NEW YORK (MONEY Magazine) - Bill Miller is a great fund manager who has become nearly a household name for one specific achievement: His Legg Mason Value Trust has beaten the S&P 500 a record 11 years in a row.

But so far in 2002 he has hit a wall. As of May 20, the $9 billion Value Trust is down 5.6 percent -- a little bit better than the S&P 500 but behind 89 percent of its peers. Worse, if you dig into Miller's portfolio, it's easy to wonder whether the man has lost his mind.

Bill Miller owns some scary stocks.

Just how scary? Try these on for size. One holding, AES, is a member of the energy industry's onetime Fab Four that included Calpine, Dynegy and Enron (another Miller holding briefly last year). From July 2001 to April 2002, AES cratered more than 80 percent as investors came down with Enronitis.

Accounting concerns have burned IBM, Tyco and Waste Management, which together account for more than 10 percent of assets. The three have fallen an average of 37.6 percent from their highs this past year.

Finally, Miller has amassed huge positions in troubled telecoms like Comverse Technology, Corning, Lucent, Nextel, Tellabs and Qwest. Following a slew of bad news and bankruptcies in the sector, this group has been decimated in the past year.

So what gives? Miller, who's usually rather chatty with Money, was unavailable to talk with us for this story despite repeated requests over nine weeks. But assistant manager Nancy Dennin did spend time with us, and if her mood is any indication, nobody at Miller's shop is panicking.

"We think the best place to find value is in these depressed stocks," says Dennin. "There's a lot of headline risk that's being discounted in the stocks." Indeed, rather than running scared, Miller and his crew have largely been increasing their shares in the laggards while paring back on the winners.

In the past six months, Miller has more than quadrupled his position in AES as the stock has fallen from $29 in September to just $5 in March. He has also upped his holdings in telecom -- scooping up an additional 4 million shares of Lucent, 5 million of Nextel and 6 million of Qwest in the first quarter of 2002.

"If we thought the stocks were attractive at higher prices," explains Dennin, "they're much more attractive at lower prices." (Interestingly, he has cashed out of only two names in the past six months, but they are big ones -- Dell and Berkshire Hathaway.)

Despite his fund's name, Miller has never been a typical value investor. He usually holds only 35 to 50 stocks, making bold, long-term bets on an eclectic group of names, from fallen growth stars like Amazon to cash cows like Eastman Kodak.

He defies Graham and Dodd tradition, having held on to Dell and AOL throughout the late 1990s, despite their pricey valuations. And he's comfortable moving big into unfashionable industries, as he did with casinos in 1996.

This is Miller's trademark -- buying stocks that everybody else is selling. He jumped into AOL in late 1996 after the stock had been chopped in half on reports of accounting impropriety. And he bought Toys R Us back in 1998 when management missteps jolted the stock by 50 percent. If he's early and a stock continues to drop, Miller usually just buys more.

Take Amazon. In 1999, the stock had fallen from $107 to $80. Miller started buying and then rode the dot.com all the way down to the single digits, adding to his shares the whole time. Between 1999 and 2002, Miller increased his stake from just 2 million shares to more than 30 million shares, lowering his average cost to around $30. After trading as low as $5.97 last September, Amazon has rallied back and now trades at $18.76.

It's tempting to criticize Miller's choices given his poor showing so far this year, but to do so would miss the lessons from his past. His biggest long-term successes have often looked like short-term stinkers. Wall Street ridiculed Miller more than a decade ago when he loaded up on underperforming money-center banks, insurance firms and mortgage lenders.

The fund trailed its category in 1990 and 1993 as a result. But he had the last laugh: the fund's 40 percent concentration in financials, including Citicorp (now Citigroup), Chase Manhattan (now J.P. Morgan Chase) and Fannie Mae, helped fuel Value Trust's outperformance between 1995 and 1998, when it placed in the top 2 percent to 5 percent of all mutual funds each year.

Investors similarly dogged UnitedHealth Group and Washington Mutual -- now among the fund's top five holdings -- back in 1998 when Miller upped his bets on those companies. Over the next two years, UnitedHealth stagnated while Washington Mutual shed more than half its value.

But his commitment there has paid off handsomely as well: Since the beginning of 2000, the stocks have posted gains of 230 percent and 140 percent, respectively, and both trade significantly above Miller's average cost.

"What we bought two to three years ago is what's working now," says Dennin. "The stocks we're buying now may be slightly behind the market, but they're poised to do well." Dennin points to telecom as a good example, confident that their picks there will rebound in the next few years.

Investors have overreacted to the cutbacks in capital spending, she says.

As for the streak, it's too early to make a call, but the fund's performance currently is just above the S&P. Back in 1998, Miller trailed the S&P 500 by almost five percentage points in October. He went on to post a spectacular final quarter, cranking out a year-end return that rocketed past the S&P 500 by more than 19 points.