Legg guru's 15-year streak is on the line

Miller fund could fail to top S&P for first time since early 1990s

September 29, 2006|By Laura Smitherman | Laura Smitherman,SUN REPORTER

Bill Miller has been down before, but never by this much.

The celebrated money manager for Legg Mason Inc. has staked his reputation, in part, on beating the Standard & Poor's 500 stock index with his Value Trust mutual fund every year for 15 years, an unrivaled record.

But he's trailing the benchmark by more than 10 percentage points, by far the widest margin he has been behind at the end of the third quarter since the streak began. That's a high hurdle to overcome in the last three months of the year, and the idea of Miller-as-underdog has stoked interest in the yearly Miller watch on Wall Street and in Baltimore's financial community.

William H. Miller III, in his pragmatic way, concedes the record could be broken.

"Certainly we want to beat the market every year," he said yesterday. "Statistically, one wouldn't expect it to continue."

The very real possibility that one of Legg Mason's principal rainmakers could stumble has raised the specter of investors fleeing Miller's fund. And it comes as the company is dealing with the stresses of reorganizing after last year's $3.7 billion business swap with Citigroup Inc. Legg Mason touts the streak in its company literature, and Miller's prowess has drawn investors to the Baltimore-based money management firm.

Investors pulled an estimated $166 million from the Value Trust in the second quarter and $21 million in July, the latest month for which data is available, according to Financial Research Corp. That's the most outflow since 2002, the year the bear market bottomed out and one of the worst years ever for Miller's fund.

Legg Chairman and Chief Executive Officer Raymond A. "Chip" Mason, however, has said the flow of investor money into the fund is "relatively strong." With the first quarter's flows, a net $306 million in new client money has gone to the fund this year. Mason noted in an earnings call in July that the streak's end might be inevitable, but that Miller is still referred to as "the guru" in the media.

Don't count him out

Analysts, too, say they believe investors would be willing to give Miller a pass if he fails -- though no one is counting him out yet.

"We're not ready to say Bill Miller is done just because one year he didn't make it," said Kerry O'Boyle, an analyst at Morningstar Inc., the mutual fund tracking firm. "Over the long run, I don't think it should be that big of a factor; 12 months is still not a long time in terms of investing."

Besides, O'Boyle added: "The last couple of years he was written off for dead, and he staged a massive comeback."

At Legg Mason's Thought Leader Forum yesterday at the Marriott Waterfront Hotel in Baltimore, Miller pointed out that he has said "a bazillion" times that the streak is an accident of the calendar, meaning there would be no streak if his annual performance were measured through any month other than December.

Legg Mason, like Miller, has been under scrutiny. The company has missed Wall Street expectations for earnings twice this year, and Legg's stock is down nearly 30 percent from a peak in February, closing at $99.23 yesterday on the New York Stock Exchange.

Chip Mason and other senior managers held an investor lunch with analysts in New York this month to allay any concerns that the swap, which doubled the assets Legg manages, wasn't on track. According to Keefe, Bruyette & Woods analyst Robert Lee, who attended the lunch, the executives expect to have the "lion's share" of the integration done this year.

The Miller question did come up, Lee said in a research note, and executives emphasized "several times" that the investment subsidiary run by Miller is a smaller part of the entire company than it was before the deal with Citigroup, and before a separate acquisition last year of Permal Group, which manages funds of hedge funds. The Value Trust, which holds $19 billion, accounts for roughly 2 percent of the company's $855 billion in assets under management.

"Management did not seem concerned that Bill Miller's performance would lead to accelerated outflows," Lee said in his note.

T. Rowe Price analyst Eric Veiel said a poor showing by Miller could cut both ways with retail clients. Brokers could have difficulty selling the fund shares in a down year. But they could argue to clients that the fund shares could now be bought on the cheap.

Miller's subsidiary also invests separately on behalf of institutions such as pension funds, and Veiel said the streak's demise would not have a big impact on that business.

The Miller watch went down to the wire Dec. 30 last year, when he beat the S&P by less than half a percentage point. As of this week, the fund was down for the year by nearly 4 percent compared with the S&P's nearly 9 percent gain.

Because Miller holds large stakes in companies, the watch is as much a vigil for some of the stocks in his portfolio.

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