From Bill Miller's First Quarter 2008 letter (.pdf) dated 4/23/08, to investors in Legg Mason Value Trust [LMVTX]:
After an awful quarter in which our fund dropped 19.7% compared to a loss of 9.4% for the benchmark S&P 500, we have begun to perform better. In the first few weeks of the quarter, the S&P 500 is up just over 5% and we are up a bit more. Our lead widens if you look back to the Monday the Bear Stearns rescue by JPMorgan was announced. While neither I nor anyone else knows if our period of underperformance is over, it ought to be, if valuation begins to matter more and momentum less in how the market behaves.
To put our results in some context, in our 26-year history, we have outperformed our benchmark 20 calendar years and underperformed 6 calendar years. Since I assumed sole management of the fund, we have outperformed 15 years and underperformed 2 (the last 2 obviously). On a rolling 12-month basis, we have outperformed 60% of the time since inception, and 68% of the time since I took over. Our relative performance this past quarter was the worst in our history, as we trailed the market by just over 1000 basis points. We have had 3 previous quarters where we trailed by over 700 basis points, 2 of which were in the 1989-1990 period which I have previously likened to this in terms of the economic and market backdrop. We have had 3 worse quarters in absolute terms: the quarter the market crashed in 1987, the 9/11 quarter, and the third quarter of 1990...
For planning purposes, here is my forecast: I think we will do better from here on, and that by far the worst is behind us. I think the credit panic ended with the collapse of Bear Stearns, and credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs. Valuations are attractive, and valuation spreads are now about one standard deviation above normal, a point at which valuation-based strategies usually begin to work again, and momentum begins to fade (there is no evidence of the latter yet, as the old leaders continue to lead). Most housing stocks are up double digits this year despite dismal headlines, a sign the market had already priced in the current malaise. I think likewise we have seen the bottom in financials and consumer stocks, but not necessarily the bottom in headlines about the woes in those sectors. Although the economy is likely to struggle as it did in the early 1990s, the market can move higher, as it did back then.
The wild card is commodities. If commodities break, or even just stop their relentless rise, equity markets should do well. If they continue to move steadily higher, they have the potential to destabilize the global economy. We are already seeing unrest in many countries due to the soaring prices of rice and other grains. Oil has rallied $30 per barrel in the past 8 weeks on no fundamental news, save only the same stories about fears of supply disruptions. The typical fundamental drivers at the margin, such as global economic growth, miles driven, and seasonality, would all suggest prices similar to those that prevailed in early February. But none of that has mattered. I agree with George Soros that commodities are in a bubble, but it also appears he is right when he describes it as one that is still inflating, and we still have the summer driving and hurricane season with which to contend.
Top Ten Holdings of the Legg Mason Value Trust as of March 31, 2008 : Amazon.com Inc. (6.5%), The AES Corp. (6.4%), JPMorgan Chase and Co. (5.0%), Aetna Inc. (4.9%), UnitedHealth Group Inc. (4.5%), Yahoo Inc. (4.4%), eBay Inc. (4.2%), General Electric Co. (4.0%), Sears Holding Corp. (4.0%), and Federal Home Loan Mortgage Corporation (3.5%).
