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Robert Hagstrom and Kunal Kapoor

Legg Mason manager Robert Hagstrom uses the value propositions of Warren Buffett to buy growth stocks.

Morningstar Advisor, 11/03/2008

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It's been a tough stretch for the investment team at Legg Mason. While the headlines have been filled with banter relating to the falling fortunes of the legendary Bill Miller, his colleague Robert Hagstrom has not had an easy go of it, either. Hagstrom, who manages the Legg Mason Growth Trust LMGTX and has written books about Warren Buffett, runs a concentrated portfolio that's lately been hit hard because of its financials exposure.

We visited Hagstrom on Aug. 25 at Legg Mason in Baltimore to see how his investing philosophy has led him to some of the market's most unloved areas--especially as a growth manager. We also spoke with him about the portfolio's exposure to areas such as technology, which has also struggled lately. The interview has been edited for clarity and length.

Kunal Kapoor: You're well-known for having written several books, and when a lot of people hear who you've written about--Warren Buffett--they're surprised to know that you run a growth fund.

Robert Hagstrom: We wrote The Warren Buffett Way back in 1994 and started the mutual fund in 1995. I was a sole proprietor, running a very small shop. It became very clear to me that you needed a lot of support to run a mutual fund well. We didn't have a marketing department. We didn't have client service. We were a 1-800 number.

I was good friends with Bill Miller, and he threw me a lifeline in late 1998. He asked if I'd come and run a growth fund for Legg Mason. I have a great respect for Bill, who I think is a great value investor, but Bill was making such a wonderful reputation off of identifying mispricing, or value propositions, in the growth space. For me, it was not that difficult to make the segue from Warren Buffett Way-land into Legg Mason, because Bill had already moved Buffett into the growth space and had done very well.

I really wanted to take the ideas of The Warren Buffett Way and move it into a new menu of stocks. Clearly, you could buy Warren Buffett stocks--the American Expresses, the Cokes, and the Gillettes--and follow the bread crumbs along the way. There are many great investors who have followed the Buffett approach and have done extremely well buying pretty much the same stocks that he did. In the book, I had already argued that these principles should apply to any part of the market--whether it's small cap, large cap, slower growing, rapidly growing. For myself, I really wanted to move into new areas in which Warren was not active to see how well I could do.

KK: Did you make some mental adjustments to accomplish that?PAGEBREAK

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