BOSTON (Reuters) - Money manager Bill Miller's performance in a key fund fell far short of its benchmark index for the second straight year in 2007, as his bets on financials and housing shares soured.
By Muralikumar Anantharaman
BOSTON (Reuters) - Money manager Bill Miller's performance in a key fund fell far short of its benchmark index for the second straight year in 2007, as his bets on financials and housing shares soured.
The $17.3 billion Legg Mason Value Trust fund, which Miller guided to 15 straight years of outperformance against the S&P 500 index until 2006, returned a negative 6.66 percent last year against a positive 5.50 percent return for the S&P index.
Before 2006, the fund's last underperforming year was also the last time it fell two years in a row, in 1989-90.
!ADVERTISEMENT!According to research firm Lipper Inc, the fund was the worst performer last year among all large-cap growth funds it tracks. In 2006, it returned just 5.9 percent against the S&P index's 15.8 percent return.
"It's tough to say right now as to what the future holds for this fund's performance in 2008. But Bill Miller has a deserved reputation as being an astute investor and I would still give him another opportunity," said Jeff Tjornehoj, senior research analyst at Lipper.
Miller, 57, usually makes big bets on a small number of stocks. The Value Trust fund, which he co-managed since its inception in 1982 before taking over sole management in 1991, had invested in 45 stocks at the end of September.
While that strategy can pay off handsomely -- as in the case of Google Inc <GOOG.O>, which Miller bought at the time of its IPO in 2004 -- it can also bring pain when markets drop.
The fund's holdings of Citigroup Inc <C.N>, Countrywide Financial Corp <CFC.N>, Centex Corp <CTX.N>, KB Home <KBH.N> and Pulte Homes Inc <PHM.N> bled due to the impact of the subprime mortgage and credit crises.
Amazon.com Inc <AMZN.O>, whose decline was responsible for some of the Value Trust fund's pain in 2006, was a huge winner for it in 2007. Shares of the Web retailer gained 135 percent in 2007 and it was the fund's top holding at the end of September with a market value of $1.7 billion.
WILL HISTORY REPEAT?
But Sprint Nextel Corp <S.N> and Qwest Communications <Q.N>, both among the top five holdings of the fund as of end-September, fell in 2007.
"There were some very bright spots in the portfolio, there just weren't enough to overcome the disappointers," said Tjornehoj of Lipper.
Miller's sub-par performance contributed to investors pulling a total of about $9.6 billion from Baltimore-based Legg Mason Inc's <LM.N> stock portfolios in the quarter ending September, analysts have said.
Acknowledging the recent poor showing of the fund in a November letter to investors, Miller said he would cut holdings of many of its biggest stocks, buy into new sectors and also cut holdings of smaller stocks in favor of bigger ones.
He also drew a parallel between the market environment in 1990, when the fund last underperformed the S&P index two years in a row, and now, saying a housing recession and swooning financial stocks then had enabled the fund to take advantage of good values to begin a sustained period of outperformance.
"While the past may not repeat itself, it does often rhyme, as Mark Twain once said," wrote Miller. The Value Trust fund has returned 13.24 percent a year against the S&P index's 10.50 percent return over a 15-year period, as per Lipper data.
Some feel the past could very well rhyme now.
"In my opinion, it's the time that I would be giving Bill Miller money to invest after he's had a couple of bad years, rather than running away from him," said Russell Croft, a portfolio manager at Baltimore-based Croft Funds Corp.
(Editing by Gary Hill)
