Bill Miller's Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago, on losses from longtime holdings...

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Bill Miller’s Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago, on losses from longtime holdings such as Sprint Nextel and newer bets including Bear Stearns.

The $12.2 billion fund fell 20 percent, trailing all but four of 660 rivals that buy stocks of companies with market values of more than $15 billion, according to data from Morningstar. Last year, Miller lost 6.7 percent, including dividends, compared with the average 6.2 percent gain among similar mutual funds.

The manager, whose 15-year record of beating the Standard & Poor’s 500 Index came to an end in 2006, has been lagging behind the U.S. benchmark for the third straight year. It’s his longest slump since he joined Baltimore-based Legg Mason in 1981.

It was “an absolutely hideous quarter, but you cannot write him out,” Russel Kinnel, director of fund research at Morningstar, said in an interview. “He’s had uncanny luck in previous years where everything worked out, but this time he’s been where you just didn’t want to be.”

Assets in Legg Mason Value Trust plunged 40 percent in the past year, through March 31, because of the losses and investor redemptions. Legg Mason’s net income in the third quarter that ended Dec. 31 fell 11 percent, in part because of $10.6 billion in net withdrawals from stock funds including Value Trust.

Miller made his name by finding out-of-favor companies such as General Motors and Eastman Kodak, holding them for years and ringing up gains when other investors discovered them too.

He also owns fewer stocks than competitors, making his strategy riskier. Value Trust had 51 stocks as of Dec. 31, about one-fourth the number held in similarly managed funds, Morningstar data show.

Miller put about 21 percent of assets in financial and housing-related stocks as of Dec. 31, two groups that have been pummeled by the worst real-estate slump since the 1930s. Communications and technology stocks, which accounted for about one-third of assets, have tumbled on concerns that earnings growth will slow.

Miller declined to comment. In a Feb. 10 letter to fund shareholders, he said that “the market abounds with good value.”

“Those values may get even better if the markets get more gloomy, but they are good enough now for us to be fully invested,” Miller wrote. “Patient long-term investors (including the fund) should be well rewarded for putting money to work right in here.”

Value Trust has a three-year Sharpe ratio of -0.51, Legg Mason said, compared with an average of 0.16 for peers as calculated by Morningstar. A higher Sharpe ratio means better risk-adjusted returns.

Miller loaded up on financials last year after saying that the sell-off among banks and brokers made them the cheapest since 1990. is the fund’s biggest holding. Miller pared his stake to 6.9 percent of assets as of year-end from 8.8 percent in September.