After 15 consecutive years of successfully outperforming the S&P 500 index, Bill Miller's Legg Mason Value Trust (FUND:LMVTX) fell behind that benchmark in 2006. In fact, it wasn't even close. That streak had been the longest-running active winning streak among mutual fund managers. As a value-focused investor, I'd hoped Miller's remarkable reign would continue, but I can't honestly say I was surprised by the news.

In general, mutual funds face several structural problems, largely stemming from the fact that they handle other people's money. Even when managed by competent professionals like Miller, those embedded issues make it difficult for them to beat the market at all -- much less for a decade and a half. For instance, there's a certain segment of the investing population that tends to chase the best performance. If a fund has a particularly good year, it attracts attention and new money for the next year -- perhaps even more money than the fund can effectively manage. After all, among the universe of available investments, only a small fraction will really trounce the market. Too much cash chasing too few good ideas is a recipe for failure. That Miller was able to wind up on top for 15 straight years shows that he had to have been doing something right.

Peeking under the covers
That said, for the past year or so, I've been watching Miller's fund with a bit of bemusement, somewhat expecting this particular train to wreck. For a fund that advertises itself as following a value discipline, it certainly hasn't been behaving much like a value fund of late. Don't just take my word for it -- no less an authority than Morningstarcategorizes it as a large-cap growth fund. Plus, according to its most recent shareholder report, the fund held shares of a whole bunch of companies not normally associated with value investing. For instance:


Shares Held by LMVTX

Value Investor's Bear Case



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In a year that saw decent returns for the market in general and even better returns for traditional value investors, Miller's loss is all the more disappointing. For a comparison, under the value-focused guidance of Warren Buffett, Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) saw a gain in the neighborhood of 24%. Buffett easily outpaced the S&P 500, and he did so without compromising the core value principles that have served him well for decades. And even Buffett's outperformance can't be attributed only to his unique genius. According to a recent Wall Street Journalarticle (subscription required), value funds were the highest-performing domestic fund class for 2006.

That other value investors succeeded in 2006 where Miller failed is likely no coincidence. The fact is that since the days of Benjamin Graham -- the value pioneer who taught investing to Buffett -- value-focused investing has trounced the market over time. Not every single year, of course, but over long stretches, value investing wins. As evidenced by his long record of outperforming the S&P 500, Miller's value roots certainly served him well -- as they have for the rest of us who follow that strategy. As Miller's 2006 shows, however, if you stray too far from the value strategy, you simply can't count on its strength to pull you through.

Why good men stray
As a mutual fund manager, Miller needed to handle not only investments within his fund but also cash flows into and out of it. Having succeeded for so long, the fund probably saw a lot of capital flow in based on the track record. Having too much cash makes value investing far more complicated than normal. The nature of the market means that the more money you have to put to work, the more likely your actions are to move a stock. The more you move a stock, the less likely you are to be able to capture any value you may find.

With those additional complexities, it's quite understandable how the fund apparently succumbed to the siren songs of growth and momentum for several of its picks. After all, with too much money chasing performance, traditional value investing becomes exceedingly difficult. Perhaps now that his streak is over, the performance-chasing capital will depart and Miller can more easily return to the value flock. I certainly wouldn't bet against Miller, though I'm not sure I'd invest my cash with him unless I had evidence of the fund returning to its value roots.

Rediscovering value
What I would do, however, is stay focused on the traditional Graham- and Buffett-style values. Over time, value trumps growth. Companies that look dirt cheap on an absolute basis will still trounce those that only look cheap if they manage to grow past already sky-high expectations. We haven't forgotten that lesson at Motley Fool Inside Value, and our successful 2006 illustrates just how well you can do if you stick to the value philosophy.

Nobody can guarantee that he'll beat the market every single year. As Miller's 2006 showed, even the best can stumble. Yet the value strategy has decades of success behind it. To get started building your own value-based portfolio to stand the test of time, click here to join us at Inside Value. If you'd rather just see how we managed to beat the very same market that tripped up the great Bill Miller in 2006, you can be my guest for the next 30 days, free.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta did not own shares of any company or fund mentioned in this article. Berkshire Hathaway is an Inside Value selection. EBay, Yahoo!, and are Stock Advisor recommendations. The Fool has a disclosure policy.