Bill Miller's fund takes tumble

What has happened to Bill Miller's Legg Mason Value Fund? Should I sell my shares?

- K.R., via the Internet


This fund run by much-admired longtime portfolio manager Miller of Baltimore-based Legg Mason Inc. had beaten the Standard & Poor's 500 index for 15 consecutive calendar years before 2006 rolled around.

Disappointing holdings such as, Yahoo, eBay, UnitedHealth Group and Pulte Homes erased its chance of extending that string.


As Miller attempts to right the course, he must cope with a high annual expense ratio of 1.68 percent and an enormous portfolio of $21 billion. That means investors should consider its prospects more carefully than in the past.

Results have tumbled: Legg Mason Value Fund (LMVTX) gained 5 percent over the past 12 months to rank in the lowest 2 percent of large growth and value funds. Its three-year annualized return of 8 percent puts it in the lowest 20 percent of its peers.

"Legg Mason Value can be a core holding, but investors must be aware of its volatility and be able to ride out short-term bumps such as this one," said Greg Carlson, analyst with Morningstar Inc. in Chicago, who still considers the fund attractive. "Because it is such a concentrated portfolio - with 45 percent of assets in its top 10 holdings - there is also some concern about flexibility."

Miller is willing to put large amounts in individual stocks, so any one of them can sway results. He has a mix of holdings, including traditional stocks such as Eastman Kodak and trendy new ones such as Google. He looks for companies trading inexpensively based on his estimate of their worth and tends to be considerably more optimistic about growth than many rival managers.

Consumer services account for nearly one-fifth of Legg Mason Value's assets. Other significant concentrations are financial services and health care. Largest holdings recently were AES, Tyco International, Qwest Communications International, Sprint Nextel, UnitedHealth Group, JPMorgan Chase, Google, Sears Holdings, and Aetna.

This "no-load' (no sales charge) fund requires a $1,000 minimum initial investment.

I've been amazed by my shares of Deere & Co. and wonder if good things will continue.

- A.R., via the Internet


The bright green tractor is plowing ahead.

The world's largest agricultural equipment manufacturer is also an innovator in computers and sensor devices that make tractors, combines, construction machinery and lawn-care equipment more efficient. It has even tested a driverless mower for use in stadiums.

Deere shares (DE) gained 40 percent in 2006. The quarterly dividend also was increased to 44 cents from 39 cents.

Prices for many agricultural commodities have rallied in recent months, potentially giving farmers more money to spend on equipment. In particular, planted acres of corn in the U.S. are increasing because of demand for ethanol, the alternative motor fuel made from corn.

Deere earnings rose 19 percent, to $277.3 million, in its most recent quarter, surpassing analyst estimates because of strong credit and leasing revenues rather than sales gains.

Shares of this famous company, which built its first plow in 1837 and was incorporated in 1868, received a boost last month when the firm acknowledged it had received and rejected a private buyout bid. It said that it "is not considering any such ideas and management is focused on running the business."


Despite Deere's strong balance sheet and cash flow, it operates in a highly cyclical business and has been cautious in voicing expectations for the fiscal year that will end in October. It predicts sales of its agricultural equipment will be flat as Congress considers multiyear farm subsidy legislation, but should pick up in fiscal 2008.

The consensus analyst rating of Deere shares is midway between "buy" and "hold," according to Thomson Financial. That consists of three "strong buys," five "buys," nine "holds" and one "sell."

Earnings are expected to decline less than 1 percent in its current fiscal year and rise 21 percent the next fiscal year. The five-year annualized growth rate is forecast at 10 percent. Estimates for the farm and construction machinery industry call for a 24 percent gain for calendar year 2006 and 3 percent increase in 2007. The five-year annualized growth rate is projected to be 13 percent.

Worldwide, Deere has taken market share from competitors such as CNH Global, the firm that resulted from the merger of Case and New Holland. But that rival may evolve into more worthy competition longer term. In addition, construction equipment, though a smaller portion of Deere's business, may be hurt by the current housing market downturn.

Andrew Leckey writes for Tribune Media Services.