Gone are the days when Legg Mason Value Trust’s Bill Miller was a sage stock-picker.
Under Miller’s management, the fund beat the S&P 500 for 15 years — until 2005.
Since then, Value Trust’s assets have dwindled from $20.8 billion at its peak in 2006 to $3.4 billion.
Since January 2011, returns have fallen by more than 10 per cent, and the firm’s value has declined by 4%.
A classic value investor, Miller tends to look for stocks that he thinks are undervalued and have potential for growth. Value investing is inherently optimistic in this sense. Shop around the bargain bins enough, and there might be a veritable Armani suit of a stock that someone put the wrong price tag on. Turns out, this works a lot better in bull markets like those that gave Miller his glory days.
One of the reasons why his winning streak ended in 2006 was that he missed out on the jump in oil-related stocks. Now, 7.4% of LM Value Trust's holdings are in the energy sector. The fund takes significant positions on BP and Conoco Phillips.
He was also tragically bullish on Citigroup in 2006, choosing the bank over commodities, which have done well.
Same goes for WorldCom. Back then, those losses weren't enough to knock Value Trust down.
He told investors, 'We were wrong to buy Enron when it was also involved in such a scandal. Our analysis of Enron was excellent, in my opinion, despite our investment being unsuccessful. Process and outcome are two different things.'
In March, 2008, Miller loaded up on Bear Stearns for about $30 a share. Not a bad price, considering that it was going for $154 a share not long before. Unfortunately, Bear Stearns collapsed just days later and the Fed had to broker an embarrassing deal that sold the investment house to JP Morgan Chase for an insulting $2 a share.
Even after the financial crisis, Miller still believes in the financials, one of the most anemic sectors
He told CNBC in January, 2010, 'Bank of America is great. Earning power of $3.50 or so and the stock is at $16. And, you know, Countrywide, they bought at a big discount to book value. Bank of America has 23, 24% market share in home mortgages in the country. Fabulous market share. Great Franchises. It's--you know, long term, it's great.'
Miller bet that Kodak would be worth $100 per share 10 years ago. This summer, he had to dump Leg Mason's 25% ownership of the imaging company for $3.89 a share. The fund realised $551 million in losses in the sale. Eastman Kodak was once a blue chip stock, but the company has struggled to remain relevant in a mostly film-free world.
He told Canada's Globe and Mail in 2007, 'Yeah, we were clearly wrong to buy it when we bought it, which was '99 or 2000, right around that time-and not because we didn't know that film was going away. Before Dan Carp became CEO, and we didn't own any Kodak, people arranged for him to come down and talk to me, not to convince me to buy it but to pick my brain on how the market thought about Kodak, what it thought about the curves of decline in film, that kind of stuff. They clearly understood that they had to change the business model. What I think we underestimated was how difficult that would be culturally. We should have recognised that sooner than we did.'
Miller quickly reversed on RIM at completely the wrong time. He bought 3 million shares in March 2010 and then sold them all in June, right after the share price dropped by about $6, and right before it rose about $8.
From a letter to investors:
'While we believe that Research in Motion offers a differentiated product and that investors are focusing way too much on the US business and not the more durable international business that is still rapidly growing, we also acknowledge the transition to their next generation operating system has become far more dicey than we previously believed. So, despite a number of positives that make us believe the market overreacted in the short term, we see a big long-term negative that makes us question its appropriateness for this strategy. Therefore, we sold the stock in June to take advantage of what we believed were other, more compelling opportunities.'
Right now, the fund's biggest bet is on Microsoft, which has been notoriously flat to down in recent years.
'We of course don't know what GDP or profits growth will be in 2010. History and the data, though, support a view that GDP ought to be 7% to 10%, if corporate profits are going to grow 25% to 35%.'
Was he talking about Nigeria?
We all wish he was right but this isn't 1982. It's different this time.
2.8% was more like it. Off by multiples.