Yesterday’s post looked at a somewhat self-serving suggestion from a money manager that investors would be better off hiring a professional to do their investing for them. One of the problems with such a suggestion is that you might end up with someone like Bill Miller. You don’t hear much about Mr. Miller these days but a few years back Mr. Miller was widely feted in the business press for beating the S&P 500 for 15 consecutive years from 1991 until 2005.

Investors who read about Mr. Miller’s streak and invested in the Legg Mason Value Trust (LMVTX), the fund he managed, would have been sorely disappointed. Since 2006, the S&P 500 is down 14.57% while Legg Mason Value Trust is down 51.68%. Mr. Miller’s disastrous bets on AIG, Bear Stearns, Freddie Mac, Countrywide Financial and Citigroup meant that his fund trailed the S&P 500 by a stunning 18 percent in 2008. Mr. Miller bounced back somewhat in 2009 but investors are not hanging around to see if his star will rise again. Value Trust’s assets have fallen from a peak of $21 billion to just $4.3 billion recently and Mr. Miller is already “passing the torch to the next generation”.

Looking back into my older posts, I cringed when I read this one that highlighted the Q1-2006 market commentary from Mr. Miller in his heyday. In it, Mr. Miller says that looking out 5 years, he prefers buying capital C — Citigroup — to Commodities with a capital C. There is still one year left but I think you can safely declare a winner here. The iShares S&P GSCI Commodity Index ETF (GSG) is down about 43% over the past 4 years. By comparison, Citigroup is down 92%.

This article has 11 comments

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  2. it’s stories like Mr. Miller’s that convinced me several years ago that it was time to give up
    on mutual funds or stock picking and just switching to ETFs.

    If investing with an expert like Bill Miller could be such a disaster, then why should I pay him (or others)
    good money to manage my money? And if experts like Bill Miller could be such a disaster, why should
    I think I can do any better? I now own a portfolio of mainly ETFs and sleep a lot better at night because
    of it.

    Oh, and stories like one of your previous postings on how mutual funds do so much worse than
    the indexes they track helped with the decision as well.

    • Canadian Capitalist

      @Mark: When I first started out investing, I assembled a portfolio of stocks, hoping that a portfolio of stocks will more or less mirror index returns (naturally, I was confident it would be more 🙂 ). Turned out that I picked some real dogs, some winners and some okay stocks. Looking back, I realize that I didn’t quite know what I was doing. My Canadian stock picks sucked (this during a time when Canadian stocks delivered relatively good returns) and my US picks worked out extremely well (again this during a time when US stock returns in Canadian dollars were terrible). I put this down to luck.

      The trouble with professional managers is that it is hard to tell from returns whether it is luck or skill at play. Bill Miller seemed to display a lot of skill until a disastrous series of bets put a huge question mark on his record. I’m glad that I took the passive route.

  3. I have often wondered if Miller closed the fund to new investors half-way through his run whether his results would be any different. When fund and fund managers get famous, there’s a tendancy to have investors pile on with unrealistic expectations forcing the manager to take risker positions to please the masses. I don’t think smart fund managers become dumb overnight. But their context changes with more mouths to feed (especially the Johnny come lately investors). But how do you say no to more money if you are a fund manager?

    It is a large structural and behaviourial issue that increases risk in active management.

  4. Canadian Capitalist

    @Thicken: Mr. Millers bets on fallen giants early in his career (such as loading up on Amazon) turned out to be blockbusters. It’s just the the troubled giants as we headed into the financial crisis deserved their “fallen” status. Many never recovered, went bust and dragged down the funds’ returns. It’s hard to guess if Mr. Miller would still have made oversized bets on troubled financials if a flood of new money did not come in. I would think that if the fund had closed say sometime in 2005, the hit may not have been so bad.

  5. Yet, hope will always spring eternal and active mgrs will survive with excessive fees.

  6. Hi CC, followup from my mis-post to the wrong article (original question in the used car article). If people invested in LMVTX, even as a component of a passive portfolio, in theory rebalancing would have limited the losses. But due to how fast the stock fell, it’s possible only those who got lucky in their rebalancing schedule may have reduced their positions beforehand.


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