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By Bridget B. Hughes, CFA | 04-13-2012 01:00 PM

Smooth Transition Expected When Star Manager Departs

After Bill Miller steps down from Legg Mason Value Trust this month, new manager Sam Peters says investors will still see continuity in the portfolio strategy but should expect some differences.

Bridget Hughes: Hi, I'm Bridget Hughes. I'm one of the fund analysts here at Morningstar, and I'm here today with Sam Peters, who is currently the comanager of the Legg Mason Capital Management Value Trust portfolio. He will become the sole manager of that portfolio at the end of April when Bill Miller steps off that fund. Miller will continue to run the Opportunity Trust fund for Legg Mason Capital Management.

Sam, thanks for joining us today.

Sam Peters: My pleasure, Bridget.

Hughes: So, those are some big shoes to fill?

Peters: Sure.

Hughes: Bill Miller obviously has been around for a very long time and has a very good long-term performance record. What is your mind-set as you come in to taking over his baby of 30 years?

Peters: Of course, I'm honored. There is a lot of rich history here. With valuation-driven stock-picking, this was one of the icons in the industry for doing that. So, I'd break it into sort of two pieces, skill and luck. From a skill side, we have a process that's pretty well-established, and there is a lot of continuity there, like I mentioned around valuation.

We think about what I call our active bets and we are in concentrated portfolios and are long-term. But the key was when I joined Legg Mason Capital Management seven years ago, I was selected for those things. So, it's not like I was a square in a round hole. So, that's gone well, and we've been able to build up the team. Much of that team I have helped build out around this culture and around those tenets, and they are people that Bill and I have vetted and worked well with together. They understand the process and are doing an excellent job. I think I have a lot of skill there in the team to work with.

Then you look at luck. Look at the time; people aren't exactly enamored of U.S. active equities right now. Equity risk premiums as we measure them and different people measure them are certainly very elevated versus historical numbers.

Basically there has been a lot of headwinds against equities and a lot of tailwinds for fixed income. As a contrarian valuation guy, when would you want to take on a long-only, active product on the equity side? It's now. So, as those headwinds become some tailwinds, I think my chances of being lucky are pretty good, and that will sort of amplify the skill that I think is there both at my level, but also in executing with a great team.

Hughes: As I mentioned, Bill Miller has been on this portfolio for 30 years using a valuation-driven process. You mentioned the things are the same. It's valuation-driven process with active bets and concentrated portfolios and also is long-term. Just very quickly, can you tell me what you mean by "long-term" and then maybe can you talk a little bit about some of the evolution that you might bring to the process or the construction?

Peters: For me, [I think of] "long-term" [to mean] if we could get a great company that's a great compounder and people just misunderstand the value proposition in the company, we will own on it forever if we think we have edge there. But with long term--realistically and where we have a lot of our conversation with management teams when they come in and we interview several a day with our analysts--we're really thinking about three to five years. We're thinking about strategic and competitive analysis over that time. How will value be created or destroyed? That's really what we're trying to frame.

Clearly, we can't control the timing in the market. Sometimes our insight gets picked up very quickly. Other times, it can take a long time, and sometimes we're just wrong. So over that time, you've got to look at it, but generally it is three to five years that we're thinking of. We live in a short-term performance-driven world, so a lot of it is how do you balance those things and still execute around three to five years, and we've done some things to really to think about that.

But for me that's there, and the proof is in the pudding as I have said you several times, talk is easy. If you look at turnover, there were times when Miller's turnover on the fund during the last three years has been less than 10%. So, clearly that's 10 years-plus. I have typically been around 25% to--sort of at the very high end during crises--around 50%, but that's still two years-plus up to five years. That still fits with that three to five years, and you'll continue to see that.

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