Star manager to bow out with tarnished legacy
Over almost three decades at the helm of Legg Mason Value Trust, legendary mutual-fund manager Bill Miller made his mark with a 15-year steak of beating the Standard & Poor's 500 index.
The forthcoming retirement of legendary mutual-fund manager Bill Miller will stop the clock on his track record, but the real question is whether the lasting image will be his legendary successes or his epic failures.
Over almost three decades at the helm of Legg Mason Value Trust, Miller made his mark with a 15-year steak of beating the Standard & Poor's 500 index. It's not that Miller's fund made money every year from 1991 through 2005, but he was the anomaly, the active manager who did better than an index fund in all market conditions. As mutual funds became mainstream investments through the 1990s, investors flocked to him.
Even as the Internet bubble burst, Miller was able to top the index despite big bets made on Enron and other troubled stocks, convincing investors that he had enough star power to overcome his mistakes.
Legg Mason said recently that Miller will retire from fund management in April, 30 years after he started running Value Trust. But in fact, most people wondered what had taken Miller so long.
When his market-beating streak ended, Miller went from the guy who could do no wrong to one who did no right.
In 2007, when the market was up, Miller was down; in 2008, Legg Mason Value Trust lost a stunning 55 percent of its value. (His other fund, Legg Mason Opportunity, lost 65.5 percent that year.)
The mutual-fund press made him the poster boy for star managers letting their egos take over while performance suffers, believing that they can somehow bend the market to the power of their wills and their investment styles.
It doesn't work that way.
Miller's 2009 gains of more than 40 percent for the Value Trust and 83 percent for Opportunity were too late; in four of the last five calendar years, Value Trust finished in the bottom 2 percent of its peer group, according to investment researcher Morningstar.
While the fund still has $2.8 billion in assets, you'd be hard-pressed to find anyone who would buy it now; new helmsman Sam Peters has been Miller's co-manager for about a year now, but expecting him to be "the next Bill Miller" is unrealistic if you are pegging that hope to Miller's stretch run.
No one who followed Fidelity Magellan legend Peter Lynch ever truly proved to be "the next Peter Lynch," and the number of top managers who have been succeeded by bright stars is tiny.
While Miller won't be the last star manager, he will be the guy known for killing off the genre. The next time someone has a hot streak or a run of great performance, it will be Miller's heyday they are compared to, and Miller's fall from grace that is the cautionary tale used to scare investors away.
That's not entirely fair. A $10,000 investment in Legg Mason Value Trust from when Miller took over in April 1982 is worth $235,089 today, a cumulative return of 2,251 percent, an annualized average return of 11.26 percent. (Of course, that account value would have peaked at nearly $400,000 in 2006, riding out years of misery since.)
The fund was one of just 14 large-blend funds to beat the S&P 500 over Miller's management tenure (from April 1982 until now), tying for 10th place in the category over that time.
By comparison, an investment in the Vanguard Index 500 is up 10.97 percent annualized (turning $10,000 into $217,457), and an investment in the average large-cap blend fund gained 9.76 percent over the last 30 years, according to Morningstar, turning $10,000 into $157,175.
The sad problem is that few people enjoyed that long record of performance.
Instead, they bought in after Miller's reputation was made, and lost money while he lost his edge.
Over the past 15 years, the fund ranks in the bottom 30 percent of its Morningstar peer group, despite the fact that it beat the market in roughly half of those calendar years.
Evaluated by his long-term track record, Miller's departure represents the end of an era of success that few managers have ever enjoyed.
Few investors will remember him that way; instead, he's the guy they were told was great but who wound up disappointing them perhaps more than any star manager in history.
Miller's streak was remarkable, but others have picked up where he left off. Currently there are eight funds that have beaten the S&P for every calendar year of the last decade.
Of those eight, only one — American Independence Stock — is in the same large-cap blend category as Legg Mason Value Trust, according to Morningstar. Despite beating the index for the last 11 years, American Independence has not generated much interest, as witnessed by having just $156 million in assets.
Miller's 15-year streak is the longest for any fund since 1990, according to Morningstar, but the second-longest streak is the current 12-year run of Matthews Asian Growth & Income.
Six funds are on current runs of 11 years; along with American Independence, they are Gabelli Small Cap Growth AAA, Schroeder US Opportunities, CRM Mid Cap Value, Lord Abbett Small-Cap Value, Wells Fargo Advantage Small Cap Opportunities. TimesSquare Small Cap Growth is the only other fund with a current streak spanning 10 years; according to Morningstar, just 22 funds in total have topped the S&P 500 for more than five consecutive calendar years.
Miller's fund is one of 14 large-cap blend funds — out of a total of 43 that have been around since he started the fund — to have topped the S&P 500 benchmark for his 29-plus years as a manager.
The Sequoia Fund tops the list, with an annualized gain of 13.58 percent, with Mairs & Power Growth and MainStay MAP I the only other funds with annualized gains north of 13 percent.
Davis NY Venture, American Funds Fundamental Investors, Selected American Shares, Invesco Van Kampen Exchange and RS Large Cap Alpha all outgained Legg Mason Value Trust (Oppenheimer Rising Dividends tied Miler with an annualized average of 11.26 percent) over the last three decades.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at P.O. Box 70, Cohasset, MA 02025-0070.
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