Bill Miller fights back

(Fortune Magazine) -- It's been a rough couple of years for Bill Miller. His $16.5 billion mutual fund, Legg Mason Value Trust, just turned in its worst two-year performance relative to the S&P 500 since 1990, trailing the index by ten percentage points in 2006 and by 12 last year. That would be a poor stretch by any standard, but it's even worse by Miller's own: Until 2006 his value-oriented fund outperformed the index every calendar year for an astounding decade and a half (see "The Man Who's Beaten the Market 15 Years Running," Nov. 27, 2006).

With relatively few stocks in the portfolio - fewer than 50 at present - Value Trust (LMVRX) has long been one of the most volatile funds in its category. But investors aren't used to seeing Miller lose, and they pulled more than $3 billion out of the fund in 2007, according to Financial Research Corp. Based on its expense ratio of 1.7%, that adds up to a $50 million annual drop in revenues from fees.

The loss of confidence in Value Trust reverberates loudly through Legg Mason (LM). Miller is not just the firm's star fund manager but also chairman and chief investment officer of its $59.6 billion equity investing group, Legg Mason Capital Management. And the stumble by its flagship fund has come at a particularly tough time for Legg. In January it finally completed a drawn-out CEO search to replace co-founder Raymond "Chip" Mason. Last quarter it had to take a $23 million charge related to asset-backed securities in its money market funds. And its stock has fallen 30% over the past year, way underperforming its peers. The Baltimore investing house could use a Miller comeback, and soon.