A Peek Inside Bill Miller's Three Legg Mason Portfolios

Where would you put money in today's market?

• New Economy stocks.
  
• Old Economy stocks.
  
• An S&P 500 index fund.
  
• Cash.

Regis, I'd like to use my lifeline. I'd like to call Bill Miller, whose $12.1 billion large-cap (LMVTX Quote)Legg Mason Value Trust is the only mutual fund to beat the S&P 500 in each of the last nine years. Let's face it, with the S&P 500, Nasdaq Composite and the Dow all down since Jan. 1, who else would you call?

Looks like Miller's final answer is B. Judging from his most recent letters to shareholders of his funds, he's still holding some tech stocks, but he's more excited about cheaper stocks in less-flashy areas like financials and retail.

This week, Miller filed shareholder reports for his large-cap Value fund, as well the mid-cap (LMASX Quote)Special Investment fund and his new all-cap, go-anywhere (LMOPX Quote)Opportunity fund. In those pages, the former Morningstar Manager of the Year explains why he trimmed some of his biggest tech positions and why he has put that money to work in stocks like Waste Management (WMI Quote) and Ceridian (CEN Quote).

Make no mistake, Miller hasn't been immune to the market's slide. Both Value and Special Investment, which he co-manages with Lisa Rapuano, are underwater and lag more than 80% of their peers since Jan. 1, according to Morningstar. The back of the pack is an unusual position for Miller, whose Value fund beat a cool 95% of its large-cap value peers in each of the last five calendar years.

So You Want to Be a Miller-onaire? Here's how Bill Miller's three Legg Mason funds are faring this year and their top holdings.
Fund	YTD Return	Top-Five Holdings*
(LMOPX Quote)Opportunity	6.2	Republic Services Gateway US Bancorp US Foodservice Ames Department Stores
(LMVTX Quote)Value	-3.2	America Online Gateway MCI WorldCom United Health Group WPP Group
(LMASX Quote)Special Investment	-7	Gateway America Online WPP Group Symantec Republic Services
S&P 500	-2.2	N/A
Source: Morningstar. Performance figures through May 18. *As of April 30, except Opportunity, which is as of March 31.

Launched at the end of last year, the Opportunity fund's early performance has been more Miller-like than his other two portfolios. Since Jan. 1, the fund, which gives Miller a free hand to take big stakes in stocks of any size or flavor, is up 6.2%, beating 70% of its mid-cap peers and the S&P 500 index.

In the past, he's spiced up his Value portfolio with prescient tech holdings like America Online (AOL Quote). But now that many tech stocks have come crashing back to Earth his general theme is that many of last year's tech darlings are too expensive.

"We think that even after its decline, the technology sector remains richly priced, though some pockets of value are beginning to emerge. Outside of the technology sector the market is not expensive," Miller writes to Opportunity fund shareholders. That opinion shows in the moves he's made in each of his three funds.

A year ago, AOL represented more than 18% of his Value and Special Investment funds. The stock, which Miller bought early and often, is still in both funds' top-five, but with weightings below 10%.

In their report to Special Investment shareholders, Miller and Rapuano say they still like AOL's prospects, but trimmed their position because AOL's proposed merger with Time Warner (TWX Quote) "will likely keep the stock 'in the penalty box' for several quarters." The stock is down 22.3% since the deal's Jan. 10 announcement.

The pair also trimmed the stake in software maker Symantec (SYMC Quote) from more than 10% down to just over 5% at the end of April, according to Morningstar. In Value, Miller reduced his position in Dell Computer (DELL Quote) and dumped biotech bellwether Amgen (AMGN Quote).

Cash from those sales has been put to work in some less-techy businesses. Miller didn't add any new stocks to Value in the first quarter, but he added to existing positions in Waste Management, which has been crushed by management and accounting problems. The stock is down 67.4% over the past year, but could be due for a rebound. It has risen 6.9% since Jan. 1.

He also added to a host of financials like Washington Mutual (WM Quote), Bank of America (BAC Quote) and FleetBoston Financial(FBF Quote), which have come back to life. These stocks are up 22.9%, 17.3%, and 40.1% since the tech-heavy Nasdaq peaked on March 10. Several financial sector fund managers and value maven Wally Weitz recently endorsed many of these stocks.

In Special Investment, Miller and Rapuano added business-services stocks like Ceridian and Equifax (EFX Quote), in addition to insurer UNUMProvident (UNM Quote) and retailer TJX (TJX Quote), which operates TJ Maxx and Marshall's discount department stores.

Miller's growing taste for ignored stocks might be better reflected in Opportunity, the concentrated fund where he can buy whatever he likes.

In his report to Opportunity shareholders, Miller describes the fund's current portfolio, which only has some 20 holdings, as a "recovery" fund, focusing on "mostly damaged merchandise -- companies that have missed earnings estimates or whose growth has slowed or who are believed to be in some kind of distress."

That approach has worked out fairly well so far. The young fund bought struggling grocer U.S. Foodservice, and almost doubled its money when Ahold, a Dutch concern, acquired the company. And textile-maker Westpoint Stevens (WXS Quote) is going private, buying out shareholders for more than the fund paid for its stake.

Unlike his other two funds where technology is still a big part of the portfolio, this fund has just two tech stocks, Gateway (GTW Quote) and AOL, that make up some 11% of the portfolio. The fund also holds Amazon.com (AMZN Quote), which has a retail sector label. Financials like US Bancorp (USB Quote), UNUMProvident, and Washington Mutual, get the biggest weighting in this fund with 31.4% of assets.

Even if you don't agree with Miller's move into less flashy stocks and his dimming outlook for tech stocks' chances of keeping up their torrid pace, ignore it at your peril. After all, people who've heeded his moves over the years are much richer than those who've ignored them.