Bill Miller is sailing into retirement humbled. The fund he managed, the Legg Mason Value Trust, outperformed the market for 15 straight years. But the fund started sinking in 2006 and provides an object lesson for investors. Over the past five years, the fund has lost about 10 per cent per annum. Years of outperformance mean little if a fund grows so large it’s unwieldy. And inflexibly following one strategy can be counterproductive.
Mr. Miller’s record, both bad and good, stems from consistency. To his credit, he avoided the typical venal sins of money management: excessive turnover and mimicking stock indexes. Instead, he liked to buy companies that could grow their earnings quickly, particularly when investors feared they might go bust. Buying AOL , cell operator Nextel and Amazon on the cheap proved prescient, as did snapping up shares in Fannie Mae in the mid-1980s. The gains more than made up for the occasional failure like Enron.
This inflexible contrarianism worked well for many years, and spectacularly so when nearly everything in markets went up. This was good for Legg Mason and Mr. Miller. The firm’s assets under management rose more than tenfold between 1996 and 2006 to close to $900-billion (U.S.). And while Mr. Miller ran less than 10 per cent of the total, he was well compensated. Among other things that allowed him, in 2006, to buy a 235-foot yacht, aptly named Utopia.
Yet this strategy always carried a small chance of failing spectacularly. The economy can slow, and whole slews of feeble companies can fail at the same time. That’s what happened in 2007 and 2008 when he bet that growth would resume in the financial sector. Mr. Miller accumulated stakes in Bear Stearns, Merrill Lynch and Washington Mutual. When the crisis intensified, he doubled down on Freddie Mac and AIG .
While Mr. Miller’s overall record is slightly better than the market as a whole – his fund returned 11 per cent per annum since inception – few investors were there at the start, and many joined the fund at its peak. For these folks, there’s no sunset to sail off into.