In a recent article, CBS Marketwatch proclaims “Legg Mason’s Bill Miller is No. 1 Again.” The one-time superstar fund manager has made the journey from hero to zero and apparently back again to hero. But it’s an interesting journey, wherein lie important lessons about investing and hero worship.
From the start of the 1990s to the middle of last decade, Bill Miller enjoyed unprecedented success. As the manager of the Legg Mason Value Trust mutual fund, he sought underpriced stocks in his efforts to deliver performance that beat the S&P 500. Not an easy feat, considering that around 80% of fund managers like him fall short of this goal every year. But succeed, he did. From 1991 through 2005, on a calendar year basis, the Value Trust fund beat the S&P 500 index fifteen years in a row.
He was the Michael Jordan of the 90s, but without the baseball hiatus. PLUS, he was the Shaq of the early 2000s without the Hollywood distractions and team power struggle. In 1999, Morningstar named him the “Fund Manager of the Decade.” He was an anomaly, an outlier. Despite the academic research that clearly shows that investors will generally experience greater success with a passively managed portfolio versus an active one that picks stocks and times markets, Miller seemingly showed that active managers can win with consistency.
So, after all this success, how did Miller fall from Grace? As all streaks do, Miller’s came to an end. But it didn’t just end quietly, falling short of the benchmark by a point or two. In 2006, when the Value Trust fund underperformed the S&P 500 for the first time in 15 years, it fell short by 9.95%. And the next year it lost again to the S&P 500 by 12.12%. And in 2008, when markets were reeling, the Miller’s Value Trust fund lost 18.05% more than the S&P 500. He turned the tide in 2009, beating the S&P 500 by 14.18%, but failed to beat the index in 2010, 2011 or 2012.
At the end of the day, the question is not whether or not Bill Miller is a good mutual fund manager and stock picker or just lucky. For 15 years, he enjoyed unprecedented success. An investor who had the prescience to invest in Miller’s fund at the beginning of the streak and get out before fortunes turned in 2005, enjoyed returns far better than the S&P 500. For that investor, the question of whether or not Miller is skillful or lucky doesn’t matter. A $1,000,000 investment in 1991 would have turned into $9,806,908 by the end of 2005, nearly double the $5,135,188 the same investment would have grown to in the S&P 500.
The real question is whether or not the investor would have the ability to determine when it was a good time to be invested in Miller’s fund. If the same investor who enjoyed all 15 years of the streak remained invested in the Value Trust fund through the end of 2012, the advantage he held over the S&P 500 would have been virtually eliminated; $7,219,056 in the Value Trust fund and $6,809,215 in the S&P 500. But it’s even worse than that. Most investors weren’t fortunate enough to begin investing in the first year of Miller’s streak. I would suspect that the accolades bestowed on Miller each year the streak continued to attract new investors.
An investor drawn to the fund based on Miller being named Morningstar’s “Manager of the Decade” investing in 2000, would have felt good about his decision after five years. $1,000,000 invested in 2000 would have turned into $1,155,883 by the end of 2005 compared to $933,988 in the S&P 500. However, by the end of 2012 his investment would be worth only $850,868. The same investment in the S&P 500 over the same period would be worth $1,238,460.
Even worse, an investor who hears about the 15 year streak and has the misfortune of investing $1,000,000 at the start of 2006 would find his investment worth only $736,120 by the end of 2012, just over half of what he would have had with S&P 500 returns, $1,325,991.
An investor who was with him all the way, investing $1,000,000 in 1983, the fund’s first full year, through 2012 would have seen his investment grow to $19,501,422. Impressive. However, the same investment in the S&P 500 would have grown to $21,739,853.
No, the real question is not is Miller skillful or lucky? The real question is would you have know when to be in and when to be out of his fund? As we have seen, even the superstars struggle to consistently outperform their relative benchmark index. Most investors look for superior five and ten year returns in search of their mutual fund heroes. That strategy would have caused you to miss a significant amount of Miller’s outperformance, and kept you in long enough to give the returns all back.
Back to the proclamation that Miller is No. 1 again. In the middle of 2012, as the Value Trust was about to fall short of the S&P 500 for five out of the last six years, Miller left the fund. What is that saying about a captain going down with his ship? Miller manages the Legg Mason Opportunity Trust fund, which has had some volatile returns (nearly 70% returns in 2003, but losing more than 65% in 2008).
Miller’s newer fund, the Opportunity Trust, finished atop a Wall Street Journal ranking that is based on 12 month returns. I’m not quite ready to anoint him back to hero status after 12 good months. Maybe more like 15 good years. Then again, we’ve seen that story before.
