Bill Miller's streak strikes out

For the first time in 15 years, the legendary fund manger's Legg Mason Value Trust won't beat the S&P 500.

By Paul R. La Monica, editor at large

NEW YORK ( -- They say it ain't over until the fat lady sings. But with just hours left on the last trading day of the year, it seems safe to say that she is going through her vocal exercises, sipping some hot tea with lemon and honey and getting ready to serenade Legg Mason Value Trust manager Bill Miller.

Miller's fund has beaten the S&P 500 for 15 straight years, a streak that has made him one of the most well-known and highly respected investment professionals on Wall Street. According to fund research firm Morningstar, his fund has had an annualized return of nearly 12 percent over the past ten years, compared to about an 8 percent return for the S&P 500.

Bill Miller won't beat the market this year, but his fund has still been a big winner for long-term investors.
The streak is over: Bill Miller's Legg Mason Value Trust has beaten the market for 15 consecutive years, but it will not outperform the S&P 500 in 2006.

But as of December 28, Miller's fund was trailing the broader market by a wide margin.

The Legg Mason Value Trust was up 6.3 percent while the S&P 500 had returned 16.3 percent, including dividends.

One reason Miller has lagged the market is a lack of exposure to the energy sector, which has been one of the better performers in 2006 thanks to a rise in oil prices. The S&P Energy index has gained 23 percent this year and makes up about 10 percent of the S&P 500's total market capitalization.

Speaking at a Legg Mason investment conference in New York earlier this month, Miller conceded that he was wrong on energy stocks. He said he thought about buying some in 2003 but felt that he would be chasing performance and decided to avoid them.

However, he added that he still is wary of oil stocks. Even though he said many energy stocks are reasonably valued, he thinks the price of oil will probably fall slightly in 2007. And oil stocks tend to move in tandem with oil prices, he noted.

Miller, despite having the word "value" in his fund's name, also has not been afraid to invest in stocks with higher growth potential that many conventional value managers would find to be too expensive.

He also tends to make concentrated bets on just a handful of stocks. According to Morningstar, Miller only owns 41 stocks in his fund, and nearly 45 percent of the fund's assets are invested in his ten largest holdings.

As such, big bets on several Internet companies have not panned out for Miller this year.

A trio of high-profile Internet stocks, (Charts), eBay (Charts) and Yahoo! (Charts), have all fared poorly this year. Amazon, Miller's ninth-largest holding, is down 15 percent. EBay and Yahoo!, Miller's 16th- and 17th-largest holdings, are down 30 percent and 35 percent respectively this year.

Miller also owns Google (Charts), though (it is his seventh-largest holding), and that stock has gained 11.5 percent this year.

But Miller said at the Legg Mason conference that Yahoo! is now one of the most attractive stocks in his fund. He said Wall Street is underestimating how much Yahoo's new search technology for advertisers will add to the company's earnings and that the stock, currently trading at about $25.50, could be worth a price in the mid $40s.

Three health insurers have also dragged down the returns of Legg Mason Value Trust this year. Miller owns UnitedHealth, Aetna and Health Net. UnitedHealth, Miller's fifth-largest holding, is down 14 percent. Aetna (Charts) and Health Net (Charts), Miller's 10th-largest and 21st-largest holdings, have fallen more than 5 percent.

UnitedHealth (Charts) has been caught up in the options backdating scandal - manipulating the dates of options grants to boost their value - that has plagued many companies this year. The company's CEO stepped down in October as a result of options backdating problems.

But Miller said earlier this month that he thought insurers would bounce back next year since healthcare spending as a percentage of the overall economy is increasing, and because the stocks are all very cheap, trading between 13 and 16 times 2007 earnings estimates.

He also expressed optimism that his fund, and the broader market for that matter, would do well in 2007.

Miller said that with the economy slowing, the Federal Reserve probably will not need to raise rates any further. He said that would be good news for stocks, particularly large-cap stocks that have underperformed in recent years.

Specifically, Miller said that large tech companies like IBM, Dell, Microsoft and Cisco Systems have the potential to beat the market next year.

"Broadly speaking, tech is where most people are underweight. So it is a good place to be," he said.

With Miller's streak coming to a close, investors may be wondering who the next Bill Miller will be. Well, there is no clear answer.

The fund with the second longest streak of beating the market, the Quaker Strategic Growth fund, is actually down 5.3 percent through December 28. That fund, run by Manu Daftary, had beaten the S&P 500 eight years in a row.

But several funds riding seven year winning streaks are on track to beat the market this year.