquidations are expected over the remaining term.


(3)	Of this balance, 5% has a remaining term of less than one year and 95% has a remaining term of 20 years.


(4)	Comprised of approximately 30% and 70% of Level 2 and Level 3 assets, respectively, as of September 30, 2013 and 32% and 68% of Level 2 and Level 3 assets, respectively, as of March 31, 2013.

There are no current plans to sell any of these investments held as of September 30, 2013.