Miller's win No. 15 looms today

Manager of Legg's Value Trust fund has outperformed the S&P for 14 years


Legg Mason Inc.'s Bill Miller was taking a good-natured ribbing from co-worker and bond investor S. Kenneth Leech less than a month ago over the buzz surrounding whether Miller's flagship mutual fund could again outrun the Standard & Poor's 500 stock index.

Leech, in his presentation at the investment firm's annual New York symposium, teased Miller for always having two market forecasts: "Stocks will go up, or stocks will go up a lot."

But seriously, Leech said, no one at Legg Mason doubted the streak will continue.

They appear to be right.

Miller is poised today to extend his record of beating the benchmark to 15 consecutive years. As of yesterday, his Legg Mason Value Trust had a return of 6.02 percent compared with 5.43 percent for the S&P, which is commonly used as a benchmark of the domestic stock market. With today being the year's last trading day, Miller could still stumble, though industry experts say it's unlikely.

The feat would raise Miller's - and Legg Mason's - cachet in the investment world at a time Baltimore-based Legg has vaulted into the top echelon of global money managers with its acquisition of Citigroup Inc.'s asset management business.

Legg Mason touts the streak in company literature, with one leaflet titled "Accolades and Achievements" mentioning Miller four times. And investors, who often track annual performance, have flocked to Value Trust.

Miller's Value Trust fund has grown to $19.5 billion in assets. That translates into more fees for Legg Mason and for brokers selling Legg Mason funds, including the financial advisers that Legg recently traded to Citigroup.

"He should be in the Hall of Fame of money managers," said Manu Daftary, who manages the Quaker Strategic Growth fund and has the next-longest streak after Miller. This year is expected to be Daftary's eighth year ahead of the S&P. "No one else has been able to do what Miller has done, and that puts him in the league of Peter Lynch and some of the other investing greats."

Neither Miller nor Legg chief executive Raymond A. "Chip" Mason were available to comment.

Much ado has been made over the years about the statistical significance of Miller's achievement.

John C. Bogle, mutual fund critic and founder of the Vanguard Group of funds, said that while he has great respect for Miller's "high character and investment acumen," he still wouldn't recommend the Legg Mason fund to investors because he believes the odds are against Miller. Bogle said his preferred investment would be an index fund that replicates a broad market. "Chances that he'd do it for another 15 years, I'd say are zero," Bogle said.

In the 2002 book The Great Mutual Fund Trap, authors Gregory Baer and Gary Gensler did the math and found Miller's 10-year record was "roughly in line with random chance," meaning that they expected only one person to have been able to do it. (In other words, they argue, why buy mutual funds if the vast majority can't do better than the market?)

More recently, John Rekenthaker at Morningstar Inc., which tracks mutual funds, compared Miller's 14-year record to a coin toss. If you flip a coin 14 times, and do another 99,999 series of 14 flips, odds are that the coin will land on the same side for all 14 flips only six times. Rekenthaker concludes: "It looks highly likely that Miller was more than lucky."

Miller can attribute much of his success this year to some of his top holdings. Several companies where Miller's fund holds sizable stakes have seen their stocks skyrocket in recent months, including Google Inc. and JPMorgan Chase & Co. Those stocks helped turn a lackluster year around for Miller, who was trailing the S&P at the beginning of the fourth quarter.

Critics point out that other funds have posted much better returns, including Daftary's fund, which is up more than 14 percent this year, or more than twice Miller's return. And Miller has had some bad years, including 2002, when the fund was down 19 percent. The S&P was down 22.

Then there's the relatively high expense ratio for Miller's fund, or the percentage deducted each year from investor accounts to pay operating expenses and management fees. The current ratio is 1.68 percent.

Nonetheless, Morningstar's Christopher Traulsen said the Legg Mason fund merits its highest rating of five stars. He said investors have been "well-compensated" for taking on the added risk of the volatile fund, and that Miller incurs fewer trading costs because he tends to hold stocks longer than other funds. When averaged out over 10 years, Traulsen said, investors in Miller's fund have enjoyed annual returns of more than 15 percent.

And along with Bogle, even Daftary is rooting for Miller. Daftary said he's starting to feel the pressure of his own record, so he sent off a short note to Miller recently to wish him luck - if only so he wouldn't have to endure the spotlight alone.

Miller responded, Daftary said, with another note. It read, "Many thanks for your kind thoughts. Let's hope we both have years of outperformance ahead of us."

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