Barron's' 'Miller Time' Completely Misses the Math - and the Mark 23 comments
Amit Chokshi
About this author:
-
Font Size:
-
Print
- TweetThis
Did Bill Miller or Legg Mason bribe Barron's for a recent cover story? Or has Barron's assumed investors cannot understand elementary math? Given Miller's atrocious performance in recent years, followed by positive 2009 performance that still has investors that committed capital to Value Trust in 2007 down considerably, one must wonder how Miller could obtain the Barron's cover story on October 12th entitled "It's Miller Time."
In the article, writer Tom Sullivan suggests that investors consider investing in Value Trust given its 38% YTD return, which places it in the top 5% of all large blend mutual funds. According to Sullivan, this performance represents "an amazing about-face from early March, when his fund had lost 72% of its value in a matter of about 18 months." Is this really an amazing about-face? Anyone familiar with Miller's investing approach and fund composition tilt towards financials should not be surprised with his performance in 2009.
Miller invested in a number of financial stocks throughout the financial crisis. To the detriment of his investors, Miller bought every dip and indiscriminately chased every financial stock on the way down, from Countrywide Financial, Washington Mutual, Bear Stearns, Lehman Brothers, Fannie Mae (FNM), Citigroup (C), and some other financials that managed to avoid bankruptcy or massive government capital injections. Miller apparently never saw a stock dip he didn't love and that served him well during the bull market of the 90s and during the last period when the US emerged from a mild recession, but from 2007-2008 this approach devastated his investors. However, in 2009 financials have rallied the strongest and Miller's exposure to this sector has resulted in improved performance. The rising tide in 2009 has benefited any fund manager with net long exposure and Miller's portfolio of high beta garbage has benefited by finally outperforming his benchmark, albeit leaving investors that committed capital to Value Trust before October 2008 still needing more positive performance to simply break even. If one invested in Value Trust in 2007, one would still need nearly a 100% from the current NAV to break even. Somehow this math was missed by the editors of Barron's who decided Miller was worthy of a cover story.
Sullivan, along with others in the Miller cheerleading camp such as George Comer of Georgetown University and Bridget Hughes of Morningstar, uses words such as "aggressive", "bold", "amazing", and "high conviction" to describe Miller's approach. Professor Comer is chief academic officer of MUTUALDecision, and that firm gives Miller its highest marks for his investment skills. Given the number of abysmal failures in Miller's portfolio, one can only assume that MUTUALDecision is simply star-struck with Miller when deciding to rank him highly in terms of investment acumen. This is the same fund manager that invested in a number of financials that went bankrupt or required massive government capital injections, as well as dysfunctional businesses such as Eastman Kodak (EK) and Sprint (S), buying these stocks over the years as they lost 70+%. Without a rising tide, Miller was generally exposed as a lucky gambler with a powerhouse marketing machine behind him.
While rough performance patches are to be expected, investors that consider investing with fund managers that have underperformed their benchmark over a period of time should examine what caused the underperformance and if the fund manager has implemented changes to address those issues. Lack of risk management led Miller to continually add to losing positions and increase exposure to one problem sector (financials) while his ego led him to believe he and his team were always right. As a result, Value Trust destroyed its investors' capital, chasing many failed financials and even worse, holding these positions until their final tick on the exchange. Unfortunately, there's little evidence of demonstrable risk management changes as Morningstar's Hughes "doesn't see signs of a fundamental shift in management."
Another issue a prospective investor should consider is whether the fund manager has an understanding of what errors were made. In the Barron's article, Miller concedes that he misread the financial crisis, but what should be very troublesome to investors is that Miller still appears to be unwilling to accept glaring investment mistakes he and his team made. For example, when describing his large loss in Bear Stearns, Miller laments that when Bear failed, "it had the highest capital ratios ever. There was no rogue trader." Despite spending decades in the investment business, Miller appears to be unable to analyze a financial services firm. High capital ratios for a poorly performing financial service firm simply mean that the firm in question is not marking its assets appropriately. If asset values are written down to their appropriate value, equity will take a massive hit with highly levered firms such as Bear, resulting in companies that are actually insolvent. Unfortunately, it appears that Miller is unwilling to recognize this glaring mistake in his analysis that cost his investors. Miller goes on to blame the Fed for Value Trust's failed investments in Lehman and Fannie Mae, which should give prospective investors pause. Ultimately, it appears that Miller believes his analysis on a company by company basis was always correct and he seems unwilling to concede any mistakes in his own analysis.
Ultimately, Bill Miller represents a broader problem with the investment management field. Miller is still remembered for beating the S&P 500 for 15 straight years and that leads to some describing him as aggressive, contrarian, bold, etc. However, how would a less popular fund manager be described if he/she generated a three-year annualized loss of 14.6%, a five-year annualized loss of 5.92%, and a 10 year annualized loss of 1.82%? In all likelihood this manager would be described as incompetent and/or be unemployed, but these are Miller's numbers. According to Sullivan, the "three- and five-year returns put the fund in the 99th percentile (or lowest 1%) in its category" while Miller's 10 year track record puts Value Trust in the 91st percentile. So for a decade, while investors -- many being average middle class Americans -- that placed capital in Miller's mutual fund were provided steep annualized losses, Miller was able to generate tremendous wealth for himself on the backs of his investors' losses. In the "real world" someone like Miller would be in the unemployment line but in the investment management business, his recent positive performance blip yields him a cover story in a prominent industry paper that may well result in more investors being swindled into funding another yacht purchase for an abysmal fund manager.
DISCLOSURE: NONE
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 23 comments:
Value Trust had $20 Billion in assets in March 2007.
Value Trust has about $4 Billion in assets today.
So that %72 decline is off of a much larger amount of money, representing about $14 Billion in losses. This year's gain amounts to about $1 Billion.
Lose $14 Billion, gain $1 Billion = not so good
I truly wish the SEC would require fund companies to prominently disclose the horrendous damage to wealth and stock portfolios that people like Miller have caused, and also make them disclose the real numbers on their performance over the years. Neither is the case right now, so there is a lot of outright fraud in the way these "investment results" are presented.
And Barron's??
Please don't make me laugh. Barron's hasn't been worth reading for years, and is getting progressively worse now that Rupert has taken over. Unless you have a need for catbox liner, save your money.
Same goes for Morningstar - basically a shill machine disguised as a service to investors. Their stock picks are entirely random, and as far as I know, haven't even matched the S&P for performance - so it's less than useless.
But he failed to dodge the "big one."
That disqualifies him from consideration as a value manager in our view.
On Oct 19 08:27 AM Bill Herbert wrote:
> Great article. Miller is a real joke, IMO, and has been for years,
> but the shill machine on WS is a high-dollar operation, and he is
> still considered by many to be a credible "money manager" who just
> had a little bad luck recently, that's all.
>
> I truly wish the SEC would require fund companies to prominently
> disclose the horrendous damage to wealth and stock portfolios that
> people like Miller have caused, and also make them disclose the real
> numbers on their performance over the years. Neither is the case
> right now, so there is a lot of outright fraud in the way these "investment
> results" are presented.
>
> And Barron's??
>
> Please don't make me laugh. Barron's hasn't been worth reading for
> years, and is getting progressively worse now that Rupert has taken
> over. Unless you have a need for catbox liner, save your money.<br/>
>
> Same goes for Morningstar - basically a shill machine disguised as
> a service to investors. Their stock picks are entirely random, and
> as far as I know, haven't even matched the S&P for performance
> - so it's less than useless.
This is what crony journalism gets you - hugely inflated egos mirroring one another.
As for his fund, its amazing to me that anyone kept any money with him over the past few years. And yes, it really IS a strong object lesson in the wisdom of investors managing their own money. For him to fail in quite so spectacular a manner, he had to have thousands of investors failing to manage their assets along with him. This is the dark fallacy - that once you transfer your money to a "professional money manager", you don't have to pay attention to what goes on yourself. Wrong. You need to watch out DOUBLY hard, and do your homework even more rigorously.
As a former Legg Mason broker, I can report Miller always had a "relative" value approach to investing. Readers should know that he was the under-study to the eclectic manager who built the LMVTX, Ernie Kiehne. Ernie was director of research and responsible for the success of the Value Trust going back to the early 1980's when it was Legg Mason's only mutual fund.
Back then Ernie used to get on the Legg Mason institutional research call and talk about how his cats had told him about the value in PEG, or some other boring true value idea. In order to keep Bill happy he was given the more aggressive/relative value fund, The Legg Mason Special Investment Trust, and he did quite well with it.
When he took over for Ernie, Miller brought his relative value ideas to the flagship fund, but many value investors always chafed at Miller's analysis. Style drift in value asset management has always been an issue as often times value investing is out of favor, which can make retaining investors/assets very difficult. Unfortunately for Bill he gave in to the dark side of value investing and no one stopped him. In the process he hurt investors, the firm and his own reputation. It will take more than a puff piece in Barrons to change that.
Heard he has 190 foot yacht. Where are his investor's yacht's?
Lose 100% in year 16. You end up with zero. That's what "great investor for 15 years missed the big one." gets you.
It's called gambler's ruin.
On Oct 20 11:27 AM Stone Fox Capital wrote:
> Funny how everybody is so negative on Miller. He was a great investor
> for 15 years the missed the big one. He could very well be up for
> the next 15 years and everybody is focusing on the one 18 month stretch
> and throwing up under the bus. Typical herd mentality of following
> the hot money. Everybody will jump back on the bandwagon 5 years
> too late.
The average American is sold mutual funds as a way to not do the hard work of tracking stocks . If you aren't willing to work hard to watch your money, why give it to a stranger to manage? It doubles the work, you have to understand his strategy and keep an eye on what he is buying and selling.
Mutual funds have lots of pitfalls. It would be better for most folks to buy a few good dividend growth stocks, read the news and meet for lunch with a couple of friends to talk about their stocks and swap jokes.
I cant understand the Barron's article because I seriously doubt that financials are out of the woods--for a long time.
The reason I dont invest with Miller is the same as the reason that I dont invest in Citigroup--lousy fundamentals, and the track record of capital destroyer over time. Want to bet that horse?