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.