Legg Mason Fund Hits 26-Year Low

Bill Miller runs the Legg Mason Value Trust mutual fund.
Bill Miller runs the Legg Mason Value Trust mutual fund. (Serge Henri - Bloomberg News)
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By Sree Vidya Bhaktavatsalam
Bloomberg News
Sunday, April 6, 2008

Bill Miller's Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago on losses from longtime holdings such as Sprint Nextel and newer bets including Bear Stearns.

The $12.2 billion fund fell 20 percent, trailing all but four of 660 rivals that buy stocks of companies with market values of more than $15 billion, according to data from Morningstar in Chicago. Last year, Miller lost 6.7 percent, including dividends, compared with the average 6.2 percent gain among similar mutual funds.

The manager, whose 15-year record of beating the Standard & Poor's 500-stock index came to an end in 2006, is lagging behind the U.S. benchmark for the third straight year. It's his longest slump since he joined Baltimore-based Legg Mason in 1981.

"It's been an absolutely hideous quarter, but you cannot write him out," Russel Kinnel, director of fund research at Morningstar, said in an interview. "He's had uncanny luck in previous years where everything worked out, but this time he's been where you just didn't want to be."

Assets in Legg Mason Value Trust plunged 40 percent in the past year because of the losses and investor redemptions. Legg Mason's net income in the third quarter ended Dec. 31 fell 11 percent in part because of $10.6 billion in net withdrawals from stock funds including Value Trust.

Miller, 58, made his name by finding out-of-favor companies such as General Motors and Eastman Kodak, holding them for years and ringing up gains when other investors discovered them too. He also owns fewer stocks than competitors, making his strategy riskier. Value Trust had 51 stocks as of Dec. 31, about one-fourth the number held in similarly managed funds, Morningstar data show.

Miller declined to comment. In a Feb. 10 letter to fund shareholders, he said that "the market abounds with good value."

"Those values may get even better if the markets get more gloomy, but they are good enough now for us to be fully invested," Miller wrote. "Patient long-term investors (including the fund) should be well rewarded for putting money to work right in here."

This year, just two of Miller's top 10 picks have had positive returns. One is J.P. Morgan Chase, the third-largest U.S. bank by assets, which has gained 5.9 percent. The other is Yahoo, the Internet-search company whose shares are up 20 percent in 2008 after a $44.6 billion unsolicited bid from Microsoft.

Sprint, his seventh-largest holding, has dropped 50 percent as the mobile phone company loses customers to rivals and cuts prices to lure them back. Bear Stearns, which accounted for 1.2 percent of fund assets, has plunged 88 percent. The fifth-largest U.S. securities firm agreed last month to be acquired by J.P. Morgan for $10 a share, down from a peak of $158.39 a year ago, to avert bankruptcy.

Miller put about 21 percent of assets in financial and housing-related stocks as of Dec. 31, two groups that have been pummeled by the worst real estate slump since the 1930s. Communications and technology stocks, which accounted for about one-third of assets, have tumbled on concerns that earnings growth will slow.

Value Trust has a three-year Sharpe ratio of -0.51, Legg Mason said, compared with an average of 0.16 for peers as calculated by Morningstar. A higher Sharpe ratio means better risk-adjusted returns.

Miller loaded up on financials last year after saying that the sell-off among banks and brokers made them the cheapest since 1990. Miller had 19 percent of assets in financial stocks such as Bear Stearns, Citigroup and Merrill Lynch as of December, up from about 15 percent a year earlier.

Citigroup and Merrill Lynch, both based in New York, have fallen 18 percent and 16 percent, respectively. Those losses have been partially offset by J.P. Morgan.

Amazon.com, the fund's biggest holding, has fallen 17 percent in 2008 after more than doubling in value last year. Miller started buying shares of Amazon, the biggest Internet retailer, in 1999. He pared his stake to 6.9 percent of assets as of year-end from 8.8 percent in September.

Miller's housing-related stocks, which he started buying about two years ago, include lender Countrywide Financial and home builders Pulte Homes and KB Home. The fund held 1.4 percent of its assets in Countrywide at the end of December, 0.8 percent in Centex and 0.5 percent in KB Home.

The fund manager has stayed out of energy stocks since a rally began in 2003, a decision Miller has rued as oil and natural resources shares surged during the past four years. Miller added his first energy holdings last year with the purchase of Exxon Mobil shares. Exxon Mobil, the world's biggest oil company, accounts for 0.3 percent of the fund's assets.


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