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Legg Mason’s Peters Sees Few Changes When He Succeeds Miller

Legg Mason Inc.’s Sam Peters, the manager named last week to eventually succeed Bill Miller on the $4.24 billion Value Trust fund, said clients shouldn’t expect big changes to the investment style put in place by his mentor.

“We have a similar value-driven approach,” Peters, 40, said in a telephone interview yesterday from Baltimore, where Legg Mason is based. Investors can expect “a few tweaks.”

Peters, like Miller, favors stocks he deems cheap based on financial yardsticks such as per-share earnings, though he may turn more often to computer models to help him select companies. And like Miller, Peters has trailed competitors as Legg Mason struggles to stem withdrawals from its equity funds.

“There’s a lot of overlap in their funds, and their funds have behaved the same way,” Bridget Hughes, an analyst with research firm Morningstar Inc. in Chicago, said in an interview. “They had a bad ‘06, ‘07 and ‘08, and a great ‘09.”

Legg Mason Capital Management Special Investment Trust, Peters’s $1.22 billion fund, gained an average of 0.3 percent in the past five years, trailing 75 percent of peers that buy a blend of midsize growth and value stocks, according to Morningstar. Miller’s Value Trust lost 8.3 percent, lagging behind 99 percent of rivals, in the same period.

Miller, 61, became Legg Mason’s best-known manager as he beat the Standard & Poor’s 500 Index for a record 15 straight years through 2005. Peters will join Miller, who has no plans to retire any time soon, as a co-manager later this year. Value Trust’s investment team includes Mary Chris Gay, the fund’s assistant portfolio manager.

Miller is chairman and chief investment officer of the Legg Mason Capital Management stock-fund unit, which has about $18 billion in assets. Peters will continue to run his current fund after joining Miller at Value Trust.

Special Investment Trust

Peters’s fund, like those managed by Miller, trailed peers from 2006 through 2008 as bank and insurance holdings plunged in the global credit crisis. Special Investment Trust slumped 2.6 percent in 2007 as the Standard & Poor’s Midcap 400 Index rose 8 percent, according to data compiled by Bloomberg.

The fund lost 54 percent in 2008, 18 percentage points more than the midcap index, as insurance company XL Capital Ltd. fell 92 percent. Special Investment Trust climbed 80 percent in 2009, beating 97 percent of its rivals, as bond-insurance company Assured Guaranty Co., its top holding, almost doubled.

EBay Inc., which Peters bought in 2008 when the shares were trading at about $10, has more than doubled since. Peters said the price didn’t reflect the Internet auctioneer’s growth prospects and ability to generate cash.

‘Talent and Insight’

Peters, who co-managed the fund from March 2005 to January 2006 with Miller, said he stuck to his convictions after some investments soured during the credit crisis, a factor he says probably made a favorable impression on the senior manager. Miller, who wasn’t available to comment for this story, turned the fund over to Peters as sole manager in 2006 after praising his “talent and insight” in managing money.

“You don’t want to change your stripes when things get tough,” Peters said. “The main thing was temperament.”

Peters, a native of Santa Fe, New Mexico, said he became familiar with Miller’s ideas after hearing the manager speak at the Santa Fe Institute, a nonprofit education center, in the early 1990s. Peters, who had graduated in 1992 with a bachelor’s degree in economics from the Norfolk College of William & Mary in Norfolk, Virginia, said he was impressed with Miller’s ideas.

First Impression

“Of all the investors I’d followed, his approach seemed to make the most sense,” said Peters, who worked at Boston-based Fidelity Investments before joining Legg Mason in 2005. “I never thought I’d be working for him.”

Peters spent six years as an analyst and portfolio manager at Fidelity, the world’s largest mutual-fund company. He said Miller approached him late last year as he started to plan his succession.

“This was just thinking long-term,” Peters said. “It’s good planning and good transparency.”

Miller’s unit is preparing to add funds this year, including a research fund that will invest in stocks picked based on ideas from his team of analysts and portfolio managers, he said at a May 13 investors meeting. Value Trust rose 41 percent in 2009 after declining 55 percent in 2008. This year, it is down 6.4 percent. Miller also runs the $1.98 billion Legg Mason Capital Opportunity Trust, which has gained 2.3 percent this year.

Fund Withdrawals

Withdrawals from Legg Mason’s stock funds fell to $2.4 billion in the three months ended March 31 from $4 billion in the prior quarter. The firm has been trying to reverse redemptions in its equity funds since late 2006, when Miller’s record streak was snapped.

Miller has run since its inception in 1982. He initially co-managed the fund with Ernie Kiehne, then took sole responsibility in 1990, the year before his winning streak began.

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