A Remarkable Record to Uphold

For 12 years, Legg Mason Value Trust has outrun the S&P 500. Can it continue?

Bill Miller hopes 13 will be his lucky number. The 53-year-old steward of Legg Mason Value Trust (LMVTX ) is the only mutual-fund manager to have beaten the Standard & Poor's 500-stock index 12 years in a row. That makes his fund a natural choice for an award in the large-cap-blend category.

But 2003 poses some special challenges for Miller and Nancy Dennin, who became assistant manager in 2000. The two already run a hefty $17 billion in the fund and private accounts, and that's a bit unwieldy. "If our assets get too large, it inhibits our flexibility in investing," says Miller, forcing him into larger companies or more companies than his concentrated investment style can handle. Indeed, part of Miller's strategy has been to keep holdings down to less than 40 stocks. With so few positions often in just a few sectors, Value Trust behaves differently than the broad market. That has helped it outperform the S&P 500 by a wide margin at times.

Miller is counting on his value-investing techniques to help him win round 13. He buys unloved companies, such as Tyco International, and typically holds on for at least five years. Like a classic value manager, he looks for companies trading at a discount to the price they would fetch if they were taken private or acquired. But he goes beyond traditional valuation tools such as the price-to-earnings ratio and price-to-book ratio: His "multifactor model" uses many more metrics to analyze different hypothetical outcomes. "Money managers often make just one forecast," says Miller. "When that forecast doesn't come true, they have to change their portfolio because it's built on that forecast. But really, investing is about probabilities."

Take a look at Amazon.com (AMZN ), a longtime holding. Right now, the stock is trading at around $23, near what he paid for it. By his estimates, it's way undervalued. Miller's model has different price targets for the stock, depending on Amazon's sales-growth rate -- in the mid-30s if the growth rate hits 14% or 15% this year, which it is on target to do, and over $40 if sales growth goes higher. Such a flexible approach allows Miller to adjust his strategy to suit the times.

He has also made big bets on debt-ridden Nextel Communications (NXTL ), scandal-plagued Tenet Healthcare (THC ), and struggling retailer Home Depot (HD ). Making such gutsy moves -- and getting them right -- are what keeps this fund ahead of the pack.

By Lewis Braham

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