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Downhill ride in 1st quarter

The Baltimore Sun

You know it was a bad quarter for stock mutual funds when even Legg Mason's Bill Miller -- whose reputation for stock picking is legend -- ended somewhere near the bottom of the pack.

Miller's Value Trust fund lost 19.7 percent in the first quarter, led by untimely bets on technology and telecommunications stocks, such as Sprint Nextel Corp., and Bear Stearns Cos., whose near-collapse and subsequent bailout by JPMorgan Chase & Co. sent markets reeling late in the quarter. It was the fund's worst first quarter since it was established 26 years ago.

Miller's slump officially started in 2006, when his record 15-year streak of beating the S&P; 500 index was snapped. But the depth of his latest loss was exacerbated by a market so bearish it left almost nobody unscathed. Of 216 Maryland-based stock mutual funds tracked by The Sun, only seven posted positive returns for the three months that ended March 31, according to data provided by Bloomberg News.

Analysts disagree over whether the economy is in recession, or just how long the current market downturn will last. Predictions are made difficult in part because of uncertainty over the depth of the subprime mortgage crisis.

"I think all bets are off until we know what the final results are from those big institutional investment firms that may also have write-downs on their books," said Tom Roseen, senior research analyst for Denver-based fund tracker Lipper Inc. "I think we are going to see some more carnage to come."

Of the seven Maryland-based funds that posted gains last quarter, all but one were so-called "sector" funds, which invest in specific market segments, such as real estate or precious metals.

The lone standout among diversified stock funds was the Hussman Strategic Growth fund, whose major holdings include wireless communications company Research in Motion Ltd. The company has gained 8 percent this year. Run by Baltimore money manager John P. Hussman, the fund gained a tiny 0.1 percent. Hussman could not be reached for comment yesterday.

Bond funds fared better, with about three-fourths of 55 Maryland-based debt funds posting gains. The leader was T. Rowe Price's International Bond fund, which gained 8.7 percent.

But for the majority of investors, analysts say, opening their quarterly statements will only add to financial anxieties about falling home values and the rising cost of everything from food to fuel.

"There was very little that held its value," said Russ Kinnel, director of fund research at Morningstar Inc. in Chicago.

Industrywide, stock mutual funds posted their worst three-month returns in 23 quarters, according to Roseen, the Lipper analyst. The average fund lost 9.7 percent as the market swooned amid fallout from the subprime lending crisis, worsening job outlook and decline of the dollar.

The Dow Jones industrial average fell 7.6 percent, and the S&P; finished down 9.9 percent. The Nasdaq composite index, which is laden with technology shares, fell 14.1 percent.

The losses came despite efforts by the Federal Reserve and Bush administration to bolster the economy. The Fed lowered its key lending rate to 2.25 percent in a bid to stimulate growth, while the president signed into law a $150 billion stimulus package. Neither did much to prevent many of the industry's star money managers from being humbled in a volatile market.

Miller's Value Trust portfolio reads like a roadmap to the hardest-hit segments of the economy. The fund trailed all but four of 660 funds that buy stocks of large companies, according to Morningstar data.

Bear Stearns, which made up 1.2 percent of his holdings, fell 88 percent as JPMorgan agreed last month to acquire the securities firm for $10 a share to save it from bankruptcy. The firm's shares peaked at $158 a year ago. Its near-collapse rippled through bond markets and set off a marketwide crisis in confidence.

Sprint, Miller's seventh-largest holding, turned out to be another tough loss, falling 50 percent as a worsening economy and the loss of customers to rivals hurt profit projections. Communications and technology stocks, which account for about a third of Miller's holdings, were laggards among industry sectors.

Ever the contrarian, Miller also has invested heavily in financial and housing stocks -- both of which have been hammered.

"Needless to say, he was in exactly the wrong place, more or less," Morningstar's Kinnel said.

A spokeswoman for Baltimore-based Legg Mason said Miller declined to comment. In letters to shareholders, he has remained steadfast, arguing that many of the stocks in his fund are undervalued and ripe for a comeback. Kinnel said time may prove him right. Many of the same companies damaging Value Trust's latest returns remain good companies, he said.

"I think this could be the bottom for the fund," Kinnel said.

Overall, 4 percent of all U.S. equity funds managed positive returns for the quarter. Not surprisingly, funds that bet on markets falling topped the list. In a research report, Lipper's Roseen said "bear-laden" Dedicated Short-Bias funds gained nearly 12 percent. Gold-oriented funds -- often seen as a haven -- gained 5.2 percent.

Telecommunications funds dropped 19.3 percent and funds invested in China plummeted 21.2 percent, Roseen said.

David R. Giroux, portfolio manager for T. Rowe Price's Capital Appreciation fund, found safety in corporate staples such as retail giant Wal-Mart Stores Inc. The fund kept its losses for the quarter to 3.9 percent, placing it in the top seven among Maryland-based equity funds.

Giroux is among those who believe the economy is in recession. But the market is beginning to act more rationally after a period of overreaction, he said. That could take away some of the volatility and lay the groundwork for a recovery for stocks. Meanwhile, some stocks look cheap, he said.

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