Superman Gets a 2nd-Quarter Bruising
Sunday, August 27, 2006
NEW YORK -- If Bill Miller were an athlete, he'd be an Olympian with a rock in his shoe. Miller manages Legg Mason Value Trust, the only mutual fund to outperform the Standard & Poor's 500-stock index for the past 15 calendar years. But Value Trust had, in his own words, "a dreadful second calendar quarter."
Value Trust, which has about $19 billion under management, lost 5.67 percent in the first half of the year, a far greater decline than the 1.44 percent dip experienced by the S&P 500. That performance places it among the bottom 1 percent of the 1,600 funds Morningstar ranks in its class. (Miller also manages the $6 billion Legg Mason Opportunity Trust, which was also below the S&P for the first half of the year.)
Value Trust shareholders aren't the only ones doing a double-take at their quarterly statements. Another $25 billion in funds and separately managed accounts is run using Value Trust as a model portfolio. So when Value Trust stumbles, the ripples can be felt everywhere from annuities sold by AXA Equitable to the $329.38 million Masters Select Value Fund, where Miller manages approximately 20 percent of assets.
The amount of money that is either managed by Miller directly or uses Value Trust as a model portfolio has raised some questions.
"Miller's record is awesome," said Louis Lowenstein, an emeritus professor of finance and law at Columbia University who is working on a book about the mutual fund industry. "I think the fund has gotten very big and size gets to be a drag on performance."
Morningstar Inc. analyst Dan McNeela wrote in May that Value Trust's prospects were somewhat constrained by its size.
"In his last annual report, Miller highlighted his penchant for buying additional shares of holdings as they go down as a key success factor," McNeela wrote. "But that option closes down as Legg Mason's stake in its favorites rises. Miller would have trouble making a bigger bet on Expedia, for example, because Legg Mason already owns more than 20 percent of the company."
(Liberty Media Holding Corp. owns another 20 percent of Expedia Inc., according to Expedia's annual report. That makes the stock even less liquid.)
Miller is a classic value manager. He looks for undervalued companies to buy and hold. This strategy translates into big bets. Twenty percent of Value Trust's assets were invested in Amazon.com Inc., eBay Inc., Yahoo Inc., Expedia, InterActiveCorp. and Google Inc. at the beginning of the year and those companies accounted for 4 percentage points of the fund's underperformance, Miller wrote in a letter to shareholders in July.
"In our view, these companies represent superior economic franchises with the ability to earn above the cost of capital as far as the eye can see, and the market's myopic, obsessive focus on what is going on for the next three or six months doesn't alter the business value," Miller wrote.
Ten percent of the fund's portfolio was invested in UnitedHealth Group Inc., Aetna Inc. and Health Net Inc.
"Momentum money has exited these names as the quarterly results have gone from spectacular to merely very good," he said.