I meant to write this post for Tuesday but we had a structure fire Monday afternoon that kept me busy until around midnight (most posts are written the night before).
Bloomberg had a quick write up giving us the latest on once legendary mutual fund manager Bill Miller. Although he no longer manages the Legg Mason Value Trust he does still manage the Legg Mason Capital Management Opportunity Trust (LMOPX) and the fund is doing very well with a 29% YTD return through October 11.
The article notes the extent to which the fund has had this move by concentrating in banks, home builders and mortgage REITs. The Morningstar page for the fund says the risk is high and most of the related stats are not good either.
So the market is having a good year and the fund is doing very well. Any guesses what the fund will do the next time the market goes down a lot?
There are funds and managers that are very much live by the sword which is fine up to a point. What I mean by that is that many fund holders did not realize that certain managers were living by the sword - that is taking very big risks.
It is very easy to look at a stock or a fund and know whether it is more likely to go up more than the market on the way up and down more than the market on the way down. Caterpillar (CAT) is a great example of this and one I have mentioned many times before. And so apparently are funds managed by Bill Miller.
Most of the time a portfolio is a mix of holdings with various volatility profiles. Typically when it looks like the market might be on the road to down a lot we will look to reduce the portfolio's volatility by selling names that tend to be very volatile--relative to the portfolio.
Understanding what each holding is likely to do (no guarantees) in the face of a large decline should go along way to managing the amount of volatility you are exposed to.