Ohio company seeks a Legg Mason cure

INVESTING

Mutual fund manager to work on portfolio

August 01, 1999|By Bill Atkinson

DAVID O'MALEY thinks he has found the perfect antidote to cure an ailing stock portfolio.

The medicine? A heavy dose of Bill Miller.

O'Maley, chairman and chief executive of Ohio National Financial Services in Cincinnati, hired Miller, the star mutual fund manager at Legg Mason Inc., and his team of money managers to take a lackluster, $300 million portfolio and rev it up.

The Ohio National Fund Equity portfolio, as it is called, needs plenty of help. It limped through last year with a 5.72 percent return, compared with the Standard & Poor's 500's 28.58 percent gain. And over five years, it has been whipped by the benchmark, which returned 24.03 percent, compared with the portfolio's 13.52 percent.

O'Maley is confident that Miller and his staff will turn it around in no time.

"It is really a perfect opportunity with very significant growth potential," he said. "I would not be at all surprised to see this fund hit $1 billion [in assets under management] in the next three or four years."

Miller and his team have been hired as "subadvisers," which means that while they work for Legg Mason, they give advice to Ohio National for a fee.

Legg receives 0.45 percent of total assets under management, or $1.35 million a year initially.

By hiring Miller, O'Maley has hooked up with one of the best mutual fund managers in the game.

The fund Miller manages, the Value Trust with $12 billion in assets under management, has been a huge success. It has beaten the S&P 500 index eight consecutive years, a feat accomplished by few other fund managers.

Last year, Value Trust was up 48.04 percent, and for the first half of the year, it was up 18 percent, compared with the benchmark's 11.7 percent return.

Miller is a "value" investor. He looks for sound, well-managed companies whose stock prices have been crushed by bad news or a lousy quarter -- "cigar butts" in industry lingo. After buying them at bargain prices, he waits for them to rise.

He has been picking up shares of Waste Management Inc., a waste hauling company, and McKesson HBOC Inc., a health care services company. Both stocks have collapsed in recent months.

"We are finding a lot of good values," Miller said. "Whenever a company runs into any kind of difficulty, people just willy-nilly dump the stock."

Miller plans a complete overhaul of the Ohio National portfolio, which will result in its becoming a smaller version of the Value Trust.

"We are in the process of restructuring the portfolio right now," he said. "We have been doing some stuff every day."

One of the first tasks is to thin it down from its mix of about 90 blue-chip stocks and small and mid-sized companies to about 40, the same number the Value Trust has. The job should be completed in the next week or two, he said.

"We buy everything we own in the Value Trust," he said.

That includes such stocks as America Online Inc. and Dell Computer Corp., which Miller bought several years ago when both companies were beaten up. Those companies are among the fund's top 10 holdings.

Ohio National, which has $8.5 billion under management, and Legg Mason are not strangers. The companies have worked together for several years with Legg Mason brokers selling Ohio National Life Insurance Co. products.

To invest in the Ohio National equity portfolio that Miller runs, investors must buy an Ohio National annuity or variable life insurance policy from the insurance company or broker who sells them.

"It is really a prefect strategic fit for both firms," O'Maley said. "It is kind of the optimum partnership."

O'Maley said the bond between the companies is so strong, it might lead to other Ohio National portfolios being overseen by Legg Mason managers.

But what if the unthinkable happens and Miller's streak comes to an end? It has happened to some of the best mutual fund managers.

"It is probably unreasonable to think that somebody is going to win every year forever," O'Maley said. "But I feel very confident having some of my own funds in Bill's hands."

Even Miller, who has been hailed in the media for his achievements, knows that fame and success can be fleeting.

"If in the next five years I go right over the cliff, people won't remember anything," Miller said.

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