How much longer can Legg Mason Inc afford to back Bill Miller, the star investor whose onetime Midas touch has lost its luster?

Reports this week that his flagship Legg Mason Value Trust fund sold out of a decade-old investment in Eastman Kodak Co and booked a $551.3 million loss was just another reminder of the tough spot Miller finds himself in.

Fans of Miller, an iconic figure in the asset management industry known for his big, unconventional bets, point out he made $1.5 billion in United Healthcare over the same period he was invested in Kodak.

They also say Miller's performance needs to be judged over the long term, a view that is supported by the data but rubs against the short-term focus of today's marketplace, where poor performance can quickly lead to dismissal.

Mutual fund companies are aware when performance falters and will do everything possible, including firing managers who perform poorly, to ensure that assets under management -- a key revenue driver -- do not decline, said Geoffrey Bobroff, a mutual fund industry consultant in East Greenwich, Rhode Island.

Senior portfolio managers are frequently asked to step aside, much as chief executives are shown the door, he said.

To the extent that you fail to maintain a consistent level of performance there is someone else in the wings ready and willing to replace you, said Bobroff, who did not address a query about Miller because he works for Legg Mason's board.

Miller was blindsided by the rise in commodity prices and has been chastised for staying wed to his stock picks for too long. Last October Sam Peters was named co-manager of Value Trust and Miller's eventual successor.

Even after dropping Kodak because its market cap is less than $1 billion and Miller is positioned for a large-cap rally, he still forecasts the company is poised for big gains. He still holds Kodak in his smaller Opportunity Equity fund.

So far this year Value Trust is up 1.6 percent as of June 30, compared to a 6.0 percent gain for the reinvested returns of the S&P 500, according to data from Lipper Inc, a unit of Thomson Reuters Corp.

Miller is dogged by a record that shows on a one-year basis he is underperforming more than 90 percent of his rivals. Yet historical data show that Value Trust performs best the longer the time frame, and that one in every five years he outguns the S&P 500 index by 10 percentage points or better.

Miller's performance faded after a stellar comeback two years ago following dismal returns during the depths of the financial crisis in 2008. The subpar performance sparked questions about whether Miller has lost his touch.

Legg Mason said it stands behind Miller.

We understand that even the best investors have periods of underperformance, said Mark Fetting, the company's chief executive, president and board chairman.

Believers in Miller say his out-of-the-box thinking and contrarian style in a market that is driven by a herd mentality will lead to meaningful returns. The recent setback is a good time to invest in Miller, said Burt White, chief investment officer at broker-dealer LPL Financial in Boston.

LPL lists Value Trust as a handful of portfolio recommendations for its network of 12,000 financial advisers.

Once his style does come back into favor, there's no one that does it better than Bill Miller, and (his) will be one of the best-performing strategies, White said.

I'm a firm believer it's hard to keep a very smart portfolio manager down for long, and Bill Miller's a great example of that, he said.

DON'T BUY HIGH OR SELL LOW

When judging a money manager, investors should ask whether the person is skillful or not, and they should not use recent performance as an indicator. Miller said in an interview.

Investors instead need to ask when is the best time to hire a manager.

The answer is always, you should hire them when they're doing badly, and you should fire them after a sustained period of doing well, he said.

Miller expects U.S. large caps to finally come back into favor after more than a decade of going nowhere. The market this year has been driven by the unrest in North Africa and the Middle East, the tsunami in Japan and the Greek credit crisis, macro events that favor correlated asset moves and disfavor his bottoms-up approach.

A couple of things that are different now that give us a lot of confidence is that this cycle of ever-higher commodity prices, ever-higher industrial material stuff and everything moving in lock-step, that's now been broken, Miller said.

In July 1986, Miller entered a 62-month period during which Value Trust's one-year numbers were terrible. Then performance kicked in, and the rest was history, the start of Miller's record streak of beating the S&P 500 for 15 consecutive years.

(Reporting by Herbert Lash; Editing by Padraic Cassidy)

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