NEW YORK (CNN/Money) -
Bill Miller has a track record that any fund manager would kill for -- he's on pace to beat the S&P 500 for a record 12th year in a row. No other fund in the history of the $6.2 trillion business has accomplished such a feat.
But Legg Mason Value Trust's fabulous record doesn't tell the whole story. Like the fact that the fund has lost money three years in a row. Like the fact that the fund is expensive. Like the fact that the fund is extremely concentrated in just a few -- very risky -- stocks.
"This is a triumph of P.R. over the interests of investors," said Sheldon Jacob, editor of the newsletter No-Load Fund Investor. "I don't think this means anything for investors. Most investors aren't happy if their fund is losing money, even if it is beating its benchmark."
A great fund -- or is it?
To be fair, few managers have made money during the bear market. What counts the most with a mutual fund is its long-term record, and on that note, Miller has hit a home run. The fund has a 10-year annualized return of nearly 15.6 percent, putting it at the top of its category. As the bear market has dragged on, his long-term performance seems all the more mythical.
 |
|
| Bill Miller |
"Somebody like Bill Miller is watched closely by people who are interested in stock pickers, who are looking for new ideas," said Chris Traulsen, an analyst at Morningstar.
Miller, 52, looks for stocks he thinks are trading at large discounts to their intrinsic values, which he measures by the present value of projected cash flows. Making such projections is inexact, of course, and often his strategy has taken him where few other value managers would tread. He bought America Online and Dell Computer back in the 1990s when they were cheap and held on even as they got expensive. The fund, with $11 billion in assets, earned 48 percent in 1998 and 26.7 percent in 1999. He was named Morningstar Manager of the Year in 1998.
But even though the fund is ahead of the S&P by about 3.7 percentage points, it's still losing 15.6 percent year to date through Dec. 6 because plenty of names in Miller's lineup are suffering mightily. Tyco International, for example, the No. 3 holding, is down about 71.5 percent amid accounting problems and criminal charges against former executives. Miller started buying the stock in the first quarter, according to Morningstar. In the first quarter, the stock traded in a range of $23.05 and $57.12 a share -- the stock traded recently for around $16.76.
| * As of Dec. 6. | | Source: Morningstar |
|
And despite strong performance by another holding, Nextel Communications (up 17.7 percent this year), Miller has been stung by his telecom bets. As of Sept. 30, Miller sold stakes in Lucent as well as Tellabs, and probably lost money on the bets, Traulsen said. (Miller started buying Lucent in the third quarter of 2001 when it traded for $4.34 to $6.21 a share; and owned Tellabs since the second quarter of that year, when the stock traded between $16.04 and $48.75 a share. Lucent is trading around $1.43 a share, while Tellabs is around $7.19.)
Miller also owned Enron briefly in the fall of 2001, though he sold out of the troubled stock before the end of the quarter, Traulsen said.
And he's not afraid to keep buying stocks that are falling. Another top telecom holding, Qwest Communications, which Miller added to in the third quarter of this year, is down nearly 70 percent year-to-date. He also defended his stake in Tyco earlier this year, arguing he'd like to buy even more of the battered stock. (Click here for more about why Miller liked Tyco.)
To be sure, Miller has a good track record when it comes to picking winners. You can't dismiss his success with AOL and Dell in the 1990s. And his patience on Amazon.com, which he began buying in 1999, has paid off -- it has more than doubled this year.
| Related stories and tools:
|
|
|
|
|
But there's no question that these are risky bets, and the fund owns just 34 stocks -- so if he's wrong on any of them, it will hurt that much more. More than 56 percent of the fund's assets are in the top 10 holdings.
The fund also comes with a steep price tag -- an expense ratio of 1.68 percent, well above the category average of 1.27 percent.
Miller, for his part, declined comment for this article, but he'll be on hand to talk about his fund at a Legg Mason investing conference on Wednesday in Manhattan. In a January press release when Legg Mason touted his record through 2001, he said his focus has been "to provide attractive long-term growth of capital for our shareholders."
And Traulsen still recommends the fund as a solid core holding for aggressive investors with a long investing horizon.
|
