Legg Mason's Peters to follow trail blazed by Miller

Legg Mason Inc.'s Sam Peters, the manager named on May 21 to eventually succeed Bill Miller on the $4.24 billion Value Trust fund, said clients shouldn't expect big changes to the investment style put in place by his mentor.

“We have a similar value-driven approach,” Mr. Peters, 40, said in a telephone interview on May 24 from Baltimore, where Legg Mason is based. Investors can expect “a few tweaks.”

Mr. Peters, like Mr. Miller, favors stocks he deems cheap based on financial yardsticks such as per-share earnings, though he may turn more often to computer models to help him select companies. And like Mr. Miller, Mr. Peters has trailed competitors as Legg Mason struggles to stem withdrawals from its equity funds.

“There's a lot of overlap in their funds, and their funds have behaved the same way,” Bridget Hughes, an analyst with Morningstar Inc. in Chicago, said in an interview. “They had a bad ‘06, ‘07 and ‘08, and a great ‘09.”

Legg Mason Capital Management Special Investment Trust, Mr. Peters' $1.22 billion fund, gained an average of 0.3% in the past five years, trailing 75% of peers that buy a blend of midsize growth and value stocks, according to Morningstar. Miller's Value Trust lost 8.3%, lagging behind 99% of rivals, in the same period.

Mr. Miller became Legg Mason's best-known manager as he beat the Standard & Poor's 500 index for a record 15 straight years through 2005. Mr. Peters will join Mr. Miller, who has no plans to retire any time soon, as a co-manager later this year. Value Trust's investment team includes Mary Chris Gay, the fund's assistant portfolio manager.

Mr. Miller is chairman and chief investment officer of the Legg Mason Capital Management stock-fund unit, which has about $18 billion in assets. Mr. Peters will continue to run Special Investment Trust after joining Mr. Miller at Value Trust.

Mr. Peters' fund, like those managed by Mr. Miller, trailed peers from 2006 through 2008 as bank and insurance holdings plunged in the global credit crisis. Special Investment Trust slumped 2.6% in 2007 as the Standard & Poor's Midcap 400 index rose 8%, according to data compiled by Bloomberg.

The fund lost 54% in 2008, 18 percentage points more than the midcap index, as insurance company XL Capital fell 92%. Special Investment Trust climbed 80% in 2009, beating 97% of its rivals, as bond-insurance company Assured Guaranty Co., its top holding, almost doubled.

EBay Inc., which Mr. Peters bought in 2008 when the shares were trading at about $10, has more than doubled since. Mr. Peters said the price didn't reflect the Internet auctioneer's growth prospects and ability to generate cash.

Mr. Peters, who co-managed Special Investment Trust from March 2005 to January 2006 with Mr. Miller, said he stuck to his convictions after some investments soured during the credit crisis, a factor he says probably made a favorable impression on the senior manager. Mr. Miller, who wasn't available to comment for this story, turned the fund over to Mr. Peters as sole manager in 2006 after praising his “talent and insight” in managing money.

“You don't want to change your stripes when things get tough,” Mr. Peters said. “The main thing was temperament.”

Mr. Peters, a native of Santa Fe, N.M., said he became familiar with Mr. Miller's ideas after hearing the manager speak at the Santa Fe Institute, a non-profit education center, in the early 1990s. Mr. Peters, who in 1992 earned a bachelor's degree in economics from the Norfolk College of William & Mary in Norfolk, Virginia, said he was impressed with Mr. Miller's ideas.

“Of all the investors I'd followed, his approach seemed to make the most sense,” said Mr. Peters, who worked at Fidelity Investments before joining Legg Mason in 2005. “I never thought I'd be working for him.”

Mr. Peters spent six years as an analyst and portfolio manager at Fidelity. He said Mr. Miller approached him late last year as he started to plan his succession.

“This was just thinking long-term,” Mr. Peters said. “It's good planning and good transparency.”

Mr. Miller's unit is preparing to add funds this year, including a research fund that will invest in stocks picked based on ideas from his team of analysts and portfolio managers, he said at a May 13 investors meeting. Value Trust rose 41% in 2009 after declining 55% in 2008. This year, it is down 6.4%. Mr. Miller also runs the $1.98 billion Legg Mason Capital Opportunity Trust, which has gained 2.3% this year.

Withdrawals from Legg Mason's stock funds fell to $2.4 billion in the three months ended March 31, from $4 billion in the prior quarter. The firm has been trying to reverse redemptions in its equity funds since late 2006, when Miller's record streak was snapped.

Mr. Miller has run the fund since its inception in 1982. He initially co-managed the fund with Ernie Kiehne, then took sole responsibility in 1990, the year before his winning streak began.