Legg Mason Inc.'s star stock picker Bill Miller said yesterday that he is making adjustments in managing his well-known Value Trust mutual fund in light of its weak performance and millions in lost assets.
Miller said he would spread out his concentrated portfolio to include broader allocations across sectors. He may buy mega-cap stocks that are trading at depressed prices, that generate cash and are at the top of their industries.
The moves appear to be deviations for Miller, whose Value Trust owns fewer stocks than most other funds. But Miller characterized the moves as tactical adjustments instead of a major change in his long-term philosophy amid unprecedented financial turmoil. And he insisted that the fund, which has been a big piece of Legg Mason's marketing prowess in recent years, will turn around.
"I'm very disappointed in our results relative to history and to our expectations and how we would have navigated this particular situation," Miller said during a brief interview yesterday at the start of Legg Mason's Thought Leader Forum for investors at Baltimore's Renaissance Harborplace Hotel. "We're responding to that by analyzing the cause and sources just as we did in the late '80s and '90s.
"We're trying to make sure we're always trying to be adaptable and flexible within the context of our core philosophy when events show us that we've been wrong," Miller said. He noted the recent financial crisis was unlike any previous one because it was global and systemic in nature.
Known as a contrarian investor, Miller makes big bets on stocks that have fallen out of favor in the market.
His flagship Value Trust had the distinction of beating the Standard & Poor's 500 index for 15 straight years before the streak ended in 2006. Since then, the fund has struggled with poor performance. The fund's assets have declined to $9.7 billion, from $20.5 billion more than a year ago.
This year, the fund has lost 35 percent through Monday, according to mutual fund tracker Lipper Inc. That compares with an 18 percent drop for the S&P.;
And the Value Trust is one of the worst-performing large-cap growth funds in the nation. It ranks last among more than 600 peer funds over the three years ending Friday, according to Lipper.
Taking note of Miller's recent stumbles, investors have withdrawn money from his Legg Mason Capital Management division and other Legg subsidiaries, hurting the Baltimore-based corporate parent. Miller is chairman and chief investment officer for Capital Management.
In the quarter that ended June 30, Legg saw clients pull out $18.4 billion. In August, the Massachusetts state pension fund pulled $2 billion in assets from Miller's shop and four other firms as part of a plan to shift U.S. equity assets from active money managers.
When asked yesterday about speculation about his future at Legg, Miller demurred, saying, "You could ask Mark about that," referring to Legg Chief Executive Officer Mark Fetting. Fetting, who took over the post in January, has said that one of his top priorities is to turn around the performance of Value Trust and other lagging mutual funds.
Mary Chris Gay, an assistant portfolio manager for the Value Trust, said yesterday that the fund's long-term performance returns were ahead of the market. And she noted that the Value Trust is also gaining clients, most notably a large institutional investor.
Miller said that he and his team had made adjustments since the near-collapse of Bear Stearns in March. J.P. Morgan Chase & Co. agreed to buy Bear Stearns at a fire-sale price. The Value Trust owned Bear Stearns and still holds J.P. Morgan.
The Value Trust sold holdings in Washington Mutual and Wachovia in the second half of the year.
But the Value Trust's portfolio concentration in financial stocks, including AIG, has hurt its returns.
Most notably, Miller's much-publicized gamble on Freddie Mac stumbled with the government bailout of the mortgage company and Fannie Mae this month.
Miller had added 30 million shares of Freddie this summer, making his shop the mortgage giant's largest shareholder with a 12.4 percent stake as of July 31.
Of Legg Mason Capital Management's 80 million shares in Freddie, the Value Trust fund held 17.7 million shares as of June 30.
Yesterday, Miller criticized the government's bailout of the mortgage giants and other private institutions, saying it discourages fund managers from investing.
"If the government tells the financial system it needs to go raise capital - AIG, you go raise capital, Lehman, raise capital, Merrill Lynch, raise capital - and ... if they run into trouble and they seize all the capital, who's going to put capital in?" Miller said. "Nobody, so we stop putting capital in. We're out, and we're not going to do that."