A Mutual Fund Legend Steps Down

Legg Mason's (LM) Bill Miller was the mutual fund industry's rock star through the 1990s and the first few years of this millennium. Now he's unplugging his amp and walking off the stage.

Miller is leaving Legg Mason Capital Management Value Trust at the end of April. It was there where he achieved the amazing feat of beating the S&P 500 for 15 consecutive years before being proven mortal in 2006. Miller isn't going away entirely. He will still serve as the company's chairman. He will also continue to co-manage the smaller Legg Mason Capital Management Opportunity Trust.

Miller's DiMaggio-esque Streak

Beating the S&P 500 isn't easy, even if cynics will argue that it's what fund managers are paid well to do.

A fund has to deal with management expenses and trading costs. If that isn't enough of a setback, an open-ended fund also has to deal with the inflows and outflows of shareholders. As money piles into a hot fund, a manager is pressed to put it to work so it doesn't drag down performance. When investors get nervous and request redemptions, fund managers sometimes have to sell stocks before they wanted to.

It's under that climate -- from 1991 to 2005 -- that Miller managed to stay ahead of the market averages every single year. We may never see that kind of DiMaggio-esque streak in our lifetime.

The Debacle of 2008

Miller's style was unconventional. You won't find too many managers running "value" funds holding on to dot-com darlings with lofty valuations, but Amazon.com's (AMZN) been one of Miller's top holdings for years. His concentrated bets on fast-growing tech stocks and well-performing financials paid off until 2006.

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Miller's fund gained 5.9% in 2006, and investors didn't seem to mind that the S&P 500 rose nearly 16% that year. The streak was over, but it was probably a fluke. Investors continued to buy into the fund, and assets peaked at more than $20 billion in 2007.

Unfortunately for Miller, Value Trust shed 6.7% of its value in 2007 while the market managed a small gain. Sticking to his guns cost him dearly the following year. Betting big on financials as the subprime mortgage market was imploding led investors to a whopping 55% decline in 2008. Shareowners in his Opportunity Trust fund fared even worse, shedding nearly two-thirds of their value.

The greatest fund manager of recent memory was suddenly at the helm of the country's worst mutual fund in 2008.

Moving On

Miller bounced back to handily beat the market in 2009, but by then investors were latching on to new fund rock-star managers. The fund lost to the S&P 500 in 2010, and it's shaping up to come up short again in 2011. The fund that peaked four years ago with north of $20 billion in assets was down to $2.8 billion by the end of September.

A change in fund management is one of my four warning signs to watch in deciding when the time is right to cash out of a particular mutual fund. Miller's recent performance -- losing to the S&P 500 in what is shaping up to be five of the past six years -- may make that point moot, but it's still something worth considering.

Sam Peters, who was brought in to co-manage the fund with Miller last November, will be taking over the reins. His first year has been unimpressive thus far, but patient investors may as well hold on to see what he can do on his own next year.
This certainly isn't the way that Miller scripted it, but his 15-year streak will outlive the final few lamentable years in the record books.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article.

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