VALUE ADDED


Time to Buy Bill Miller

Steven Goldberg

Legg Mason Value's record of beating the S&P 500 for 15 straight calendar years is imperiled, thanks to horrible performance so far this year. But the best time to buy this fund is when it's sagging.



The vultures are already circling over Bill Miller. His Legg Mason Value, which has beaten the SP 500 a record-breaking 15 consecutive years, is trailing the benchmark by nearly 13 percentage points so far this year. That's so awful that his fund ranks in the bottom 1% among large-cap blend funds.

Believe it or not, even that understates what a horrific year Miller has been having. This year's performance is so wretched that Legg Mason Value (symbol LMVTX) now lags the SP 500, as well as the average fund in its category, over both the past three and five years. Vanguard founder Jack Bogle and other proponents of index investing have cause to celebrate.

What should you do? If you own shares, it's a good time to buy more. If you don't, it's an ideal time to open an account with probably the best investor of our time. It's also probably a great time to scoop up some of the Miller stocks that have been creamed. (More on those in a bit.)

Why buy Miller now? Because despite his phenomenal streak, Miller has hit rough patches before. What's happened this time is that several parts of his portfolio have imploded at the same time. The rebound may well be just as sharp.

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Miller is a long-term investor, typically holding stocks five years or longer. He usually buys early. Then, when a stock declines, he buys more, "averaging down" with the kind of courage (backed by painstaking analysis) that I've never witnessed in another manager. Indeed, Miller pinpoints his willingness to buy more of a stock as it falls as the single most important reason for his long-term success.

And make no mistake: His long-term numbers are terrific. Over the past ten years, his fund has beaten the SP by an average of eight percentage points per year. Over the past 15 years, he has beaten the SP by nearly 11 percentage points per year. The fund ranks in the top 2% among its peers over both periods.

When evaluating a manager, the long-term number is always the one to focus on. One- and three-year results can be pure happenstance.

In his newly issued quarterly report, Miller is forthright, but confident -- as you'd expect a good manager to be. "We had a dreadful second calendar quarter," he writes. But he adds, "We have been doing this a long time and have been here before (way behind the market)."

The chief reason for Miller's plunge is his big weighting in Internet stocks such as Amazon (AMZN), eBay (EBAY), Expedia (EXPE) and Yahoo (YHOO). The best of this off-key quartet has lost only one-third of its value so far this year. Miller still likes them all. "The market's myopic, obsessive focus on what is going on for the next three or six months doesn't alter their business value."

Managed-care stocks haven't been any prettier. After soaring almost 300% the past five years, Aetna (AET) and UnitedHealth (UNH) have lost more than 30% and 20% respectively. "Momentum money has exited these names," Miller writes.

Nor have homebuilders helped. Miller recently bought homebuilder Pulte (PHM), and it has proceeded to fall more than 25%. "We clearly made a mistake by initiating positions too early." But Miller thinks housing stocks will do much better than expected longer term.

Last but not least, Miller has avoided energy. "We were clearly wrong," he concedes. His rationale then and now: All the good news is already reflected in the stocks' prices.

I'd be a buyer of this fund -- especially now -- even though it has an expense ratio of 1.68% annually and even though Miller is managing $45 billion in this fund and other similarly run accounts.

But given the girth of Legg Mason Value, I'm more enthusiastic about Miller's other fund: Legg Mason Opportunity (LMOPX). Yes, it has an expense ratio of 2.08%. But it also has assets of only $5.5 billion. That gives it more flexibility and allows it to own stocks of smaller companies. Indeed, Opportunity has held up slightly better than Value this year and has still beaten the SP by four percentage points per year over the past five years.

Miller is down, but a long way from out. Will the streak end this year? Probably. But will he continue to be a great fund manager? Bet on it.




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