As 2007 winds to a close, Legg Mason Value Trust (Symbol: LMVTX) manager Bill Miller finds himself trailing the S&P 500 for the second consecutive year after his 15-year streak of beating the index finished in 2005. Never one to hug the index benchmarks and ignoring sniping from critics, Miller has missed out on the entire energy sector rally while dramatically overweighting technology, telecommunications and media companies. His top 10 holdings have included virtually the same 10 names for several years now, including Amazon.com (AMZN), AES (AES) and UnitedHealth Group (UNH).
But unlike last year, Miller says he’s going to take some action now, reshape his portfolio, change his views. In a third quarter outlook letter to his shareholders dated November 1, Miller says its time for a change. “Just as the right thing to do in 2002 was to buy what everyone was panicked about, I think the greatest gains over the next 5 years will be made in those securities people are panicked about today,” he writes, without naming names but citing the financial and consumer goods sectors. Of course, he’s already got some of those panic-hit names in his fund, like Countrywide Financial (CFC), down 65% year to date, and Citigroup (C), down 28%. I don’t think those are the ones he’ll be changing (he even says Countrywide’s fair value is more than three times higher than its current price).
So what’s Miller says he’ll do:
“Here is what you can expect: the fund will become more of what it already is, large capitalization US, as we systematically reduce our mid-cap names in favor of those with larger market values. As I noted elsewhere, I think large-cap US is the cheapest part of the equity market and so we will have more of those names. We will also extend exposure into some sectors from which we were previously absent. Inter industry valuations are pretty homogeneous and so concentration pays less than it used to. In other words, we will own more stocks, and in new industries. We will still be quite concentrated compared to the average mutual fund, just less than we have been previously.”
To cover some of these buys and to reduce the risk to the fund from over-concentration, he says he’s lightening up on his top 10 holdings. Bad news for Amazon, down 2%. What about those mid-cap names? Stay tuned…