Miller looks for fund to rebound

The Baltimore Sun

Legg Mason star money manager Bill Miller hopes his Value Trust fund has seen the worst of market volatility.

In a quarterly letter to shareholders released yesterday, Miller said his fund is turning a page on its "awful" performance. The Value Trust fund lost 19.7 percent in the first quarter, the worst three-month span compared with the S&P; 500 index in its 26-year history. That continued a slump that began in 2006, when Miller's record 15-year streak of beating the benchmark index was broken.

The fund's weak performance - it was ranked last among peers in a recent tally - has contributed to financial struggles at Baltimore-based Legg Mason, where investors have pulled money from the company's mutual funds in recent months.

The company's stock has fallen 19 percent since the beginning of the year, on top of the 25 percent decline last year. And it is working to shore up money market funds containing mortgage-backed debt.

Miller said the fund is starting to perform better, gaining a "bit more" than the 5 percent increase in the S&P; 500 in the first few weeks of April. And, as he has in recent quarters, Miller said the bottom has been reached in the housing and financial markets. "For planning purposes, here is my forecast: I think we will do better from here on and that by far the worst is behind us," Miller wrote, noting volatility in commodity prices as a wild card in the market recovery.

A Legg Mason spokeswoman said Miller was not available for comment yesterday.

"Our portfolio, in my opinion, is in excellent shape, despite, or more accurately because of, its performance. Prices have declined substantially more than business values," he said. "It is this assessment that makes us confident our, and your, investment will deliver results more consistent with the past 26 years than the past two."

Value Trust has become one of the worst performing large-cap growth funds in the nation. It is ranked last among more than 600 peer funds over the three years that ended Tuesday, according to mutual fund tracker Lipper Inc.

Investors have taken note of the poor performances of Value Trust and some other Legg Mason products, and moved their money elsewhere. In the third quarter, Legg Mason reported a $10.6 billion outflow in client equity assets. The company will report earnings for the three months that ended March 31, its fourth quarter, in the next few weeks.

Miller said the credit panic ended with the near-collapse of Bear Stearns Cos. and its subsequent bailout by JPMorgan Chase & Co.

Value Trust's position in Bear Stearns dropped drastically, though. It began buying up Bear Stearns between July and September and increased its stake to 2.3 million shares as of Dec. 31. But the fund also held a position in JPMorgan, which Miller noted was three times larger than Bear Stearns. JPMorgan constituted 5 percent of Value Trust's portfolio assets as of March 31.

"Credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs," he said.

Miller, who said investors are right to expect better returns from his fund, remains bullish on the stock market.

He repeated his opinion in his earlier letter to shareholders that financial and consumer stocks have hit bottom and noted that housing stocks are up despite bad headlines.

"With most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting more cash to work in equities," he said.

Shares of Legg Mason rose 97 cents, or 1.7 percent, to close at $59.04 in trading on the New York Stock Exchange yesterday.

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