Legg Mason's Miller tones down risk

NEW YORK (Reuters) - Star Legg Mason Inc (LM.N) stock picker Bill Miller, known for gutsy bets on stocks with long-shot business models, is reducing risk by focusing more on big-cap companies and broadening holdings in his battered flagship portfolio.

In a sign that almost two years of underperformance has been humbling, Miller said on Thursday he is also paring back on the sizable stakes he's held in the past in his Value Trust fund in a move to lower volatility.

The move will likely reduce the chance of the outsized returns Value Trust has delivered in the past on classic Miller picks like Dell (DELL.O) and America Online in the early 1990s and Google Inc (GOOG.O) at its public offering in August 2004.

Miller didn't say what stocks he has bought for Value Trust LMVTX.O, but he said the market dislocation in August -- as past dramatic market swings have proven -- was the perfect time to buy. He said the rebalancing began in August and could continue through year-end.

"The Value Trust will be more of what it already is," Miller said at the end of a two-day conference for clients of Legg Mason Capital Management, an affiliate of Legg Mason he oversees as chief executive.

"It will be even more U.S. and even more large cap. It will have more names in it and the market capitalizations will be considerably higher. That's kind of the broad strategic change that we've made," he said.

By reducing the weighting in the fund's top 10 holdings -- as of June 30 they accounted for almost 50 percent of the portfolio's $20.6 billion in assets -- Miller said he could add more and bigger large-cap stocks.

He also said cutting mid-cap stocks will in effect reduce portfolio volatility, a complaint of institutional investors.

"In practical terms, what's likely to happen is the portfolio will become less volatile as some of the more volatile names will have lower weightings," Miller said.

Miller is famous for his gumption, holding large stakes for a long time as he awaits a big payoff. But the strategy hasn't worked recently. At 7.3 percent of Value Trust's $20.6 billion in assets as of June 30, Amazon.com (AMZN.O) is Miller's largest holding and has more than doubled this year.

But Value Trust ranks at the bottom of similar funds this year, up 3.10 percent as of Thursday compared with a 9.5 percent gain in its benchmark, the Standard & Poor's 500 Index

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Yahoo Inc (YHOO.O), which is up barely 3 percent for the year, is the company in his holdings that over time is most likely to match the stellar run that Amazon.com has had this year, Miller said.

A smaller portfolio that Miller manages, Opportunity Trust, has outperformed the S&P 500 by almost one and one-half percentage points this year as of Thursday.

While Value Trust is structured for a "long-cycle effect" of U.S. large caps outperforming many other asset classes, Opportunity Trust has targeted specialty finance and mortgage-related names with market caps of $1 billion to $15 billion that have recently suffered, Miller said.

"The outlook hasn't changed dramatically for the average company since June 30, it's just the case that particular sectors of the market have been deeply disrupted during that period of time," he said.

Miller said he has invested about $800 million in alternative investments in Opportunity Trust, which had $8.3 billion in assets at the end of June. The investments include private equity, hedge funds and seed money for start-ups such as Sermo, an online service of physicians, and real-estate Web site Zillow Inc.

The venture capital investments offer great potential returns and detailed industry insight as closely held companies are not constrained by disclosure regulations, Miller said.

As for home builders, which have weighed on Value Trust, Miller said they are near a historic low when measured by their share price in relation to the value of land and housing assets, or book value, Miller said. Home builders have traded at about 1.5 to 1.6 of book value since the early 1990s, with a range of 0.3 to more than 3, he said.

Home builders are now trading at about 0.5 or 0.6 to book, he said. Over time they prove to be "very good investments," he said.