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Miller, who was recently in Hong Kong for a series of client meetings, says the volatility created by the US subprime crisis has created a good opportunity for him to adjust his portfolio because of changing valuations and risk appetite.
ôTypically, when you have these highly emotional periods when prices get really volatile, valuations come undone and we can take advantage of that to improve the risk-adjusted rate of return of the portfolio,ö Miller says. ôWhen you have these kinds of credit dislocations, itÆs usually the case where it represents a period where new leadership emerges in the market.ö
Many large-cap US stocks are trading at lower price to earnings multiples than small- to medium-cap stocks, many of which have lost their discount to the market in line with a flight to quality, Miller notes.
General Electric is among the large-cap US stocks that are being added to the Legg Mason Value Trust. Miller expects to add more financials and consumer discretionary companies, ôwhich have underperformed and are very cheapö, to his portfolio. He is also long on the US dollar, which is at a 40-year low.
Miller says an expected slowdown in US consumer spending isnÆt a deterrent for him because he believes this has already been factored into share prices. Positioning behind financials at a time of credit concerns in the US is also justified, he says, because he believes the crisis has lowered valuations to attractive levels and a steeper yield curve will be benefit the firms he plans to invest in.
Nearly one-third of MillerÆs flagship $20 billion Legg Mason Value Trust is already invested in consumer discretionary companies, one-fourth of the portfolio is in information technology, 13% is in financials, while the balance is spread across other sectors.
The fundÆs top 10 holdings û which make up around 50% of the portfolio û as of end-August were Amazon.com, Google, Sprint Nextel, AES Corporation, Qwest Communications International, UnitedHealth Group, JPMorgan Chase, Aetna, Sears Holdings, and eBay. Before the summer, Tyco International was also in that list.
MillerÆs fund has benefited from Amazon.comÆs strong gains this year, but has suffered from a sharp drop in Tyco InternationalÆs share price over the past nine months. In the past, the fund generated hefty returns from investments in Dell and America Online in the early 1990s and from the Google initial public offering in 2004.
Miller, who has managed the Legg Mason Value Trust since its inception in 1982, calls himself a ôpatient contrarian, value-drivenö fund manager and the past year has indeed been a major test of his patience. Legg Mason Value Trust rose 5.3% last year compared with the S&P 500Æs 16% return, the first time since 1991 that Miller failed to beat his benchmark. So far, it looks as if his midas touch hasnÆt returned because the fund was down 1.5% as of end-August compared with the indexÆs 5.2% gain.
Miller's performance has also been hurt by falling housing-related stocks, which he started buying around 18 months ago, including Countrywide Financial and Pulte Homes. He also steered cleer of energy stocks, a position that worked against him because shares of companies in the oil and natural resources industries have performed strongly in recent years.
Baltimore-based Legg Mason Asset Management has around $71 billion in assets in US equities.
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