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Bill Miller Heads for the Exit

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After nearly 30 years at the helm of Legg Mason Value Trust (LMVTX), famed investing guru Bill Miller is calling it quits.

Legg Mason announced today that Miller will be stepping down from the fund at the end of April, capping off three decades of stewardship. According to the management company, co-manager Sam Peters, who joined Miller on the fund in late 2010, will take over as sole portfolio manager upon Miller's departure. And while Miller will stay on as chairman of Legg Mason Capital Management, he will hand off the role of chief investment officer to Peters as well.

Legg Mason Value Trust shot to stardom after Miller steered the fund to a truly impressive track record in the 1990s and early 2000s. The fund beat the S&P 500 index every single calendar year from 1991 to 2005, leading the press to laud Miller as one of the greatest money managers of our time.

But recent years have found Miller and Value Trust struggling to replicate that success. Some bad calls on troubled financials like American International Group (NYSE: AIG  ) and now-defunct Bear Stearns led the fund to a 55% loss in 2008. Performance since then has not redeemed Miller, and the fund now ranks behind 99% of all large-cap blend funds over the past decade. Assets at the fund have fallen from a peak of more than $20 billion back at the end of 2005 to just under $3 billion today. While Miller's departure may have nothing to do with the fund's bottom-of-the-barrel track record, Legg Mason will surely be looking to the fund's new manager to turn things around soon.

Changing of the guard
Miller's departure has big implications for shareholders in the Value Trust fund. As is the case with any mutual fund, when a manager heads for the door, investors should immediately re-examine whether they should hold on to their investment. A fund is only as good as the manager running it. In this case, the fund's prior track record is no longer a good indication of how it may perform in the future. Now, this may be a good thing if you consider performance over the past six years, or a bad thing if you look at the fund's track record in the 15 years before that, but the point stands.

To be fair, there's a decent chance the fund could experience a renaissance. The portfolio is packed with cheap, market-leading tech stocks such as Apple (Nasdaq: AAPL  ) and Microsoft (Nasdaq: MSFT  ) . Names like these are selling at reasonable prices right now, have mountains of cash, and offer the potential for significant future growth, even if the economy remains somewhat anemic. However, with Miller no longer at the helm, there's a good chance the fund could undergo a facelift. Odds are some changes will be made in an attempt to right the sinking ship -- and that means the fund will no longer be the same as what investors owned before. There could very well be better days ahead for Legg Mason Value Trust, but I think investors would be better off looking elsewhere to meet their large-cap needs, at least for now.

Taking the long view
But there are greater lessons investors can take away from the recent travails of Bill Miller and Legg Mason Value Trust. While it is possible to identify funds and managers that can outperform the market over time, investors need to beware of chasing performance. No doubt investors were lured in several years back by Miller's streak of market-beating performance. But even the best managers stumble, and Miller definitely did. All those folks drawn in by the fund's great track record soon headed for the door when that performance didn't continue to materialize. I'm an advocate for investing with great active managers, but you've got to be willing to sit tight through periods of inevitable underperformance.

Investors in another formerly high-flying fund turned martyr should pay attention. Just like Value Trust, Fairholme (FAIRX) was sitting pretty at the top of the performance charts, attracting billions of dollars. However, also like Value Trust, manager Bruce Berkowitz made a big bet on embattled financials like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) . As the financial sector has continued to plummet, Fairholme has quickly fallen to the bottom of the pack, losing 29% year-to-date. Predictably, investors are jumping ship. While Fairholme's big financial bet may not end up being a moneymaker for shareholders, investors should consider the long-term picture, rather than focusing on just one year of lagging performance.

Ultimately, Bill Miller and Legg Mason Value Trust serve as a warning that even the mighty, and the truly talented, can fall in the investing world. It's not enough to just latch on to the hottest-performing funds or managers of the past year or so. Investors need to evaluate returns over the long run, which will almost certainly include periods of short-term underperformance, and sometimes even extended periods of underperformance. The past few years shouldn't take away from what Miller was able to accomplish over his career -- including a truly remarkable track record of peer- and market-beating performance.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. Amanda owns shares of Fairholme. The Motley Fool owns shares of Apple, Microsoft, Bank of America, and Citigroup. Motley Fool newsletter services have recommended buying shares of Apple and Microsoft, as well as creating bull call spread positions on Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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