Value Added

Opportunity Rocks

With a 14-year winning streak against the S&P 500, Bill Miller is a rock star in the world of mutual funds. His Legg Mason Opportunity fund is his next big hit.

By Steven Goldberg, Contributing Columnist, Kiplinger.com

March 1, 2005

Bill Miller is the closest thing the mutual fund world has to a rock star. His Legg Mason Value (LMVTX) has beaten the Standard & Poor's 500-stock index a record 14 years in a row, and that gives him superstar status.

But just like fans rushing the arena for the best view of the show, money has flooded into Value. Miller, 55, now manages more than $40 billion in the large-company value fund and other similar accounts. I wouldn't bet against Value, but Miller runs another fund that I think should do much better -- albeit with more volatility.

Indeed, Legg Mason Opportunity (LMOPX) has beaten Value in each of the five years since inception. It has returned an annualized 9% in those years -- almost double what Value has earned.

Opportunity has just a fraction of the assets as Value and it is much more freewheeling. It invests in smaller stocks and Miller can even bet on declines in stocks and stock indexes in Opportunity.

"The fund is intellectually interesting and fun," Miller told me Sunday. "Much of what we own in Opportunity would be inappropriate on a market-cap basis for Value."

There's another reason, too. With Opportunity, he doesn't have to worry about looking over his shoulder at the S&P and keeping a winning streak alive.

Not Your Father's Mutual Fund

I like to think of Opportunity as a kind of low-cost hedge fund. With an annual expense ratio of 1.9%, it's a very expensive mutual fund. But compared with hedge funds, which typically take 20% of the profits, it's a bargain. And I think it will do better than the vast majority of hedge funds.

But even Miller cautions that it's not a center-of-the-plate fund. "It's somewhat unpredictable in what it owns and what it contains. It ought not have a central part in people's overall portfolios."

He owns lots more foreign stocks in Opportunity, and some racy names, such as XM Satellite Radio (XMSR), which is years away from turning a profit.

He also owns Sina (SINA) and Netease.com (NTES), two Chinese Internet companies. "The market caps are so small relative to the Chinese Internet, it's hard to see how you don't do well in these over three, five or ten years."

His long time horizon is very different from most hedge fund managers, who tend to be hyper traders. "When our stocks get clocked, then we add to our positions."

Miller also uses his insights on the overall stock market and the economy to help guide his stock selection. And currently, he thinks the bulls are right.

He sees rising profits, low long-term interest rates, little inflation, a boom in mergers and acquisitions, and a market that's not overvalued. He's not worried about the dollar or the trade deficit. Indeed, he thinks the dollar is probably near its bottom.

One part of the market he doesn't like is energy. "Most energy names are up 25% to 30% in the first two months of this year, and that's a little bit excessive. The area doesn't appear to me to offer great opportunity."

CNBC guests nowadays favor energy stocks, he says. "That's all people can talk about." That's a bearish sign to Miller.

Worth Singing About

A lot of what Miller likes today is tech oriented. Longtime holding Amazon (AMZN) should grow at 20% to 25% annually, he thinks, while it will sell at 20 times free cash flow, about a market multiple, by 2006.

Another favorite is IAC/InterActive Corp. (IACI), a group of online businesses, including Expedia, Hotels.com, Match.com, Lendingtree.com, as well as the Home Shopping Network. The company plans to split in two, which Miller thinks will push the price up.

Ameritrade (AMTD), the online broker, is another favorite. It's a "low-cost provider," and "the stock has sold off because people are concerned about a price war" among online brokers. Miller says. Ameritrade has a lower cost structure than competitors. Plus, he thinks individuals will start trading more as stocks rise.

Netflix (NFLX), the movie rental company, has sold off, but Miller thinks it has hit bottom. He doubts Amazon will compete with it in the U.S., and he thinks the company, which has no debt and $2 to $3 a share in cash, will earn 50 cents to 60 cents next year.

Nextel (NXTL), which is merging with Sprint, will form the third largest wireless phone company. Miller thinks the wireless industry is changing as the number of major players shrinks to three. As a result, price wars will be less likely and analysts will revalue the group upwards over time.

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