Miller May Be Back To Winning Ways

July 03, 2009|By Hanah Cho | Hanah Cho,

Legg Mason's star money manager Bill Miller appears to be bouncing back, much to the delight of investors who have stuck by him despite heavy losses during the past two years.

Miller's Legg Mason Opportunity Trust was one of the top gainers among U.S. stock funds in the second quarter, surging 46 percent amid a spring market rally.

And his flagship Value Trust fund rose 29 percent in the quarter.

In an interview Thursday, Miller said the funds were positioned to expect a market rebound.

"The funds were oriented toward a market recovery and ultimately an economic recovery," Miller said.

Both funds are heavy on financial, consumer discretionary and technology stocks. Holdings include big Internet names like Yahoo, eBay and Google and banks like Goldman Sachs and Morgan Stanley.

Morever, stakes in preferred shares of Citigroup and Bank of America in the Opportunity Trust fund boosted its performance during the second quarter.

Miller said he acquired those shares because of the history of preferred shareholders having more protection than common stockholders in the event of a collapse, though he noted that he didn't expect Citigroup or Bank of America to fail.

Bridget Hughes, an associate director of fund analysis at Morningstar Inc., said such bets worked in Miller's favor during the second quarter.

"What really sort of sent him into the stratosphere was that he decided that financials were going to be market leaders at some point," Hughes said.

The positive turnaround for Miller's two funds are a stark contrast to his poor performance during the past several years. The losing streak came after his Value Trust beat the Standard & Poor's 500 index for 15 straight years. From the end of that streak in 2005 through March 31, however, the fund slumped 61 percent because of bets on real estate and financial stocks.

Known as a contrarian investor, Miller makes big bets on stocks that have fallen out of favor in the market.

But well-publicized gambles on financial and housing stocks hurt the Value Trust during the past two years.

Most notably, Miller's decision to raise his stake in Freddie Mac stock last year stumbled with the government bailout of the mortgage company and Fannie Mae. Miller had criticized the government's bailout of the mortgage giants and other private institutions, saying it discourages fund managers from investing.

"What he's noted for is doubling down and when he likes a business or a stock and it falls, for whatever reason, he's more inclined to add more and that's what got him in trouble with the financials in 2007 and 2008," Hughes said, though she noted that the same philosophy has also meant big returns.

Last year, the Value Trust lost 55.05 percent, while the Opportunity Trust declined 65.49 percent, the worst return among 505 mid-cap growth funds, according to mutual fund tracker Lipper Inc.

As a result, investors have been withdrawing money from Miller's funds. For instance, Value Trust's assets have declined to $4.1 billion, from $20.5 billion in mid-2007.

U.S. stock mutual funds rose an average of 19 percent from March 31 through June 29, the biggest quarterly gain in almost a decade, according to data compiled by Morningstar. The increase was the first by equity funds in a year.

Bloomberg News contributed to this article.

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