This is the Bill Miller you've been talking about? Holy s**t!
Mean Street: Losing Faith in Freddie Mac and Bill Miller
Posted By Deal Journal On July 10, 2008 @ 3:56 pm In Mean Street, The Players | 56 Comments
Fund manager Bill Miller is in Sun Valley, Idaho, mixing with media kingpins and presumably trying to salvage his investment in Yahoo.
His friends should keep him away from his BlackBerry. One look at today’s single digit price for Freddie Mac, one of Legg Mason’s large holdings, could send him marching straight for the Salmon River near Ketchum with rocks in his pockets.
How does Miller keep the faith? Better yet, how does he get his followers to keep the faith?
According to Morningstar, Miller’s Legg Mason Value Trust is ranked dead last among the hundreds of its peers for its 3- and 5-year record. For the past year, the fund is down an astonishing 40%. Yet here is Morningstar’s latest take:
On Jan. 31, analyst Greg Carlson urged investors to “Keep the faith.”
On June 27, with Value Trust investors having incurred an additional 27% loss on their money, Carlson was back at it: “Despite abysmal returns, management continues to earn our confidence.”
Confidence in what? If a couple of years ago, a random fund manager had been told to pick those stocks that would perform worst, it is highly improbable he could have picked as many big losers as Miller.
Miller’s rogues gallery of picks has included Aetna, American International Group, Bear Stearns, Citigroup, Eastman Kodak, Qwest Communications, Sears Holdings, United Healthcare and Yahoo.
Take Freddie Mac, which is off more than 20% today and more than 75% since the beginning of the year. As of the end of March, Legg Mason was one of Freddie’s largest shareholders. Miller has been adding to his position all the way down.
In a recent interview with Asian Investor magazine, Miller justified that buying. “In dumping shares of Freddie Mac over credit concerns, investors missed the point.…Freddie Mac and Fannie Mae are a solution to, rather than cause of the credit crisis….Freddie is trading in the low $20s and we believe should earn half that price or $10 within five years.”
But at today’s price of $8, Freddie is trading below Miller’s earnings target. A bargain. He may be brave and right. Or Freddie could be insolvent and he could be wrong. It is looking more like the latter.
Carlson says Miller has good people and processes. And that “what they’re doing has not fundamentally changed” from when Miller outperformed the Standard & Poor’s 500 for 15 consecutive years. The value playbook is to buy when stocks look cheap and to keep buying as they get cheaper.
Still, it makes one wonder what you have to do to lose Morningstar’s confidence.
Miller’s disciples point to his long-term track record. Make that, in Carlson’s words, his “very long term record.” The Legg Mason Value Trust is now significantly trailing the S&P 500 for the past 10 years. Over that same period, it trails 72% of its peer funds.
To get outperformance from the fund versus the S&P500, you have to go back 15 years or more. That is indeed “very long-term”.
Of course, Miller isn’t alone in his recent troubles. A bunch of other highly regarded value investors including Rich Pzena, Marty Whitman, Joel Greenblatt and Bruce Sherman also have lost more than 30% of their investors money in the past year.
But Miller is probably the highest-profile value investor out there. And the future of his fund’s parent company, Legg Mason, rides heavy on his shoulders. A chart of the performance of the Value Trust fund and Legg Mason’s own share price is awfully telling.
When Legg Mason reports results in early August, a look at the redemptions will tell us just how many investors are keeping the faith in Bill Miller. |
