'So Sorry'

Fund Managers Now Well-Versed in the Language of Loss

Being a stock market fund manager or strategist these days means always having to say you're sorry.

Unlike other apologies, this is a special art form. When stock managers or strategists say they are sorry, their apologies are usually cloaked in a language all its own. They blame irrational market sentiment, hail the Patient Investor, invoke the folk wisdom of Warren Buffett and try to stop badly burned customers from heading to the exits by recalling how suddenly and unpredictably markets have, historically, recovered.

Some fund managers deep in the hole resort to borrowing hackneyed metaphors. "To sail across the ocean, you must balance making progress in fair weather with the ability to withstand the inevitable storms," Clipper Fund's Christopher C. Davis, wrote, quoting his father, also a fund manager. "Those who think only of the storms will never leave the shore. Those who think only of fair weather will never reach the other side." Clipper Fund was down 46 percent this year as of Oct. 29. In an unusually frank Oct. 6 report titled "Eating Humble Pie," Citigroup equity strategist Tobias M. Levkovich said, "Admitting to being wrong is often one of the more difficult tasks for people, as human nature involves some level of stubbornness, especially since the prior analytical work seemed logical and thorough." Yet, he added, "with hindsight and experience, we have to concede that some of the assumptions we made late last year have proven to be deeply flawed."

There is plenty of humble pie to go around. Of the actively managed funds that list the Standard & Poor's 500-stock index as their primary prospectus benchmark, 52 percent were trailing the S&P 500 year-to-date return of negative 33.86 percent through Oct. 22, according to Morningstar.

Even the once-mighty, such as Legg Mason's all-star fund manager Bill Miller, have a seat at the table this year. Miller, who beat the index for 15 years in a row through 2006, is having an appalling year. Earlier this year, his Value fund held stocks like Freddie Mac (now nationalized), Countrywide Financial (acquired at a fire-sale price), American International Group (effectively nationalized) and two home builders, whose share later dropped as housing fell into a deeper swoon.

Miller's most recent disclosures show that he still owns big stakes in AES (down 62 percent this year), UnitedHealth Group (down 59 percent) and Google (down 47 percent) that once seemed to fit his value strategy of buying cheap, undervalued companies. But, as the seldom quoted saying goes, sometimes cheap stocks are cheap for a reason.

Explaining all this isn't easy.

Miller hasn't written a letter to fund investors since the summer, when he sounded defensive and confused. "It has been explained to me that it was obvious we should not have owned homebuilders, or retailers or banks, and that I should have known better than to invest in such things," he wrote on July 27. "While I am quite aware of our mistakes, both of commission and omission, when I ask what is obvious NOW, there is little consensus. If there is something obvious to do that will earn excess returns, then we certainly want to do it."

Since then, his Value fund has dropped 31 percent more.

Recently, Legg Mason sent a "special message" to investors conceding what was already obvious: "This period has been particularly difficult . . . as our funds have not weathered the storm as well as any of us would have liked." The unsigned note said that the firm's managers "share both the disappointment and financial pain" and were "intensively examining the sources of our below par results." Legg Mason declined to comment for this article.

Some fund managers have been apologizing all year. In January, Weitz Funds managers Wallace R. Weitz and Bradley P. Hinton said that they were "glad that 2007 is history" and that "the flipside of this gloomy picture is that the recovery process for the financial system has begun."

Oops. Since the beginning of 2008, Weitz Value Fund, which had $1.3 billion in assets on Sept. 30, is down 40.27 percent for the year to Oct. 29. It held big stakes in AIG and Fannie Mae, both of which have effectively been nationalized. Last year, it took heavy losses in Countrywide Financial, which was acquired by Bank of America at a fire-sale price.