Bill Miller Is Still the Master

Suddenly Bill Miller isn't looking so all-knowing anymore. Yes, that Bill Miller -- the one who has piloted Legg Mason Value to a record-shattering 15 straight years of beating the SP 500. So far this year, Legg Mason Value (LMVTX) is down more than one percentage point --- almost seven percentage points behind the SP.

I'd ignore those four bad months. Bill Miller, regardless of whether he beats the SP this year, hasn't lost a step. He's still one of the shrewdest money managers on the planet. Which is why I think it's important to listen to what he says in his new quarterly report.

Miller's main point: Commodities have had a huge run, and many people who missed the party are beginning to pile in. That almost always ends in disaster. His funniest example is J Sainsbury, a U.K. supermarket chain. It recently decided to invest 5% of its pension fund in commodities, according to the Financial Times.

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"Is it any surprise now that ... after the biggest commodity rally in 50 years ... that pension funds are falling all over themselves to allocate a portion of their assets to commodities," he writes.

Miller, 56, is blessed with a good memory. He remembers the spring of 2000, just after many of the best-known value managers had hung up their spurs. Among them were Julian Robertson, the famed hedge fund manager, George VanderHeiden of Fidelity and Robert Sanborn of Oakmark. Of course, that was just as the tech bubble was starting to pop, and a bull market in value stocks was beginning -- one that continues to this day.

Miller says the same kind of thing is happening now with commodities. "The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now."

Most commodities are now trading above their cost of production, he contends. What's more, Miller notes, "Historically, commodity prices have tended to fall in real terms due to the improvements in technology."

I think Miller is right. Regular readers of this column know that T. Rowe Price's Charles Ober, my favorite energy expert, says oil prices will fall to around $40 to $45 over the next three or four years as supply begins to catch up with demand. Ober's point is that, at those prices, lots of energy companies -- though by no means all -- still can make money.

But this is hardly the time to jump into energy futures -- much less copper or orange juice futures -- with both feet.

Where is Miller finding value? "The mega-cap SP names have lagged the small and mid caps, which are in the seventh year of relative outperformance."

That won't last forever. "In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years."

In other words, Miller likes large-company growth stocks like almost every superior manager I know. What he can't tell you -- and no one can -- is how long it will be before they bounce back.

But when the turn comes, you could do worse than owning some of Miller's biggest holdings, such as UnitedHealth Group (UNH), Amazon.com (AMZN), Tyco International (TYC) and eBay (EBAY).

Better yet, let the master pick stocks for you. But don't buy Legg Mason Value. It has gotten awfully big. Buy Miller's other fund: Legg Mason Opportunity (LMOPX). With just $6 billion in assets, it's far more flexible than Value.

The proof is in the results. Opportunity has beaten Value every year since inception at the end of 1999. What's more the fund is up more than 8% already this year.