At the same time, analysts cautioned about reading too much into Miller's bet on Freddie, noting that his Legg Mason Capital Management division represents a small slice of the parent's $923 billion of assets under management.
Other value-driven money managers also stumbled with investments in Freddie and Fannie.
Roger Smith, an analyst at Fox-Pitt Kelton, said Miller's Freddie stake is not likely to affect Legg's earnings potential. "It's more [reputation] than anything else," Smith said.
Added Robert Lee, an analyst at Keefe, Bruyette & Woods, "Let's put it this way: The perception of his impact on the Legg Mason business overall, I think, tends to be greater than the actual impact. I don't want to say there is no impact. You have to put it into perspective. It's not positive, but given his notable holdings of the [government-sponsored entities], Legg Mason is up today."
Shares of Legg Mason gained $2.83, or 6.4 percent, to close at $47.35 yesterday.
Several analysts pointed to Legg's potential upsides in the government takeover of the two mortgage giants.
Mortgage debt guaranteed by Fannie and Freddie rallied yesterday as investors showed signs of confidence in the government's action to increase the companies' holdings of mortgage-backed securities.
If the improvements continue, it could benefit Western Asset Management, Legg's fixed-income division, which owns some of those bonds, analysts say.
Western Asset is Legg's largest subsidiary, and fixed-income assets represent 53 percent of the company's total assets under management.
Financial stocks also gained yesterday, offsetting losses in Fannie and Freddie for some equity investors, including Legg's Value Trust, analysts say.
Under the conservatorship that operates Fannie and Freddie, the government is injecting money into the two troubled companies to keep them afloat. The government will receive warrants representing an 80 percent ownership stake in each company, reducing ordinary shareholders' equity to 20 percent.
The more money the government injects, the more diluted shareholder equity becomes. Shareholder value can increase if the housing market recovers, though it's not expected to happen anytime soon.
Miller began investing in Freddie at the end of last year, accumulating 14.6 million shares as of Dec. 31.
The money manager increased his stake to about 50 million as of March 31, when the stock was trading in the $20 range.
"Unfortunately, it's another case where Bill Miller and the rest of the team was a little too optimistic about the potential losses on the books," said Morningstar mutual fund analyst Greg Carlson. "One of the things they've argued is, accounting rules being what they are, firms have been forced to take bigger write-offs than they otherwise might."
Of Miller's 80 million stake in Freddie, the Value Trust fund held 17.7 million shares as of June 30.
Freddie represents 3 percent of the fund's portfolio, said Carlson. Other fund investments include American International Group, Capital One Financial Corp. and Citigroup Inc., which all gained in the market yesterday.
"I still like the long-term prospects," Carlson said of the fund.
Bloomberg News contributed to this article.
