'An amazing feat'

Manager: His Value Trust mutual fund has outperformed the S&P 500 index for the ninth consecutive year.

January 09, 2000|By Bill Atkinson | Bill Atkinson,SUN STAFF

William H. Miller III closed the decade with a bang.

While cruising along California's coast, Miller learned that the mutual fund he manages for the Legg Mason Inc. -- the Value Trust -- outperformed the Standard & Poor's 500 index for the ninth consecutive year, an act accomplished by only a handful of money managers over the past three decades.

"It is an amazing feat," said Christine Benz, associate editor of Morningstar Inc., the Chicago-based mutual fund tracking firm, which last year named Miller, 49, one of three mutual fund managers of the year.

James Hardesty, who manages $500 million at Baltimore-based Hardesty Capital Management, said: "I think that is a tremendous achievement. The people who have done it, you can count them on one hand. I wish I could say the same."

What does it all mean to Miller?

"I am just trying to make good investment decisions on a long-term basis," he said. "I am delighted for our shareholders that we have been able to do this. I hope we can do this for 10 or 20 years in a row."

The Value Trust returned 26.71 percent with dividends reinvested, beating the S&P -- a widely used benchmark to measure portfolio managers' performance -- which returned 19.53 percent.

The Value Trust's performance followed a 48 percent return in 1998, which in itself outperformed the S&P benchmark by nearly 20 percentage points.

But two years tells just part of the story. The fund began putting up big numbers with consistency five years ago and has averaged a 38.20 percent return annually in that period.

Miller, of course, isn't the only one who has benefited from his track record. A client who invested $10,000 in the Value Trust in 1990, when Miller began managing the fund, is worth $75,760 today. The same investment in the S&P has grown to about $40,000.

Along with the stellar performance, Value Trust's assets have ballooned. The fund, which had $636 million in assets under management in 1990, had $13.5 billion last week.

"You'd have to give him an A," said Edwin Boyer, principal at Baltimore-based Asset Strategy Consultants, a Baltimore-based consulting firm that ranks the performance of money managers for pension plans, endowments and foundations. "He has clearly displayed a unique ability to value companies, and be able to ride them for a long time. Bill Miller will go down in the books."

For all of his success, Miller's investment style is not vastly different from many other portfolio managers. He's from the "value" school of investing, made popular by investment guru Warren Buffett, who is known for buying companies that have been beaten up -- "cigar butts" -- holding them for years, and making loads of money as their prices rise.

What has set Miller apart from other value investors is that he not only has embraced technology stocks, but has held on to them even after their prices have climbed sharply. He believes that many of his technology holdings are still undervalued and will continue to rise.

In a letter to shareholders, Miller argued that many value investors have buried their heads in the sand by choosing to ignore technology companies.

"The reasons typically given are that technology is difficult to understand, that it changes rapidly, and that the stocks are usually too expensive according to standard valuation methods," he said. "All of these reasons are weak."

High-flier purchases

He's bought high-fliers such as Dell Computer Corp., Amazon.com Inc., America Online Inc., and Gateway Inc., at bargain prices. And the investments have paid off for Value Trust investors.

Value Trust's returns last year were driven by Nextel Communications Inc., which jumped 351 percent; Nokia Oyj, up 220 percent; Gateway, up 182 percent; and AOL, up 95.81 percent, according to Morningstar.

"I think he has woken a lot of value managers up," said Morningstar's Benz. "It just shows that to beat the indexes, you don't necessarily want to be a clone of the index. He is radically different from the index."

Raymond A. "Chip" Mason, Legg Mason's chairman and chief executive officer, said when Miller bought Dell and AOL they were bargains.

"The fact is, the real credit that he and others [Miller's assistants] should get is that they didn't up and sell at $10. I think anybody who criticizes him for buying them is nuts."

When the stock market dives, as it did Tuesday, Miller is at his best. His greatest asset is "his ability to pull the trigger," Mason said.

"Making decisions when you truly have to put the money on the line -- is something that many people don't do well," Mason said. "Usually, you are buying in adversity. You are buying when everybody is selling. When the market seems to be cratering -- is typically when he is a buyer. That is what it is all about."

Share of losers

That's not to say Miller's touch is pure gold. The portfolio had its share of losers last year, including McKesson HBOC Inc., down 71 percent; Waste Management Inc., down 63 percent; Bank One Corp., down 35 percent, and Toys `R' Us Inc., down 16 percent.

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