He was described as “one of the greatest investors of our time” by Fortune magazine in 2006. His record of beating the Standard & Poor’s 500 Index for 15 years from 1991 through 2005 is unmatched. And yet his mutual fund—Legg Mason Value Trust—suffered poor returns over subsequent years, landing him in the bottom of the pack in 2010 out of 1,187 large capitalization U.S. stock mutual funds. And so the much talked about Bill Miller has announced he is stepping down as portfolio manager of Legg Mason’s flagship fund.
Miller’s record has often provoked arguments over whether his record demonstrated that he had great skill, or just good luck. Statisticians say that whenever a large group of people competes, probability theory suggests that some will come out ahead by luck, while some will lag behind and the majority will be average. Miller stood out among investment managers because no one had come close to his record of consecutive annual outperformance. To do him justice, it is well known that he rarely bragged about his performance and that he even noted that when measured by annual periods that did not follow the calendar, his fund lagged behind the S&P 500 Index.
He also had a formidable hurdle to overcome: his mutual fund’s expenses, at 1.75 percent annually, were well above the average of big U.S. stock funds. He also used a concentrated investment approach, making bold and large purchases of individual stocks. He won big on purchases of Dell, America Online, and Fannie Mae, but later lost on stocks issued by Eastman Kodak and Bear Stearns.
His post 2005 performance affected his long-term record: MarketWatch.com reported that his fund lagged the S&P 500 Index for the entire 21 years that he ran it, all due to the fund’s results since 2005. In 2008, the fund lost 55 percent.
Investors who can’t stand that type of volatility would do better to give up on looking for a “star” manager and stick to a passive, diversified portfolio.
