April 3 (Bloomberg) -- Bill Miller's Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago on losses from longtime holdings such as Sprint Nextel Corp. and newer bets including Bear Stearns Cos.

The $12.2 billion fund fell 20 percent, trailing all but four of 660 rivals that buy stocks of companies with market values of more than $15 billion, according to data from Morningstar Inc. in Chicago. Last year, Miller lost 6.7 percent, including dividends, compared with the average 6.2 percent gain among similar mutual funds.

The manager, whose 15-year record of beating the Standard & Poor's 500 Index came to an end in 2006, is lagging behind the U.S. benchmark for the third straight year. It's his longest slump since he joined Baltimore-based Legg Mason Inc. in 1981.

``It's been an absolutely hideous quarter, but you cannot write him out,'' Russel Kinnel, director of fund research at Morningstar, said in an interview. ``He's had uncanny luck in previous years where everything worked out, but this time he's been where you just didn't want to be.''

Assets in Legg Mason Value Trust plunged 40 percent in the past year because of the losses and investor redemptions. Legg Mason's net income in the third quarter ended Dec. 31 fell 11 percent in part because of $10.6 billion in net withdrawals from stock funds including Value Trust.

Miller, 58, made his name by finding out-of-favor companies such as General Motors Corp. and Eastman Kodak Co., holding them for years and ringing up gains when other investors discovered them too. He also owns fewer stocks than competitors, making his strategy riskier. Value Trust had 51 stocks as of Dec. 31, about one-fourth the number held in similarly managed funds, Morningstar data show.

Miller declined to comment. In a Feb. 10 letter to fund shareholders, he said that ``the market abounds with good value.''

``Those values may get even better if the markets get more gloomy, but they are good enough now for us to be fully invested,'' Miller wrote. ``Patient long-term investors (including the fund) should be well rewarded for putting money to work right in here.''

2 for 10

This year, just two of Miller's top 10 picks have had positive returns. One is New York-based JPMorgan Chase & Co., the third-largest U.S. bank by assets, which has gained 5.9 percent. The other is Yahoo! Inc., the Sunnyvale, California-based Internet-search company whose shares are up 20 percent in 2008 after a $44.6 billion unsolicited bid from Microsoft Corp.

Sprint, his seventh-largest holding, has dropped 50 percent as the Overland Park, Kansas-based mobile-phone company loses customers to rivals and cuts prices to lure them back. New York- based Bear Stearns, which accounted for 1.2 percent of fund assets, has plunged 88 percent. The fifth-largest U.S. securities firm agreed last month to be acquired by JPMorgan for $10 a share, down from a peak of $158.39 a year ago, to avert bankruptcy.

Financials, Housing

Miller put about 21 percent of assets in financial and housing-related stocks as of Dec. 31, two groups that have been pummeled by the worst real-estate slump since the 1930s. Communications and technology stocks, which accounted for about one-third of assets, have tumbled on concerns that earnings growth will slow.

Value Trust has a three-year Sharpe ratio of -0.51, Legg Mason said, compared with an average of 0.16 for peers as calculated by Morningstar. A higher Sharpe ratio means better risk-adjusted returns.

Miller loaded up on financials last year after saying that the selloff among banks and brokers made them the cheapest since 1990. Miller had 19 percent of assets in financial stocks such as Bear Stearns, Citigroup Inc. and Merrill Lynch & Co. as of December, up from about 15 percent a year earlier.

Paring Amazon

Citigroup and Merrill Lynch, both based in New York, have fallen 18 percent and 16 percent, respectively. Those losses have been partially offset by JPMorgan.

Amazon.com Inc., the fund's biggest holding, has fallen 17 percent in 2008 after more than doubling in value last year. Miller started buying shares of Seattle-based Amazon, the biggest Internet retailer, in 1999. He pared his stake to 6.9 percent of assets as of year-end from 8.8 percent in September.

Miller's housing-related stocks, which he started buying about two years ago, include lender Countrywide Financial Corp. and homebuilders Pulte Homes Inc. and KB Home. The fund held 1.4 percent of its assets in Calabasas, California-based Countrywide at the end of December, 0.8 percent in Dallas-based Centex Corp. and 0.5 percent in KB Home of Los Angeles.

The fund manager has stayed out of energy stocks since a rally began in 2003, a decision Miller has rued as oil and natural-resources shares surged during the past four years. Miller added his first energy holdings last year with the purchase of Exxon Mobil Corp. shares. Exxon Mobil, the world's biggest oil company, accounts for 0.3 percent of the fund's assets.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: April 3, 2008 15:52 EDT