Legg Mason Value Trust manager Bill Miller built his reputation -- and the fortunes of his investors -- by beating the benchmark S&P 500 for 15 years, a streak that ended in 2006.

But since that run ended, the fund has struggled mightily with bad bets on companies like Countrywide Financial (NYSE: CFC), Bear Stearns (NYSE: BSC), and Yahoo! (NASDAQ: YHOO). Now Miller's investors are questioning his philosophy, and so is is the legend himself.

A big part of Miller's brilliant track record was his belief in focus investing -- concentrating his bets on a few stocks rather than a bunch. The Legg Mason Value Trust holds just 35 stocks. But according to the New York Times, that strategy is now being reconsidered. Miller said that "The question we are asking ourselves is: Should we think more broadly now about probability, about high-impact events and protecting against them by having broader exposure to the market?"

I seriously doubt that that's the right strategy. Miller is universally acknowledged to be a great stock picker -- diluting his influence by building a portfolio consisting of his 200 best ideas instead of his 35 best sounds like a sure road to mediocrity.

The larger point is this: After a 15-year streak of greatness, Miller has hit a rough patch. Two years of underperformance doesn't change 15 years of greatness, and this is a bad time to consider changing the strategy that led to his track record.

When it comes to mutual funds, there are the good, the bad and the ugly. Let's press past the obvious Eastwood-esque reference there and ask a question: how did your funds do this year? I'm not talking about returns -- I'm talking about returns minus sales costs minus transaction costs minus (insert misc. fee here) minus tax consequences of company stock turnover inside the fund.

You see, there is a lot more to "total returns" that most mutual fund hawkers like to advertise to lure in new investors. Total returns is a meaningless figure -- what counts is the return that your bottom line sees after everything is accounted for. So, then, what were the worst funds to own in 2007? That list probably spans a few thousand funds, but let's look at a short list here.

Clipper (CIMFX) -- through December 17th -- lost 2% year-to-date (YTD). Clipper has a huge 48% share of stocks in the financial market, which, as we all know, really has done pretty poorly in the back half of the year due to subprime write-offs and risky decisions that bombed and caused the ouster of many CEOs in this sector.

How about Oakmark Select (OAKLX)? Down 14% YTD on the back of including 15% of net assets in mortgage lender (and hurting) Washington Mutual. eggs in one basket? You bet. Those are just two funds with overconcentrations in industries that had exposure to huge risks -- and were hit hard -- this year. How are your funds doing?

According to a study written up in the New York Times (subscription required) this week, it isn't lousy management's frequent trading that's responsible for the poor performance of mutual funds. Nope, it's the investors who redeem their shares and force the funds to sell even if they don't want to. The study found that "liquidity-motivated" trades perform poorly compared to trades based on fundamentals.

Mark Hulbert, the author of the piece, suggests that investing in closed-end funds may be a way to avoid this problem, because they generally don't face redemption. In an exchange-traded fund, an investor who wants to sell shares just sells them to another investor. It's just like how selling shares of McDonald's Corp. (NYSE:MCD) would have no impact on the operations of the company.

And yet there's still a problem: Regardless of what any study says, mutual funds simply cannot, on average, outperform passively managed indexes. It's a zero-sum game. Before expenses, the average fund's performance can only be average. After expenses, the average fund is considerably below average. The fact that ETFs are almost always passively managed (rebalanced/adjusted once a year generally) is a large contributor to their outperformance. The fact that they are immune to redemptions by panic-stricken shareholders at precisely the wrong time adds to their value.

The more I study it, the more obvious I think it becomes: ETFs are probably better than traditional mutual funds for most investors.