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moneysense.ca, 14/09/08
The travails of Bill Miller
While it hasn’t been easy being an equity investor, it has been far worse for investors in legendary manager Bill Miller’s Legg Mason Value Trust (LMVT, Canadian investors will be familiar with Mr. Miller through the CI Value Trust). After racking up a 15-year streak of beating the S&P 500 index, LMVT has trailed the index by 10% in 2006, 12% in 2007 and is 17% in the hole so far this year. Investments in Bear Stearns, Freddie Mac, Countrywide Financial have resulted in the fund losing one-third of its value this year alone.
Investors are responding in a predictable fashion — by selling the fund. A striking example is the Massachusetts state pension fund which fired Mr. Miller’s fund and four others for “inconsistent performance” and says that it has reached the conclusion that “active managers add no value over long periods of time”.
In his latest letter to shareholders, Bill Miller urges patience and notes:
The best time to open an account with us has always been when we’ve had dismal
performance, and the worst time has always been after a long run of excess returns. Yet we (and everyone else) get the most inflows and the most interest AFTER we’ve done well, and the most client terminations AFTER we’ve done poorly. It will always be so, because that is the way people behave.
Unfortunately, it is falling on deaf ears.
moneysense.ca, 14/09/08
And so the dangers of ‘few bets, big bets’ active investing is exposed. Pity the man, he did do an excellent job up to 2005.
His remarks on investor behaviour is accurate though. I wonder who the Massachusetts State PF switched to, perhaps the latest outperformer? If so, the trustees should also be relieved of their duties.
Interesting post as it seems to touch on the behavioral element exhibited with investors in general.
I think Bill Miller’s comments may also be applicable to many investors, regardless if they are investing in mutual funds, stocks, or any investment vehicle for that matter. It seems that overall, many investors tend to follow the band-wagon when stocks are generally on the rise and sell when there are actually good buying opportunities. I know its a broad statement, but I think one could appreciate that there is some validity with it.
Cheers
The Rat
After checking into the LMVT fund a little more, it actually has about 20% exposed to financials so its expected to incur negative figures from at least a sizable chunk of the fund. I’m not a huge mutual fund fan to say the least, but there could be some dollar-cost-averaging opportunities for those that may have a vested interest in the fund.
Even if you are not a fan of active investing, you have to feel for the guy. He made people rich for 15 years and then they dump him when everyone else is doing poorly as well.
Makes you wonder why people even bother playing with public money instead of doing a private fund. Too much grief answering to too many people.
NN: The news release mentioned that they are moving the proceeds to index funds and hedge funds.
Rat: Maybe but the S&P 500 is 17% in financials too. That doesn’t explain the significant under performance for three years.
Thicken: I’m not a fan of active investing but I wouldn’t count out Bill Miller. But apparently investors in his funds are — their conviction only extended to the results of the latest quarter.
Well, you can add his bet on Lehman Brothers as a significant miss as well.
Bill Miller’s issue relates to his bets on distressed securities. He is now way behind the gun, so he is now taking bigger bets on distressed financials. I’m not sure, but I think Miller has become desperate to recover from his losses now. Problem is, he can’t recover them in one year (although he will try).
Regardless of what people should do, if Bill Miller makes it through this, everyone will come flying back later. It’s human nature to wait until people are successful without you before jumping in with them (basically, what he said).
True, but 4.2% of holdings in JP Morgan and 3.7% in Citigroup alone could play a factor. Perhaps if there was more diversification within the sector, it could have been spread out a bit. Over the past 1.5 years, JPM has been on a steady decline and is not hovering at 2003 price levels. Significant exposure to IT could have played a factor too. I understand what you mean about three years however – 36 months ago, these stocks weren’t battered as they have been over the past 12-14 months, which is true. With ~8% of the fund attributed to these two companies, it definitely has an impact.
Rat: Fair enough. Concentrated bets in some financials rather than slight over exposure to that sector, sounds like a better explanation of Bill Miller’s significant under performance.
BAM: Yes, Bill Miller did double down on Freddie Mac (and possibly other stocks). He has done it in the past, unfortunately for him, it didn’t work out this time around.
Jon: I have no idea if Bill Miller would outperform in the future but many investors in his fund are simply chasing performance.
I think there are a number of useful tidbits in that recent report as I’ve read it a number of times. For all the attention both Miller & Buffett receive I like to focus often on their infrequent failures rather than their more well known successes. Often they give a young value investor insight beyond their years and this helps you to remember in tough times what to avoid in the hopes of not falling into the same trap.
would also get out of the fund. some investors stick with a losing fund or stock for to long. let us look at the examples just this year Bear, Lehman… have a stop in place. He ignored all off the information especially the negative.
why be in US financials or have a large positon in them at this time. tech never did fully recover from the party in 1999.
Why is a fund manager obligated to invest huge influxes of new cash in equities? If he knows that people buy high and sell low, maybe there should be a mechanism to start holding some rainy day money that comes in at the frothy peaks for opportunities like this instead of blaming his investors.
First of all the problem with most stock picking strategies is that they have glory days and they have horrible days. The tough part is sticking to your guns and not panicking when the going gets tough.
Second of all, Bill Millers fund might have simply been lucky over the past 15 years. It’s not unheard of. The market has been generally trending up for that period of time ( except 2000-2002) so buying stocks that don’t perform well worked pretty good. Untill most such stocks happened to fail in the same year, at the same time.. ouch..
In conclusion I believe that one has to not only be diversified across asset classes but also across multiple strategies.