Bill Miller is one of the few money managers that i truly admire. He has one of the best long term records in the money management business. However, now i've got to say you've got to look REALLY long term to find the stretch of period that he outperformed the broader stock market.
The flag ship Legg Mason Value Trust has suffered a drop in NAV by over -36% for the past year and -8.62 over the past 3 years, and -0.4% over the past 5, which compared unfavorably with S&P 1 year, 3 year, 5 year return of -13.12%, 4.41% and 7.58%. You've got to look at records of over 10 years to see the annualised return of Value Trust outperforming S&P 500.
Value Trust has essentially no energy and commodities stocks in its portfolio, which was the higest return sector in the S&P 500 over the past few years. On the other hand, it is heavy in financials, healthcare and infromation technology firms, which has been the biggest detractors on S&P 500.
Given the facts, the questions are
(1) Has Bill Miller lost his touch?
(2) Did anything go wrong?
(3) If yes to (2), then was it due to process or people?
(4) Is it possible that nothing 'went wrong', just the the general market is not kind to this form of value strategy?
(5) Are there any positive outcome from this dismal performance?
(6) What am i worried about?
(7) Is there a need for any action from my part ?
To answer (1), we have to go through (2) to (4). In general, Miller's strategy has been buying companies that are undervalued relative to its intrinsic value. He sees no arbitriary difference between value / growth stock. The general approach is that of discounted cash flow. He prefers stocks with high return on capital, high competitive advantage, and available in huge chunk for purchase at discounted valuation.
(2) Did anything go wrong?
Miller didn't position the fund to participate in the energy sector. Some value player such as the Davis fund purchased some low cost producer and oil and gas explorer and did not miss out too much on the rise in oil and commodities price.
Miller was also (on 20/20 hindsight) too early on tilting the portfolio into housing and financial sector. Read interview here. Last quater puchase of Freedie Mac and the subsequent 40% fall in stock price will hurt the fund performance.
(3) I believe that the process and people are both sound. But it seems that given the aggressive position the Value Fund takes, investors better be expecting a bumpy ride. Miller commented that perhaps he should take a more diversified view on investing, ie finding situations that are statistically advantageous.
(4) I think something did went wrong, in terms of due dillegence in terms of cutting certain losses, when fundamentals of company deteriorate faster than the market quotation. Companies are dynamic, situation changes and the value of firm (esp financial ones) could change quite rapidly.
(5) A great positive outcome is that the fund size has SHRUNK! I rejoice at this as we know that for most fund managers, fund size penalise performance. Given the concentrated portfolio he runs, i'm much more comfortable with his current $9 bn portfolio than the previously $18bn portfolio.
(6) I'm actually worried about two things. One, the huge recent redemption forces the fund to liquidate huge portion of shareholdings at a huge loss, excarbating the fund performance. Furthermore, expense ration will probably increase with the decrease in fund size. The other question is regarding the 'employment' of Bill Miller. I do have faith in him, but i'm not sure the new CEO of Legg Mason (a public company) will have the same patience with Bill Miller.
(7) I purchased the fund to have my money managed by an established fund manager, if he goes, i'm not sure if i'll stay with the fund. But given that i've got no free cash flow right now, i can't average down my investment in the fund. On the other hand, i will not sell any as i believe that the current portfolio is largely undervalued, and the fund's mandate and priciples has not changed.
As usual, I shall be focused on the long term and takes all the volatility in its stride.
For a great writeup on the principles of building wealth, read this great great article from the Davis Fund, especially on the pages on "Expect periods of disappointments".
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