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Can Legg Mason Value Revisit Its Glory Days?

A recent visit with Bill Miller reinforces our confidence.

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From first to worst--that summarizes  Legg Mason Value's (LMVTX) performance over the past decade. The fund has lagged the S&P by 23 percentage points for the 12 months ended July 28, 2008. As a result, investors who bought the fund even a decade ago have now experienced performance over that span that lands near the large-blend category's worst quartile and lags the S&P 500 Index, too. That's right--the fund that famously beat the index in each of the 15 calendar years from 1990 through 2005 has seen its once-superb record greatly tarnished by the severity of its recent underperformance.

Investors have subsequently fled the fund in droves. But while the fund's poor performance has been painful, we think it's time for investors to consider buying more shares.

What Went Wrong
The fund's troubles have been well-documented, most recently in a column by my colleague Russ Kinnel, Morningstar's director of mutual fund research. In a nutshell, portfolio manager Bill Miller and company have made significant mistakes. One, they underestimated the extent to which their financial holdings were exposed to shaky borrowers. ( Freddie Mac (FRE) is a painful example of this.) And two, they didn't recognize the extent of the bubble in the housing industry. Miller bought into builders after they initially dipped in late 2005, only to see the stocks fall much further. Another factor that hurt performance was the fund's avoidance of high-flying energy stocks--an area that Miller and company have largely ignored over the fund's lifetime. Amplifying the effects of problems in specific stocks is the fact that the portfolio is (and always has been) highly concentrated. When a top holding goes into free-fall here, it hurts. When four or five or six do, it's excruciating.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.