Investment star Bill Miller revises strategy

The Baltimore Sun

Legg Mason Inc.'s renowned money manager Bill Miller wants to avoid a new streak - this time on the losing side.

Facing another year of subpar returns, Miller is changing some investments to boost the returns of his record-setting mutual fund that stumbled in 2006 and lags behind its benchmark stock index again this year.

Miller said his team at Legg Mason Capital Management has worked since August to "reposition" the Value Trust, one of the most talked-about funds in the industry.

He said they hope to capitalize on recent market sell-offs sparked by disruptions in credit markets from the subprime mortgage crisis. And he said he's tweaking his overall strategy, which could mean a departure from making bold investments in order to reduce the fund's risk profile.

The flagship fund has the distinction of beating the Standard & Poor's 500 stock index for 15 consecutive years, a record that was known in the investment world as "The Streak."

But it ended in 2006, and this year the fund had gained only 3.1 percent through Thursday, compared with a 9.5 percent return for the S&P; 500 index with dividends reinvested, according to the latest data from mutual-fund tracker Lipper Inc.

"As with previous periods of disruption, our activity tends to go up during these periods," said Miller, who describes himself as a "contrarian" investor, often taking positions in stocks that have fallen out of favor in the market.

"Our objective is to increase the risk-adjusted rate of return," Miller said.

Legg Mason, a global investment company based in Baltimore, has seen clients withdraw money in recent months across its subsidiaries, including Legg Mason Capital Management, and now has roughly $1 trillion in assets under management.

The parent company's shares are down more than 10 percent over the past six months, and Keefe, Bruyette & Woods, a financial services research firm, recently downgraded the stock to a "hold" from a "buy."

Changes outlined

Miller broadly outlined the changes to be made in the $19 billion fund during an interview at Legg Mason's Thought Leader Forum for investors last week at Baltimore's Marriott Waterfront Hotel.

He said he would buy more large-cap stocks and increase the number of companies in the fund, reducing exposure to the biggest holdings relative to the smallest.

The moves appear to be deviations for Miller, who is known for making big bets on stocks and owning fewer of them than most other funds. But analysts said he is not likely to substantially change his long-held strategies.

"I still think the fund is a great choice," said Greg Carlson, an analyst with Morningstar Inc., which tracks funds. Its data shows that the Value Trust is trailing 96 percent of its peer funds with similar investment styles.

'Proven stock picker'

"You've got a very proven stock picker who invests with conviction and hasn't significantly changed his process," Carlson said. "He just seems to be going through a bad streak right now, and I think that's generally a good time to buy a fund from a proven manager."

Miller has acknowledged making mistakes. Most notably, he has conceded, he missed out on the long-running rally in energy stocks. The sector outperformed every other industry over a five-year period ending in June as oil prices steadily rose. The fund still owns no energy stocks, though Miller has said he may rethink that position.

Miller also says that he was wrong to buy housing-related stocks 18 months ago, which turned out to be near the peak of the housing market boom. He points out, however, that many of those stocks are trading around historic lows in terms of price-to-book value, which compares a company's market price to the value of its assets. He said the stocks could turn out to be good investments.

Miller notes that his other mutual fund, the Opportunity Trust, has "killed the market." The $8 billion fund is up about 11 percent this year. Miller said the fund, which has an open charter that allows it to invest in alternative investments, has ramped up holdings in private companies and hedge funds to about $800 million.

In recent weeks, Legg Mason Capital Management has announced a number of venture-capital investments in Internet companies, including online real estate Web site, online intra-physician community Sermo, online currency trader Oanda and social-networking startup Ning Inc. Miller said his group has expertise in the industry; he has taken huge stakes in Inc. and Google Inc.

When asked if Legg Mason's deal with Citigroup Inc. caused him to lose focus and perhaps lead to the end of his streak, Miller smiled and said, "No." He said that the deal didn't affect his operation at Legg Mason Capital Management.

He explained that the fund simply didn't have the "octane" to overcome his lack of exposure to energy stocks and the hits he took on housing stocks. He didn't say if he thought the streak would be revived.

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