Poor results signal trouble for Legg's Miller

BOSTON (Reuters) - Legg Mason Inc's once-celebrated Value Trust fund is set for its worst-ever annual returns in 2008, and some investors grumble that time is running out for its manager, Bill Miller.

The flagship stock mutual fund lost 57 percent in the year to December 29, the worst in its class and underperforming the Standard & Poor's 500 Index for the third straight year following the S&P 500's 39.4 percent loss.

The losses are so big, the fund now trails the benchmark S&P 500 Index over not just one year but over three, five and 10 years. It is barely ahead over 15 years.

Hemorrhaging assets, its size has shriveled to about $4.3 billion at the end of November from more than $20 billion in mid-2007.

Miller's luster is fading. The 58-year-old made his and Legg Mason's name as the only manager to beat the S&P 500 Index 15 years in a row until 2006 with bold portfolio picks that once characterized the Value Trust.

"Either he turns it around next year, or probably something happens. If it doesn't work for him in the next year, probably in 2010 he'll be asked to retire," said an analyst who owns Legg shares at a Washington, D.C.-based hedge fund and who declined to be identified so he could speak candidly.

Neither Legg Mason nor Miller would comment for this story.

The $1.3 billion Opportunity Trust that Miller manages has fared worse, losing 66.9 percent in 2008 and suffering the ignominy of the worst performance in its category according to research firm Lipper Inc, a unit of Thomson Reuters.

Miller, who has enjoyed strong backing from Legg Mason Chairman and Chief Executive Mark Fetting, is to gain additional responsibilities from January 1 when he joins a team to manage the Legg Mason Partners All Cap Fund at the Baltimore-based asset management company.

'FALSE BOTTOMS'

Miller made big bets on the financial sector in stocks such as insurer American International Group , mortgage lender Freddie Mac and investment bank Bear Stearns. All imploded in the worst U.S. financial crisis since the Great Depression of the 1930s.

Each had to be rescued by the U.S. taxpayer.

"The fund owned some of the financial firms that completely blew up when the crisis worsened," said Greg Carlson, a mutual fund analyst at Morningstar. Carlson said drops in Value Trust's two biggest holdings, power firm AES Corp and online retailer Amazon.com Inc , also hurt.

Miller, who conceded his performance was "terrible", has begun to change his approach, spreading the fund's investments to more sectors and halting a policy of aggressively purchasing select stocks that others are dumping.

The Value Trust dumped AIG, Freddie and Goldman Sachs . It bought credit card company American Express , which was granted access to $5.72 billion of U.S. taxpayer money just before the Christmas holiday.

Value Trust also bought stock exchange operator NYSE Euronext , software firm Microsoft Corp , corporate storage equipment maker EMC Corp and industrial and consumer goods maker 3M Co in the September quarter.

Banking firms Citigroup Inc and JPMorgan Chase & Co , among the fund's 10 biggest holdings in September, were absent from the top 10 by the end of November, according to the most recent data. The fund's holdings rose to 43 investments from 32 at the end of September.

Miller's changes seem to be working. The Value Trust is up 12.4 percent over the past month, outperforming the S&P index's 6.8 percent return.

Still, 16 percent of the fund is invested in financials.

"We believe financials are going to underperform in 2009," said Neil Hackman, president and chief executive of Oak Financial Group, a Stamford, Connecticut-based advisory firm which had about $10 million invested with Miller until 2006.

Hackman said Oak Financial would not invest with Miller or other value investors with sizable financial sector exposure next year "unless they somehow change their focus and mix."

(Editing by Jason Szep, Leslie Gevirtz)

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