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Legg Mason’s Bill Miller Will Exit Main Fund After It Falls Behind Peers

Bill Miller, the Legg Mason Inc. (LM) manager famous for beating the Standard & Poor’s 500 Index for a record 15 years through 2005, will step down from his main fund after trailing the index for four of the past five years.

Miller, 61, will be succeeded by Sam Peters as manager of Legg Mason Capital Management Value Trust (LMVTX) on April 30, which is the 30-year anniversary of the fund, the Baltimore-based firm said today. Miller, who ran the fund since inception, will remain chairman of the Legg Mason Capital Management unit while Peters will be chief investment officer.

Miller, a value investor known for his bullish views of the economy and stock markets, became mired in the worst slump of his career as he wagered heavily on financial stocks during the 2008 credit crisis. Value Trust lost 55 percent that year as the S&P 500 dropped 37 percent, including dividends, prompting a wave of withdrawals. The fund’s assets have plunged from a peak of $21 billion in 2007 to $2.8 billion.

“April 2012 is the right time for Sam to take over,” Miller said in the statement. “Over the past year, Sam and I made important adjustments to the fund’s portfolio construction and characteristics, and we’re both very pleased with how it is positioned.”

Miller last year named Peters, a former Fidelity Investments stock picker who joined the firm in 2005, to become his co-manager and eventually his successor. Miller initially co-managed Value Trust with Ernie Kiehne, then took sole responsibility in 1990, the year before his winning streak started.

Stock Market Boom

Miller’s rise in the 1990s, helped by a bull market for stocks, was driven by his picks of inexpensive financial shares as well as out-of-favor technology companies. Two of his most successful bets were big stakes in Dell Computer Corp. and America Online Inc., which he accumulated in 1996.

Morningstar Inc., the Chicago-based research company, named him fund manager of the decade for his performance in the 1990s.

Miller became known for his concentrated portfolio, often holding fewer than 50 stocks, and his style of adding to holdings as prices fell. He doubled his stake in power-supplier AES Corp. during 2002 when the stock fell 83 percent. In 2003, AES’s stock almost tripled.

“Bill Miller has been synonymous with Legg Mason for more than 20 years, and Legg Mason’s ability to attract money has been tied to its brand,” said Todd Rosenbluth, a mutual-fund analyst at S&P Capital IQ, a unit of New York-based Standard & Poor’s.

Source: Legg Mason via Bloomberg

Sam Peters, a fund manager at Legg Mason Inc. Close

Sam Peters, a fund manager at Legg Mason Inc.

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Source: Legg Mason via Bloomberg

Sam Peters, a fund manager at Legg Mason Inc.

Cutting Kodak

More recently, the strategy backfired. Miller started buying shares of Eastman Kodak in 2000, when the shares were trading at an average price of $55, and had increased his stake to as much as 25 percent at the end of 2005. He unwound the bet earlier this year at an average price of $3.89 a share, realizing a $551 million loss through the divestiture, according to a regulatory filing.

Miller started trailing the S&P 500 in 2006 when he stayed away from energy stocks that had surged amid a commodities boom. His performance was hobbled further in 2008 as picks including U.S. insurer American International Group Inc. and Freddie Mac tumbled during the global financial crisis.

“The two main culprits were that in the early to mid-2000s, he stayed away from energy stocks and that was a huge opportunity cost,” said Bridget Hughes, an analyst with Morningstar in Chicago. “A much more damaging decision was the one to stick with financial stocks.”

Recovery Bet

As markets rebounded in 2009 and 2010, Miller bet the U.S. economy would return to its old strength and stayed with bank stocks and consumer-oriented companies. The fund topped peers and the S&P 500 with a 41 percent return in 2009 as markets rebounded, only to fall behind benchmarks again last year with a 6.7 percent gain. Value Trust declined 5.5 percent this year through Nov. 16, trailing 60 percent of similar funds, according to data compiled by Bloomberg.

Over the past five years, the fund has fallen at an average annual pace of 9.6 percent, ranking near the bottom of its peer group.

Miller will continue as manager of the $964 million Legg Mason Capital Management Opportunity Trust (LMOPX), which has slumped 34 percent this year, according to data compiled by Bloomberg. Over the past five years, that fund has declined at an annual pace of 13 percent.

Stock Pickers’ Woes

The inability of famed stock pickers such as Miller, Capital Growth Management’s Kenneth Heebner and Fidelity Investments’ Harry Lange to protect investors from the market declines helped spur $537 billion in withdrawals from actively managed U.S. equity mutual funds since 2006, as clients shifted money into bonds and index products.

This year, more top stock pickers have fallen on hard times as market volatility surged. Fairholme Capital Management LLC’s Bruce Berkowitz is trailing peers after his flagship fund fell 29 percent. Berkowitz was named domestic stock mutual fund manager of the decade by Morningstar in 2010.

At Legg Mason, Miller’s underperformance contributed to 16 straight quarters of net redemptions for the parent company. Chief Executive Officer Mark Fetting has said improving fund performance at all affiliates is a priority after returning the firm to profitability from a $2 billion loss in fiscal 2009.

Replacing Managers

Activist investor Nelson Peltz, who took a stake in 2009 and is on Legg Mason’s board, said in an interview last month that he expects the Western Asset Management fixed-income division, the firm’s biggest, to lead the turnaround.

Legg Mason fell 2.8 percent to close at $24.83 in New York. The shares have lost 32 percent this year, compared with the 25 percent decline in the S&P index of asset managers and custody banks.

Miller worked in the research unit of Legg Mason before being named portfolio manager of Value Trust. He earned an economics degree from Washington & Lee University, where he graduated in 1972. After graduating, Miller served as a military intelligence officer overseas and then pursued graduate studies in philosophy in the Ph.D. program at Johns Hopkins University.

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

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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