Mean Street: Losing Faith in Freddie Mac and Bill Miller
Posted by Deal Journal
July 10, 2008, 3:56 pm
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.
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Rock and Roll (picking stocks) is a loser’s game; it mesmerizes, I can’t explain.
Comment by Ray Davies - July 10, 2008 at 4:47 pm
Also see Richard Pzena’s interview in Barron’s at the end of last year. He said FRE and FNM “in the $20s don’t make any sense … hence big positions for us in both Fannie and Freddie”. These glib professional investors are very good at explaining what went wrong after the fact and why they are not wrong this time.
Comment by AnonComment - July 10, 2008 at 4:52 pm
Thanks for noticing that this Emperor has no clothes. The key to investment success IMO is avoiding big losses. By that standard Miller flunks. Compare him with another well respected value guy, Jean Marie Eveillard of First Eagle International and Overseas funds. He’s holding up well in this roaring bear as he did in 2001-2003.
Comment by Gary E Miller - July 10, 2008 at 4:59 pm
a lot of these guys are betting on a mean reversion and they’ll be right eventually but deciding which time period from which to calculate your mean and the timing of when it will revert is more challenging … the effects of globalization are a powerful secular force preventing the mean reversion these guys are betting on …
Comment by Anonymous - July 10, 2008 at 5:27 pm
a lot of these guys are betting on a mean reversion and they’ll be right eventually but deciding which time period from which to calculate your mean and the timing of when it will revert is more challenging … the effects of globalization are a powerful secular force preventing the mean reversion these guys are betting on …
Comment by anonymous - July 10, 2008 at 5:27 pm
sorry to all for the duplication
Comment by anonymous - July 10, 2008 at 5:28 pm
Mean reversion is a good theory, provided that the person’s intelligence and capability are intact. Maybe something fundamentally has changed with the man, in which case reversion to the mean is placed in doubt.
Comment by Comfortably Numb - July 10, 2008 at 5:52 pm
Isn’t this the guy who said he would vote against BAC taking over his CFC shares?
Why should he care? it isn’t his money.
Comment by Anonymous - July 10, 2008 at 6:41 pm
I am not an economist, nor am I a good stock picker, but having read a fair amount about booms and busts, it seems to me that the fear driving some of these stocks lower will eventually subside and those who load up now will reap the rewards when the tide turns.
Comment by johnstenn - July 10, 2008 at 6:47 pm
What an irony. I remember just last year Miller was on the cover of BusinessWeek for his amazing long term records and his successful strategy. (editorial note --- the famed Business week curse.... back at work!!! --- ed JP)
Comment by Anonymous - July 10, 2008 at 6:59 pm
Although I own no shares in Bill Miller’s fund, I do have respect for him. In my personal account I own Citi a which has performed
abysmally. Because of his
continue optimism in Citi I have retained my shares albeit
with an substantial loss. According to THEBUYLIST, Miller just purchased another
chunk of Citi for the period
ending 9JUL08. So, either Miller is still receiving funds from the faithful or he is altering his portfolio. Either way he is still positive on Citi and his convictions are consistent. In other words, he is not changing his philosophy in investing - he is sticking to his game plan which has made
him (up to recently) one of the best investors in this era.
Comment by Ed - July 10, 2008 at 8:09 pm
the higher you go the harder you fall..from one of the best fund managers to one with the most losses…
Comment by diversification - July 10, 2008 at 8:17 pm
Excellent post, thank you. I’m looking forward to the follow up in August.
Some of the losses in these funds and the concommitant decline in the market are the result of redemptions forcing the managers to sell at the lows and creating a vicious cycle.
The good news is that the redemptions create bargains. I believe Miller has been forced to sell a lot of EK. Kodak’s brand, cash, patent portfolio and disappearance as a competitor may be worth considerably more than 13.50 to someone like HP or Canon. Unlike subprime ridden banks and mortgage insurers, EK is a company with marketable assets and limited debt.
Comment by Berbatov - July 10, 2008 at 8:30 pm
SELL.
Comment by Frank - July 10, 2008 at 9:05 pm
Fund Managers make money by drawing fees from the fund. Size matters, nothing else does.
Comment by Fitz - July 10, 2008 at 9:12 pm
Evan, recently you said:
“Shortly after mocking the futility of picking market bottoms, I went ahead on Tuesday and bought XLF, the financial sector exchange traded fund. I paid $19.84 a share.”
It stands at $19.24 at the end of today’s trading.
What’s worse for the gut when buying shares: ignoring the high or determining the bottom?
GOOG 100,200,300,400…yeah, I remember a broker telling me not to buy it on opening day…wonder who bought it at the peak of ~700
It’s easy to spot the euphoria on the way up, and plenty of folks buy on that emotion.
On the downside, I’ve seen insider transactions of issues that were bought at the beginning (15%) of their stock’s plummet. Many say that it can’t go any lower, and then it does.
Comment by the gut check - July 10, 2008 at 9:27 pm
Long only managers have had no where to hide this year. Long/short hedge fund managers are on the other side of Miller’s trades and don’t have to wait for mean reversion.
Comment by Nimble market maker - July 10, 2008 at 10:40 pm
You failed to mention his poor numbers with his Opportunity fund. This is the fund where he has free reign to sell short or go long. He couldn’t even get that right.
Comment by vetwrap - July 10, 2008 at 10:47 pm
evan, i was one of your early critics. you’ve responded well to the criticism. your early blogs were statements of the obvious. more recent ones are insightful, witty, sarcastic, no holy-cows blogs. keep it up. welcome aboard WSJ. this customer at least thinks he’s getting his money’s worth.
Comment by nice recovery - July 10, 2008 at 10:53 pm
The market is trading on pure technicals not fundamentals. Once we reach the point of capitulation we will begin to recover. Citi is a buy. A global business model with a number of profit drivers. Pandit will right the ship
Comment by Nimble market maker - July 10, 2008 at 10:54 pm
The market is trading on pure technicals. Fundamentals point to S&P below 1000.
However, after 25 years of buying the dips it is hard to convince the extremely smart public that the system has been pushed to the limit.
Or maybe not and housing will recover in 1Q09 like we were promised.
Good luck!
Comment by Anonymous - July 10, 2008 at 11:02 pm
He was a one trick pony, his trading strategy was designed to excel when the only economic problems were short, where any dip in stocks was a buying opportunity. When economics are more severe to a firm his dip buying got hammered. He proves that he was not a smart investor, but had a strategy that succeeded in the market conditions of the past 15 years, until now.
Comment by Sean - July 10, 2008 at 11:46 pm
If the goverment want to fixed the economy, it is easier if the goverment just buy the house in the trouble housing area to the reduce the inventory to the six month level. It may cost the goverment about $50 Billion, but the stock market will not need to spend hundred billions of bail out on Fannie Mae and Freddie Mae
Comment by Steve - July 10, 2008 at 11:55 pm
it’s “implied” that the US Govt ’stands behind’ the GSE’s,
if that implication turns out to be hogwash-
Kaboom — House of Cards
Comment by Buy American - July 11, 2008 at 1:15 am
--------------\Now watch Miller get all wet riding his huge position in Amazon down.
Miller’s problem? He has no sell discipline.
Comment by Kindle this - July 11, 2008 at 2:18 am
July 11 (Bloomberg) — U.S. officials are considering a plan to have the government take over one or both of Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, if they continue to deteriorate, The New York Times reported.
The companies would be placed under conservatorship if their problems worsen, the newspaper said today, citing unidentified government officials briefed on the plan. The shares of the two firms would be worth little or nothing under this proposal and any losses on mortgages they own or guarantee, which could be “staggering,” would be paid by taxpayers.
Their shares are plunging and their borrowing costs are rising as investors worry the companies will suffer losses larger than the $11 billion they have lost in recent months, the report said….
bloomberg.com
Comment by Anonymous - July 11, 2008 at 3:40 am
link
bloomberg.com
Comment by Anonymous - July 11, 2008 at 3:42 am
Truth be told, nobody can predict a crisis. Even the Medici bankers of the middle ages used fractional reserve banking, which works fine assuming no contagion. I can’t see how even a 20% decline in housing prices can make financial companies go insolvent, assuming they have not leveraged all their capital on buying junk bonds. Assuming.
Comment by TruthBeTold - July 11, 2008 at 3:43 am
Miller is an arrogant gunslinger who has been taking huge risk with other people’s money. He’s not only down big again this year, but will also distribute a big capital gains distribution for investors to pay taxes on because he sold his few winners and loaded up on more of his many losers. He needs to retire while he still has a shred of reputation.
Comment by Frank - July 11, 2008 at 6:50 am
If only 1.2% of loans are 90+ days overdue, why are the gse’s devalued so much?
Comment by DoesNotGetIt - July 11, 2008 at 6:54 am
Buffett has a famous quote. “You find out who’s been swimming naked when the tide goes out.” There is no better example of this than Bill Miller.
Answer to DoesNotGetIt above: Extreme leverage.
Comment by Tom - July 11, 2008 at 7:01 am
If the US Gov’t was unwilling to let an investment bank fail, do you think they will allow it to happen to FMAC & FNMA?
Comment by rayy - July 11, 2008 at 8:00 am
Too big to fail? A few years back the US government bailed out Chrysler and look where the American auto industry is today. And now Bear Stearns, and tomorrow Fannie and Freddie, and next week Citigroup and Bank of America? The politicians are forcing the public to pay for the failures of the capitalist system….. Sound familiar? Moral hazard? Perhaps wealth expropriation is a better term.
Comment by Arbuthnot - July 11, 2008 at 8:53 am
Redemption time? AMZN, look out, belowwwwwwww……..
finance.yahoo.com
Comment by TM - July 11, 2008 at 10:38 am
It is too early to make a call on Bill Miller. If the price declines in Miller’s picks are a result of irrational panic, Miller will look like a genius in coming years. I don’t buy the criticism that “[t]he Legg Mason Value Trust is now significantly trailing the S&P 500 for the past 10 years.” If you take a look at the 10 year market return of American Express, for example, it is essentially flat compared to a modest (very modest) gain in the S&P 500. Yet, looking at fundamentals, AXP has one of the most enviable franchises in the world; it is earning about 85% more than it was in 1998, has a significantly higher return on equity today; and has 14% fewer shares outstanding. You could come up with several other similar examples. Thus, I think there is more than enough evidence to suggest that there is a good deal of selling out there which does not correlate with fundamental reality. As for Miller’s specific picks, only time will tell whether his judgment has been sound.
Comment by Hanoch - July 11, 2008 at 11:09 am
The world is a state. What is seen on the stage is not indicative of what is going on behind the scenes. Big money & power determine the production and how things play out. Illusion & smoke and mirrors - all that is seen cannot be believed. Mass media is worthless - journalism is a lost cause. Propaganda rules. Control by any means; there are no limitations and there are no rules. Program trading including complicity & conspiracy, private equity, stock options & undefined buybacks (to Treasury or cancellation of certificates is NEVER news however so vitally meaningful) are just a few practices that must be prohibited & the most severe punishment must be implemented & imposed without exception or dimishment to dissuade/deter unbridled greed & avarice.
Those who have profited big time in these messes (subprime, credit problems, etc.) must be held to account.
Disgorgement/recovery is the word - not taxpayor liabilities. Track the funds to offshore accounts not in dollars -
There is NO enforcing govt. agency: the SEC and DOJ have no teeth & unsavory politicos have neutered them. Enforcement of anti-trust laws is zero; those laws are dead.
FACTS, TRUTH, ACCOUNTABILITY, INTEGRITY AND JUSTICE - THESE ARE THE PRINCIPLES NOW. ARE THE FREEDOMS GUARANTEED BY THE
BILL OF RIGHTS RIGHTS REAL OR IMAGINARY???
THE PEOPLE MUST BE THE RISING GIANT. STAND-UP, STAND-UP, STAND-UP FOR YOUR RIGHTS.
Comment by 2bitsworth - July 11, 2008 at 11:21 am
So some are clarifying that Sec. Paulson did NOT say “bailout”.
Like the BearStearns debacle, there will be a mammoth session of work over the weekend culminating in the bailout, paid by you and me. Break out your checkbooks.
Comment by Sarumon_the_White - July 11, 2008 at 11:32 am
EDIT/CORRECTION: The world is a stage.
So sorry for this error which takes the wind out of the sail.
Comment by 2bitsworth - July 11, 2008 at 11:35 am
Bill Miller’s basic problem is that he doesn’t have a clue about how to value businesses and never has. He’s all about reversion to the mean, go opposite the crowd, etc. It worked when the Greenspan put was in effect to keep bad companies from going under and the Legg Mason sales force was shoveling new money in for him to average down on his many losers.
Amazon is often cited as evidence of Miller’s “skill”. Amazon is trading for less than what it was when Miller first bought it 10 years ago. So he averaged down on it like a maniac while it dropped 90% from his first purchase. Is that skill or just stubborn arrogance?
Now he has no captive sales force and his shareholders have finally had enough so he’s having to sell his dogs into a down market because of an ongoing stream of redemptions. No doubt there are hedge funds short-selling Miller’s book. He is done.
How does somebody who can allegedly value businesses end up in ALL the following stocks?
Enron
WorldCom
Eastman Kodak
Countrywide Financial
Bear Stearns
Freddie Mac
I’m looking forward to Miller’s latest litany of excuses for his miserable performance in the upcoming Q2 letter.
Morningstar, Kiplinger and the rest of the financial press that has acted as a publicity arm for this reckless gunslinger owes the investing public a big mea culpa.
Comment by DP - July 11, 2008 at 11:39 am
I want to write a daily column in the WSJ - am not a liberal or a conservative. A progressive. I am a fiscal conservatism and social liberal, the latter meaning I am a strong advocate of the Bill of Rights - the rights of the individual. Anyone listening or give a damn?
Comment by 2bitsworth - July 11, 2008 at 11:43 am
Edit: …a fiscal conservative. |
