Legg Mason money manager Bill Miller built his reputation on making contrarian picks, betting on downtrodden stocks to make a comeback. His Value Trust mutual fund beat the Standard & Poor's 500 Index for 15 straight years before the streak ended in 2006.
So Wall Street took note when Miller gambled on Freddie Mac this summer, adding 30 million shares to his already-sizable holdings of the mortgage company. It made Baltimore-based Legg Mason Freddie's largest shareholder and signaled that Miller believed the stock could turn around.
But yesterday, Miller and other Freddie shareholders saw the company's stock lose more than 80 percent of its value in the aftermath of a government bailout of Freddie and Fannie Mae, the nation's other mortgage giant.
Miller's Legg Mason Capital Management subsidiary and its affiliates owned 12.4 percent of Freddie's common shares, or nearly 80 million, as of July 31, according to a filing last month with the Securities and Exchange Commission.
The shares were worth $652.6 million then, when Freddie's stock traded at $8.17, already down substantially from a year earlier. Based on yesterday's closing price of 88 cents a share, such a stake would be worth a little more than $70 million now. It's unclear whether Miller and Legg still owned that many shares. Miller and company executives declined to comment yesterday.
But Miller's high-profile bet on Freddie Mac could further worry investors in the Value Trust mutual fund, which has lagged behind its peers during the past two years, analysts said. And it is more bad news for the corporate parent, Legg Mason, which has seen its shares drop 34 percent this year as clients take their mutual fund investments elsewhere.
Investors pulled $18.4 billion from Legg funds in the quarter that ended June 30, with some of the equity withdrawals coming out of Legg Mason Capital Management.
Analysts say the news of Miller's gamble doesn't help restore investor confidence in his investment style. As of last week, the fund was down almost 31 percent so far this year, according to Morningstar. Shares of the Value Trust gained 64 cents, or 1.6 percent, to close at $40.86 yesterday.
"Investors will assume the worst, either take more funds out of Bill Miller's fund or not invest in it again," said Morningstar analyst Alan Rambaldini.
