Legg's star, Bill Miller, again beats S&P 500

But his Value Trust fund also fell nearly 19% in 2002

January 01, 2003|By Meredith Cohn | Meredith Cohn,SUN STAFF

Just like the Standard & Poor's 500 - and the Dow Jones industrial average and the Nasdaq composite - Bill Miller's Legg Mason Value Trust lost money for the third straight year in 2002.

But just like the previous 11 years, the return on the fund that Miller manages from the Legg Mason tower in Baltimore beat the return on the S&P 500.

Miller's fund was down nearly 19 percent for the year; the S&P 500 was off more than 23 percent.

"In a difficult environment, he's done well on a relative basis," said Edwin Boyer, principal at Asset Strategy Consultants, a Baltimore-based consulting firm that ranks the performance of money managers for pension plans, endowments and foundations.

"If your benchmark is the S&P 500, his returns have been significantly better than the S&P 500," Boyer said. "When you take time to put the results in bar chart, beating the S&P by 250 basis points, or 2.5 percent, is no small feat, especially given the size of his fund. He has a concentrated portfolio, which is a risk and benefit. He's proven over time that he usually makes the right call."

Each call has loomed large in that concentrated portfolio - the fund owns about 30 stocks - according to other analysts.

"He did have a number of stock-picking mistakes this year," said Christopher Traulsen, a senior analyst at Morningstar Inc., the Chicago-based mutual fund tracking firm. "Gateway was a mistake, but it looks like he exited it by the end of the third quarter. AOL continued to hurt the fund. On telecom-related issues he was clearly too early. Some he has since sold, most notably Lucent," Traulsen said.

Miller's picks for the $7.16 billion fund have not been the traditional "value" stocks, such as underpriced utilities. Instead, the analysts said, he buys volatile stocks - in the technology sector, for example - that he believes are undervalued and will produce significant cash flow in the future, even if they cost a bit more than other value stocks.

That gamble can translate into losses. An example is Amazon.com Inc. Miller's trust recently took a $53 million loss on shares of the online retailer.

Miller sold 792,000 shares, reducing the trust's stake in the company, but maintains 30 million shares.

"The risk factors have helped it do extraordinarily well in past years," Traulsen said. "You take risks hoping to get paid, but sometimes it doesn't work out. ... Bill Miller is different because he's willing to take risks on those volatile kinds of stocks."

Miller has been sole manager of the fund since November 1990 and co-managed it with Ernest Kiehne from its inception in 1982.

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