Old, new acquisitions sting Miller's Legg Mason fund

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 Corp. and newer bets including the Bear Stearns Cos. Inc.

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 Inc., of 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 index came to an end in 2006, is lagging behind the U.S. benchmark for the third straight year. It is his longest slump since he joined Baltimore's Legg Mason Inc. 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 last 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 Corp. and Eastman Kodak Co., 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.

2 for 10.

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

Sprint, his seventh-largest holding, has dropped 50 percent as the mobile-phone company, located in Overland Park, Kan., 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 JPMorgan for $10 a share, down from a peak of $158.39 a year ago, to avert bankruptcy.

Financials, housing.

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.

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."

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 Inc., and Merrill Lynch & Co. Inc. as of December, up from about 15 percent a year earlier.

Paring Amazon.

Both based in New York, Citigroup has fallen 18 percent and Merrill Lynch has fallen 16 percent. Those losses have been partially offset by JPMorgan.

Amazon.com Inc., the fund's biggest holding, has fallen 17 percent in 2008 after more than doubling in value last year. Miller started buying shares of Seattle-based 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 Corp. and home builders Pulte Homes Inc. and KB Home. The fund held 1.4 percent of its assets at the end of December in Countrywide, of Calabasas, Calif., 0.8 percent in Centex Corp., of Dallas, and 0.5 percent in KB Home, of Los Angeles.

Manager:

Bill Miller.

Assets:

$12.2 billion.

Performance:

Down 15.58 percent in 2008.

Key holdings:

Amazon.com, AES Corp., UnitedHealth Group Inc., Aetna Inc.

Ticker:

LMVTX.

SOURCE: Bloomberg News