'So Sorry'
Fund Managers Now Well-Versed in the Language of Loss

By Steven Mufson
Washington Post Staff Writer
Sunday, November 2, 2008

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.

Every quarter has offered the chance for another mea culpa. In April, they wrote, "as we have said -- possibly ad nauseam -- we and our shareholders may have to be unusually patient." In July, they conceded that "our stock market fund results have been poor." In September, they said: "The credit crisis . . . turned very ugly in the third quarter. Then it got worse in October."

In an interview, Hinton said, "It's been kind of a long year for everyone." He said he believed investors were "pleased with level of detail we provide, the candor that [his co-manager Weitz] provides. It doesn't mean they're happy. No one's pleased with the recent results. We certainly aren't, either."

Other than gold and Treasury bonds, perhaps the only bull market around is the market for code words. "With the benefit of hindsight, we have obviously been wrong to be as constructive on the market as we have been," David E. Nelson, chairman of the investment policy committee of Legg Mason Capital Management, wrote in early October, delicately substituting the word "constructive" for optimistic.

Many managers concede mistakes succinctly. Davis and Kenneth C. Feinberg, co-managers of the Clipper Fund, said frankly that their fund's performance was "poor both on a relative and absolute basis."

One purpose of the letters to customers is to hang onto customers. So investment managers and strategists from Weitz Funds, the Clipper Fund and Legg Mason all pointed to Warren E. Buffett as an example of patient investing.

Hinton said, "Warren Buffett is without peer in the investing world." Hinton added, "And a lot of the common sense that he's been preaching for years was probably never more true than at a time like this." The fund's biggest holding is now Buffett's Berkshire Hathaway.

Clipper and Legg Mason strategists both compared buying stocks today to a sale in a retail store, with both funds' managers noting that people rush to Macy's during a sale but stay away from the stock market during downturns.

In times like this, there is a run on platitudes. "It is often said that investing is simple but not easy," write Davis and Feinberg. They also say, "As the old saying goes, only liars buy at the bottom and sell at the top."

Optimism dies slowly. In a report sent recently, Fidelity Dividend Growth manager Charles Mangum, who confessed to erring by having a large stake in AIG among other losers, said "I remain bullish on the United States. We're an unusual country." Just below his discussion of performance, Fidelity added a note saying that a new manager took over the fund on Sept. 9.

Fidelity spokesman Adam Banker said the appointment of Mangum's successor, Lawrence Rakers, "is in the interest of the shareholders of the fund and will position the fund to attain strong long-term performance." Banker said Rakers had "a successful, long-term track record." He added that Fidelity was working with Mangum to "identify potential other opportunities within the firm." Mangum joined Fidelity in 1990 as an equity research analyst.

This year's performance tarnished a good run for Mangum, whose Dividend Growth fund edged out the S&P 500's average annual total return by 7.2 to 6.52 percent since he took over in January 1997 through June 30.

In his Oct. 6 note to investors, Citigroup's Levkovich cut his year-end forecast for the S&P 500 to 1200, 19 percent lower than his earlier year-end forecast but one that would still require a huge rebound from the current level of 968.

"It's looks pretty nutty -- no make that aggressive -- at the moment," Levkovich said in an interview late last month. "It certainly looks aggressive. But we could also be at the verge of a pretty powerful rally."

Legg Mason's Nelson was also feeling optimistic early last month. "As humbly as we can, we state that we believe investors are now being afforded one of the best buying opportunities of their lifetimes," he wrote. "If we are wrong about that, we will have yet another reason to apologize."

Steven Mufson has an investment in Legg Mason Value fund.