Legg Mason's Miller Sees Blue Skies for Tech in 2001

While marquee stock picker Bill Miller was predicting bluer skies for tech stocks next year at a Midtown Manhattan press lunch Wednesday, data from Fidelity illustrate that firm's tepid attitude toward the sector.

The skipper of the (LMVTX)Legg Mason Value, which is down 6.1% in the year to date, said he wasn't going to make any predictions, but in a hurried presentation he divulged what he sees down the road. The upshot: The price of oil will drop, the euro will rise, high-yield bonds look attractive and the tech-laden Nasdaq Composite Index will recover from its 28% loss this year. Gazing up at a slide detailing the losses of the Nasdaq and its sibling exchanges overseas, Miller simply said, "That's where we think the opportunity will be next year."

That same morning, the December issue of Fidelity's Mutual Fund Guide arrived, and it doesn't look like the titanic shop's managers are all that jazzed about tech stocks. Of the 34 nonindexed diversified stock funds, 20 dropped their tech weighting in October. And half of those funds had a smaller weighting in the tech sector than their benchmark -- growth fund managers usually underweight sectors they think aren't particularly strong at a given time. While much of this fall was probably due to sagging stock prices in the tech sector, it doesn't look like managers were rushing out to buy more shares.

The December Guide comes on the heels of similar findings in its September issue (sector weightings aren't updated in November). The latest issue shows that the (FFTYX)Fidelity Fifty fund still owns no tech stocks at all, while (FMAGX)Fidelity Magellan fund manager Bob Stansky let the $92.6 billion fund's tech stake drop from 29.2% at the end of September to 25.1% on Oct. 31. The S&P 500, the fund's benchmark, has a 28.2% tech-stock weighting.

Fidelity managers' attitude toward tech is widely watched because the firm is known for its acumen at tech investing. Also, the more than $600 billion the firm manages in its stock and bond funds can move the markets if Fido changes strategies.

That said, there's plenty of reason to pay attention to Miller's thoughts on the market. He's probably best known as the manager of the only fund to beat the S&P 500 in each of the past nine years -- though Transamerica's Jeff Van Harte has the same index-beating streak with a fund offered only through variable annuities. Miller, named Manager of the Decade by Morningstar last year, is currently lagging the index by just 0.5%.

Though it's a close race, this has been a tough year. Miller is taking a beating thanks to sagging bets on nontraditional value stocks like America Online(AOL), Gateway(GTW) and Amazon.com(AMZN). These three stocks, among the fund's top five holdings at the end of October, are down 35%, 75% and 66% this year, according to Morningstar.

Miller's Picks The skipper has made big bets on the stocks listed below, with mixed results this year.
Stock	Weighting in Legg Mason Value	YTD Return
America Online(AOL)	6.7%	-35.9%
Gateway(GTW)	6	-75.6
United Health Group(UNH)	5.5	122.8
Waste Management(WM)	4.5	47.4
Amazon.com(AMZN)	4.5	-66
Washington Mutual(WM)	4.4	94.1
Fannie Mae(FNM)	4.2	35.8
MGIC Invest(MTC)	4	4.3
Citigroup(C)	3.7	27.4
Bank One(ONE)	3.6	12.7
Avg. Large-Cap Growth fund	N/A	3.9
Source: Morningstar.

"It's amazing we're not 2,000 basis points [20%] behind the market," he said, given the hits his top picks have absorbed. Earlier in his presentation he acknowledged that "tech has been a disaster."

Traditional value investors typically scour the market for bargains, using yardsticks like price-to-earnings multiples or price-to-book multiples. This usually leads to portfolios with modest exposure to pricier sectors like technology. Miller breaks that mold, preferring to focus on how much free cash flow a company will generate in the future. The approach has led to significant and vigilant bets on pricey tech stocks, while also keeping tamer fare like financial stocks in the fold.

While he runs a focused portfolio with big bets on his favorite stocks, Miller said that in the first quarter he sold about two-thirds of his fund's America Online shares and almost all of the fund's Dell(DELL) shares, in addition to liquidating the fund's stake in Nokia(NOK) and Nextel(NXTL). That said, he's not selling his Amazon.com shares, despite questions about the company's accounting practices and its long-term prospects. The stock is down 66% this year.

While the fund's concentrated style has helped it ride top picks to outsize returns, this year has shown the downside of a focused portfolio. By selling shares of home-run picks like AOL early in the year Miller triggered two big taxable capital gains distributions. He also noted that his big position in Gateway kept him from missing the stock's recent carnage because he couldn't exit the position quickly.

Over the past 10 years his fund boasts a 23% annualized return, beating the S&P 500 by more than 5% and 99% of its large-cap value peers, according to Morningstar.

Miller closed his presentation by modestly downplaying his accomplishments. "We're only slightly better than a coin toss," he said, looking at a chart showing the fund's quarterly losses and gains vs. the S&P 500 over the past 10 years.

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