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Bill Miller Again Lags the S&P -- and Himself

If you're betting on his Value Trust to resume beating the S&P, you've got the wrong fund.

It's nearly halfway through 2007, and legendary investor Bill Miller is already falling behind Wall Street -- for the second year in a row.

If this goes on much longer, you won't be surprised to see investors in his $11.5 billion

Legg Mason

(LMVTX) - Get Report

Value Trust (LMVTX) start to feel aggrieved.

The kicker is that Miller isn't just underperforming the

S&P 500

.

He's also underperforming ... Bill Miller.

Miller, of course, is best known for his 15-year streak beating Wall Street while at the helm of his Value Trust. That was the longest such streak in the mutual fund business until he finally fell behind the eight ball last year.

Profit in 2006: 5.85% -- way behind the 15.5% produced by the broad-based

Vanguard

(VTSMX) - Get Report

Total Stock Market Index Fund (VTSMX).

OK, so Miller had a mediocre year. And yes, he's off to a dull start for 2007. After nearly five months, his fund is up just 7.6% -- compared with 8.5% for the market overall. But while his bigger fund is starting to turn in dull results, Miller is also running a much smaller fund for clients of white-shoe brokerage Smith Barney.

And the

Legg Mason

(LMOPX) - Get Report

Value Trust Opportunity Prime Trust (LMOPX), which you can only buy through Smith Barney, is shooting out the lights.

In this more flexible fund, Miller was able to produce a 13.4% return in 2006. OK, so that wasn't quite as good as the overall market. It was nonetheless twice as good as the return over at Value Trust.

This year the gap remains huge. Sure, Value Trust is lumbering along with a return of about 7.6%. Opportunity Trust? Try 15.2%. In less than six months.

How is he doing it?

Miller could not be reached for comment yesterday. Legg Mason said that he was traveling.

But communications boss Mary Athridge explained that the funds pursue "completely different mandates." Value Trust invests in stocks, "and its stated mandate is to purchase securities at large discounts to Miller's assessment of their intrinsic value. He's got a long holding period and low turnover, which means he's willing to be patient."

Opportunity, on the other hand, is completely flexible: Miller is free to invest overseas as well as in the U.S., and in "convertible securities, private placement securities, debt securities, options, etc.," Athridge explains. The fund can also be more heavily concentrated if Miller wants to make a few big bets.

In other words, Opportunity Trust is the equivalent of hiring a tennis pro to take your place in the annual tournament and leaving it up to him to decide what shots to play and how.

Value Trust, on the other hand, is like hiring the pro but telling him he can only play forehand -- from the baseline.

"No volleying! No backhand! No lobs!"

Are you really surprised at the different performance?

The really miserable news: Most mutual funds are structured just like Value Trust. The fund company charges you high fees to pay an expert manager to run the fund. Then they don't leave him free to run the fund.

Athridge insists, "We believe that both strategies continue to be very relevant and important," whatever that means.

And she adds: "Given each's distinct investment discipline, it's not unusual to have one outperform the other over short periods of time."

Ahem.

"Short periods of time"?

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Opportunity Trust was launched in late 1999. So for six calendar years, Bill Miller has run the two alongside each other.

Guess the number of years that Opportunity Fund has beaten Value Trust? That would be ... six.

Opportunity proved safer on the way down, losing just 15.5% during dismal 2002 while Value Trust lost nearly 19%. And Opportunity proved more exciting on the way up, gaining 68% in booming 2003 while Value gained 44%.

In total, Opportunity has outperformed Value by a massive margin. Over the last five years alone, according to data from Lipper, it is up more than 100% while Value Trust has risen 60%.

The latest public filings from both funds tell an interesting story.

It turns out the Opportunity Fund is making its money right now from a handful of big, high-conviction bets. Three are steel companies:

U.S. Steel

(X) - Get Report

has soared 39% this year,

AK Steel

(AKS) - Get Report

is up 81%, and

Arcelor Mittal

(MT) - Get Report

has climbed 73%.

Cleveland-Cliffs

(CLF) - Get Report

, a maker of iron-ore pellets, is up 43%.

NII Holdings

(NIHD) - Get Report

, the former Nextel International running mobile networks in booming Latin America, is up 19%. And

Amazon

(AMZN) - Get Report

, a long-term Miller holding, is up 55%.

All these were in Opportunity's top 10 holdings as of March 31.

But only one, Amazon, was in the top 10 for Value Trust.

It seems odd that Miller, so successfully gung-ho for steel in one fund, is so cool on it in the other. Instead he's holding big stakes in laggards such as

Sprint Nextel

(S) - Get Report

.

The Opportunity fund may owe its success to more than just its greater flexibility.The really good investors don't just do it for the money: They do it because they love it.And no one likes playing tennis in handcuffs as much as they like playing their natural game.

This is impossible to prove, and I am sure a good professional such as Bill Miller would deny it anyway, maybe even to himself: But I'm willing to bet he has a lot more fun running the Opportunity Trust than he does the Value Trust.

That might also play a part in why it is doing so much better.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.