Fund Times: A Shaky Start for Legg Mason in 2008

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.

The first quarter of 2008 hasn't been kind to Legg Mason. The Baltimore-based asset-management firm reported a $255 million loss for the period, its first quarterly loss since it went public in 1983. The firm wrote off $291 million to support a pair of money market funds stung by a small exposure to structured investment vehicles, which have struggled amid the ongoing liquidity crunch. Investor outflows amid poor recent performance for a number of its offerings are also on the rise, contributing to a $48 billion dollar drop in the firm's assets under management in the first quarter alone.

As the firm's flagship fund, Legg Mason Value Trust LMVTX run by the legendary Bill Miller, remains mired in a slump, investors have continued to head for the exits. For the year through March 31, the fund shed 19.7%, its worst three-month showing relative to the S&P 500 (down 9.4% for the same period) on record. That loss, combined with shareholder redemptions, caused the fund's size to drop from $17 billion at the outset of 2008 to $12 billion by the end of March. The fund's legendary 15-year winning streak against the S&P 500 came to an end in 2006, and a bet on firms exposed to an ailing housing market, such as homebuilder KB Home KBH and mortgage lender Countrywide Financial CFC, dragged down returns in 2007.

Despite the fund's recent dry spell, we think shareholders cashing out now are making a mistake. Miller and his deep, experienced team strike us as one of the most thoughtful and fundamentally focused investing units around, and their willingness to invest with great conviction and ride out short-term pain are appealing traits that should continue to work in the fund's favor over the long haul.

Janus to Shareholders: Your Check's in the Mail
The SEC has approved Janus' plan to pay shareholders back for losses incurred as a result of the firm's involvement in the market-timing scandal. As part of its August 2004 settlement, Janus set aside $100 million to make restitution payments to shareholders. After an independent distribution consultant determined the level of damage for each shareholder, a proposed plan was submitted to the SEC for approval almost a year ago. The firm will start making payments on or around July 23.

Individual shareholders shouldn't expect a huge payout, though. Roughly two thirds of affected Janus fund shareholders--those who were due damages in an amount less than $10--won't receive anything. Instead, that money will go directly to the funds in proportion to the estimated damages, which only provides a small benefit to current fundholders. For shareholders who meet the $10 hurdle, the average payment they'll receive amounts to $55.

Affected funds include: Janus Mercury (now named Janus Research JAMRX), Janus Adviser Worldwide JDWAX, Janus Worldwide JAWWX, Janus Enterprise JAENX, Janus High-Yield JAHYX, Janus Adviser International Growth JIGFX, and Janus Overseas JAOSX. PAGEBREAK

AMF Loses Bond Manager
In what we consider a loss for shareholders of certain AMF bond funds, portfolio manager David Petrosinelli has parted ways with Shay Assets Management to take a position with Sandler O'Neill & Partners. Shay Assets Management is the advisor to the AMF family of mutual funds, including AMF Ultra Short Mortgage ASARX, AMF Ultra Short AULTX, AMF Short U.S. Government ASITX and AMF Intermediate Mortgage ASCPX. Petrosinelli's departure follows that of Jon Denfield, who left Shay for UBS in early 2006. David Adamson, who recently returned to Shay Assets Management from its sister firm Shay Financial Services, will step in to comanage the funds with remaining managers Kevin Blaser and Beatriz Barros.

Van Wagoner Overhaul Muddled
A proposed plan to shake up the organization responsible for Morningstar Fund Analyst Pan Van Wagoner Emerging Growth VWEGX has hit a snag. In February 2008, Van Wagoner Capital Management announced plans to hand off management of the funds to subadvisors Insight Capital Research and Management and Husic Capital Management, pending shareholder approval. This week, though, the firm announced that Insight is no longer being considered as a possible subadvisor, and the fund's board plans to discuss possible substitutes at an upcoming meeting.

This untidy attempt to reverse an ailing fundshop's course looks remarkably uninspiring. Emerging Growth has been managed by firm founder Garrett Van Wagoner since its launch at the end of 1995. The fund's size reached $1.5 billion at the start of the decade, but staggering losses throughout the bear market and a constant string of bad investment decisions sent shareholders packing, whittling assets down to a feeble $17 million today.