Marquee Managers Get Their Mojo Back

Bill Miller is back. Or so some headlines would have you believe, in a nod to the terrific returns at his flagship mutual fund lately. Legg Mason Value Trust -- the fund that won Miller his reputation for excellence by beating Standard & Poor's 500-stock index 15 straight years -- soared 83% from the market's March 9 bottom through September 4, as the S&P 500 gained 52%.

The headlines imply that Miller has rediscovered his stock-picking prowess after a series of bad picks during the 2007-09 bear market -- including Freddie Mac, American International Group and Merrill Lynch -- devastated his long-term record. Investors who held on to Value Trust still haven't recovered their losses; from the start of the bear market, Value Trust (symbol LMVTX) is still down 49%, a decline 17 percentage points greater than that of the S&P 500.

Miller isn't alone in fund purgatory. Harry Lange, manager of Fidelity Magellan (FMAGX), invested in AIG and Wachovia, as well as some technology stocks that sagged, costing shareholders 60% during the bear market, or five points more than the S&P 500 lost. Since March 9, Magellan has snapped back 64%, or 12 points more than the index.

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Could this be the start of big winning streaks for Miller and Lange? Both Miller's funds and Magellan have rebounded for largely the same reason: They invested in riskier-than-average stocks with a heavy bias toward financials and tech. Yes, both managers made the right call that an eventual market rally would reward riskier names over safer ones, and that financials would lead the market. But as James Bianco, president of Bianco Research, a market-research firm, puts it, "If I bought Citigroup at $50 and rode it down to $1, should I be applauded after it goes from $1 to $3?" It's just too soon to say whether either manager is "back."

But we feel a bit more confident about letting other fallen stars out of the doghouse. Although the boneheaded move by Bill Nygren and Henry Berghoef to place 15% of the assets of Oakmark Select (OAKLX) in Washington Mutual, which eventually became virtually worthless, caused shareholders severe pain, the pair have already made up for lost ground and then some. From the start of the 2007-09 bear market through September 4, Select is now ahead of the S&P 500.

Similarly, Marty Whitman, manager of Third Avenue Value (TAVFX), has nearly caught up to his bogey. The fund, which lost 61% during the bear market, is now down 35% from the market's peak, compared with a decline of 32% for the MSCI World index. Third Avenue's weak results stem largely from its concentration in Hong Kong real estate companies. Investors should give the fund time for Whitman's analysis to bear fruit.

Mason Hawkins and Staley Cates still have some catch-up work to do at Longleaf Partners (LLPFX). The managers didn't heed the siren song of dirt-cheap financials, but they cost shareholders big-time because of poor decisions to invest in General Motors and Sun Microsystems. The fund has lost 41% -- or nine points more than the S&P 500 -- since the market's peak. But Hawkins and Cates have been open about the mistakes they've made and why, and they have detailed how they are incorporating a new emphasis on loss protection into the fund's existing investment process. We'd stick it out with Longleaf, which remains in the Kiplinger 25.