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Bill Miller is back and smelling bull!

Mutual-fund manager Bill Miller, whose Legg Mason Value Trust was slammed in the market’s collapse, continues to see a brightening light at the end of the tunnel.

In a quarterly report to fund shareholders, Mr. Miller said that a new bull market is under way and that technology and financial-services stocks would be among its leaders.

[Bill Miller]

Bill Miller

“Bull markets typically begin when the following four conditions are present: the economy is bottoming; profits are bottoming; the Fed is stimulating; and valuations are low,” Mr. Miller wrote in commentary published Wednesday. “That’s where we are now.”

Mr. Miller lauded technology as a sector that, “on average, has a great balance sheet, is flush with cash, and trades at a large discount to the market on a free cash flow yield basis.”

He also pointed out that financial stocks have been standouts in the market’s rally, “just as they were off the bottom of the last banking crisis in the late 1980s and early 1990s. Banks still face mounting credit losses for the next year or so, but that should not impede their performance.”

About 55% of Value Trust’s (symbol: LMVTX) assets were in technology and financial-services companies as of June 30. Its largest stakes included eBay, State Street, Yahoo, Hewlett-Packard and Cisco Systems.

Mr. Miller’s noteworthy performance so far this year — Value Trust is up almost 20% through July 21, topping its benchmark Standard & Poor’s 500-stock index by 12.6 percentage points — stands in contrast to the battering the fund manager has taken in the past few years.

His commitment to financial services in particular proved costly in the market’s meltdown that began in the fall of 2007. Value Trust lost 55% in 2008, trailing the S&P 500 by 18 percentage points. The fund sank to the bottom of its large-blend category in each of the past three calendar years, according to investment researcher Morningstar.

Through it all, Mr. Miller stuck to his guns against a wave of criticism and a shareholder exodus, remaining optimistic even in the market’s darkest hours.

“The worst is behind us,” he told fund shareholders in April 2008, following the collapse of Bear Stearns. “This too shall pass,” he wrote in late January as stocks were tumbling to new lows. And in May, he said the market’s rebound since March seemed real — not a bear-market trap that would end badly for buyers.

Mr. Miller did warn of some specific risks to his forecast: rising interest rates; a sharp spike in commodity prices, especially oil; and mistakes by policy makers in their efforts to restore confidence in the financial system.


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