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FUNDWATCH
Miller's streak hits a rough patch
Flagship Legg Mason fund trails both S&P 500 and peers
By Jonathan Burton, MarketWatch
Last Update: 7:55 PM ET Jul 13, 2006

SAN FRANCISCO (MarketWatch) -- Baseball has its all-star break, and so apparently does mutual-fund manager Bill Miller.
The all-star skipper of Legg Mason Value Trust (LMVTX : Legg Mason Value Tr;Prm
News , chart, profile, more
Last: 63.01-0.99-1.55%

6:03pm 07/13/2006

LMVTX63.01, -0.99, -1.5%) is stuck in a deep slump. His $19 billion portfolio, the flagship of Legg Mason Inc.'s (LM : Legg Mason, Inc.
News , chart, profile, more
Last: 94.99-0.44-0.46%

8:10pm 07/13/2006

LM94.99, -0.44, -0.5%) lineup, is down 6.8% for the year through Wednesday, according to investment researcher Morningstar Inc.
This dim showing puts the fund in last place against about 650 large-cap blend rivals that Morningstar tracks and lags the benchmark Standard & Poor's 500 Index (SPX : S&P 500 Index
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Last: 1,242.29-16.31-1.30%

SPX1,242.29, -16.31, -1.3%) by almost 9 percentage points. If Miller intends for his fund to top the S&P 500 for a 16th consecutive year, he's going to need some late-inning hits. But the market lately isn't tossing any good pitches.

"In the past, it's been a case where if one part of the portfolio was struggling, his picks in other areas were more than making up for that disappointment," said Dan McNeela, Morningstar's associate director of fund analysis. Now, however, "so many of the bigger bets in the portfolio are down at the same time."

Every active fund manager is trying to beat a benchmark. Some choose to replicate an underlying index and trade opportunistically around it. In contrast, Miller long ago determined that to outdo the S&P 500 his fund should differ substantially from it.

Accordingly, Value Trust had large stakes -- totaling around 40% of assets -- in Internet retailers, health-care providers and home builders at the end of March, the most recently published portfolio, and nothing in the oil, energy and commodity stocks that have led the market.
Those bets in technology, housing and health care are under pressure. For example, top fund holding eBay Inc. (EBAY : ebay inc com
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Last: 26.58-0.64-2.35%

EBAY26.58, -0.64, -2.4%) is down 37% so far this year; Amazon.com Inc. (AMZN : Amazon.com, Inc.
AMZN33.73, -0.90, -2.6%) is off 27%, and Yahoo (YHOO : Yahoo! Inc.
Last: 32.23-1.15-3.45% YHOO32.23, -1.15, -3.4%) has lost 15%. Meanwhile, home builder Centex Corp. (CTX : Centex Corporation CTX47.37, -0.49, -1.0%) shed 33%, and health-care giant UnitedHealth Group Inc. (UNH : unitedhealth group inc com UNH48.01, -0.05, -0.1%) declined 23%.

Value Trust's positions as of June 30 will be disclosed within a few weeks, but the concentrated roster is unlikely to have changed much. Miller isn't one to trade frequently nor does he jump aboard the market's latest bandwagon. His report to fund shareholders in late April bashed the commodity sector and embraced stalwarts such as banking giant Citigroup Inc.

"You can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years," Miller wrote. "Given the choice of buying Commodities with a capital C, or buying capital C -- Citigroup -- at current prices, I'll take the latter." Miller, through a Legg Mason spokesman, declined to comment for this article.

Following the leaders
Miller's iconoclastic style and ventures into riskier market sectors certainly don't hold universal appeal, but the fund manager's patience with his stock picks and his avoidance of the latest trends offers investors a valuable lesson.
"Sometimes the best course of action is not to do anything," McNeela said.

Miller might not have much choice. Miller runs a total of about $45 billion between Value Trust and other accounts, and it's difficult for managers to be nimble with such a large amount of money. Managers of big funds often struggle to add meaningfully to favorite positions without having an impact on the stock's price, and Miller may be facing that dilemma, McNeela said.

"At some point the fund loses flexibility to make certain stocks as big a percentage of the portfolio as he may have wanted," McNeela added.
Yet this isn't the first time Miller has lagged far behind the pack, and given his aggressive style probably won't be the last. So it would be foolish to underestimate Miller, whose fund still boasts a 10-year record that's better than 98% of all rivals. Such a strong history suggests that Miller's slump may be temporary and that judging the fund manager on short-term performance could be short-sighted.

In fact, investors would do well to copy Miller's contrarian style when considering Value Trust or any fund with quality management that has hit a bump, McNeela said.

"Now might be a good time to buy" into Value Trust, McNeela added. "Too many people shy away from good funds if they're having a bad streak. You want to have a long-term perspective and try to resist the temptation to buy funds after they've enjoyed a really good streak. No fund keeps going up forever. It's better to buy a proven fund after a rough spot than after a blowout year."

Jonathan Burton is MarketWatch's investments editor, based in San Francisco.