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Top fund managers socked by financial bets

The bloodbath in financial stocks has walloped funds run by Legg Mason's Bill Miller and other top money managers.

Last Updated: July 18, 2008: 10:52 AM EDT

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Legendary investor Bill Miller is paying the price for his bets on financial stocks.
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NEW YORK (Fortune) -- A two-day rally aside, the beating that financial stocks have taken lately have knocked out some top money managers and their brand-name mutual funds.

No champ has endured more pain than Bill Miller of Legg Mason Value Trust (LMVTX). Until 2006, Miller held the distinction of beating the S&P 500 for 15 consecutive calendar years, but lately the fund has struggled. Last year, LMVT fell nearly 7%, while the S&P finished up more than 5%. Even after losing 20% in the first quarter, Miller wrote to shareholders that he thought the worst was over.

If only that were true: as of Wednesday's close, Miller's fund is down 41% year-over-year, according to Morningstar. The S&P 500 is down 18% over the same period.

Since Miller is also the chief investment officer for Legg Mason, his stock picks have weighed on many of the firm's funds. Miller bought Countrywide even as the company unraveled, and his top ten holdings at the end of June included Citigroup (C, Fortune 500), off 43% year-to-date, JPMorgan Chase, and Aetna.

One bright spot: Miller lowered his exposure to Freddie Mac in the second quarter. On the other hand, his other big holdings include Amazon and UnitedHealth. See the graphic at right for the performance of Miller's top holdings.

Flailing funds

Miller, whose fund still holds $9.7 billion in assets, isn't suffering alone. Several top funds whose managers loaded up on financial stocks when they were booming before the credit crunch hit a year ago have taken a beating.

To wit: Fidelity's Growth and Income fund (FGRIX) is down 31% for the year, compared to its 9% average annual return from 2003 to 2007. Manager Timothy Cohen has been adding financial stocks, including Fannie Mae through the year only to see them slip further. The $13 billion fund's top ten holdings include AIG, down 60%, Bank of America, down 43%, and Wachovia, down 71%.

The nearly $3 billion Oakmark Select (OAKLX) fund has fallen 31% since last July, hammered by its large position in troubled thrift Washington Mutual, which is down more than 88% on the year. That's compared to the 9% average return the fund posted in the previous five years.

Oakmark's Bill Nygren is a deep value investor, meaning he looks for really cheap stocks. The fund typically holds just 15 to 20 stocks, and has lately been heavily invested in financials, adding Capital One, down 20% this year, and Morgan Stanley, down 33% year-to-date.

Like Oakmark, the John Hancock Classic Value (PZFVX) fund is paying the price for falling into a value trap, a term money managers use to describe stocks that look compellingly cheap but actually have big problems.

This nearly $4 billion fund is down about 41% in the last year, compared to average returns of 12% from 2003 to 2007. Early in the year, manager Richard Pzena bulked up his positions in Citigroup - now his second-biggest holding - as well as Freddie Mac, Fannie Mae, and Morgan Stanley.

He's still a believer: his latest client note argues that the sector is being pummeled unfairly, creating opportunities for value investors. He's also holding on to Fannie and Freddie, both of which have lost over 75% of their stock market value this year.

Finally, there's Putnam Investors (PINVX), which has dropped 29% in the past year, compared to an average 12% total return in the last five years. The fund, with $2.5 billion in assets, held a big stake in Bear Stearns when the credit crunch hit last summer, and its top holdings include Goldman Sachs, down 20%, and Bank of America. Financials still make up about 20% of the portfolio, but that's starting to change.

Manager Richard Cervone left in June, and the new team plans to cut its exposure to the decimated sector, according to a Putnam spokesperson. All the companies declined to make managers available for comment. To top of page