Oct. 14 (Bloomberg) -- Legg Mason Inc.’s stock funds, including those run by Bill Miller, are luring back clients as improved returns spur institutions to put money into equities.

Miller’s unit was picked this month to run part of a stock portfolio for Oaks, Pennsylvania-based SEI Investments, said Kimberly Mustin, the head of Legg Mason’s institutional arm in the U.S. She declined to disclose the size of the mandate. The firm’s ClearBridge Advisors will run a $300 million large-cap stock portfolio for Principal Financial Group Inc., Mustin said in an Oct. 9 interview. Legg Mason’s shares rose the most in almost four months.

Legg Mason is trying to reverse seven straight quarters of net redemptions after its funds lagged behind peers during the biggest market losses since the Great Depression. The pace of withdrawals at the Baltimore-based company slowed to $30 billion in the quarter ended June 30 from a peak of $77 billion in the last three months of 2008. Chief Executive Officer Mark Fetting said last month the firm was seeing an “exciting turnaround.”

“In the institutional space, people are starting to look at their equity portfolios,” Mustin said. “The markets have helped.”

The Standard & Poor’s 500 Index rose 58 percent from its 12-year low on March 9 through Oct. 9 on signs that the U.S. recession is ending. Miller’s $4.7 billion Legg Mason Value Trust jumped 95 percent during the period after slumping 55 percent in 2008, including reinvested dividends.

Legg Mason rose $2.93, or 9.6 percent, to $33.45 at 4:15 p.m. in New York Stock Exchange composite trading, the second- biggest gain in the S&P 500. The shares have tripled from a low of $10.79 on March 9.

‘Positive Sign’

The firm, whose stock-fund divisions include ClearBridge as well as Miller’s Legg Mason Capital Management, will disclose flows for the period ended Sept. 30 when it releases earnings Oct. 22.

“Small victories are victories in themselves, but Legg Mason still has a ways to go,” Jeffrey Hopson, an analyst with Stifel Nicolaus & Co. Inc. in St. Louis who rates Legg Mason’s stock “hold,” said in an interview. “Outflows are moderating, and that’s a positive sign.”

Legg Mason’s assets fell to $693 billion as of Aug. 31 from $1.01 trillion on Sept. 30, 2007. About 60 percent of the money is managed for institutions.

About 63 percent of the firm’s new institutional money is slated for equities, Mustin said. Unlike mutual-fund investors, who are still choosing the relative safety of bond funds, institutions are showing an appetite for equities and “alpha- generating products” that seek higher returns than market benchmarks, according to Mustin.

Miller’s Moves

Mutual-fund investors deposited $15 billion into stock funds this year through August, while putting in $220 billion in bond funds, according to trade group Investment Company Institute, which doesn’t track deposits by institutions.

Legg Mason also is benefiting from moves to communicate more with its clients and to assess risk based on their needs, Mustin said. Miller, seeking to reduce risk in Value Trust, has tried to make the fund more representative of market benchmarks by adding industry groups that he has avoided in the past, such as energy.

Miller, best known for guiding Value Trust to better returns than the S&P 500 for 15 straight years through 2005, trailed the U.S. index for the next three years as he underestimated the impact of the global credit crisis on financial stocks such as American International Group Inc.

Ahead of S&P

Declining returns prompted institutions such as Massachusetts Pension Reserves Investment Management to pull money from Miller’s unit, Legg Mason Capital Management, last year. The pension plan also removed money from four other firms as part of a shift away from managers who actively pick stocks to buy and sell.

Legg Mason Value Trust advanced 38 percent this year, as of Oct. 9, as top holdings such as power producer AES Corp. and Sears Holdings Corp. surged. The fund was ahead of the S&P 500 by 17 percentage points.

ClearBridge, formed in 2006 after the acquisition of Citigroup Inc.’s investment unit, oversees about $47 billion. Its ClearBridge Equity Fund, using a strategy similar to the one it will manage for Principal Financial, advanced 20 percent this year through Sept. 30, according to data posted on the firm’s Web site. Manager Michael Kagan seeks stocks in industries that have the potential to grow faster than the economy.

ClearBridge is Legg Mason’s second-biggest unit after the Western Asset Management bond-fund division. Pasadena, California-based Western, which manages about $484 billion, is close to winning $1 billion each from two undisclosed clients later this year for a core fixed-income strategy, Mustin said. Bond-fund outflows, which totaled $22 billion in the three months ended June 30, have slowed, she said.

Legg Mason reported its first quarterly profit since December 2007 in the period through June 30, after ending a series of losses stemming from its money-market funds.

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

Last Updated: October 14, 2009 16:37 EDT