Bill Miller's exit marks fresh start for Value Trust fund

November 20, 2011|Jay Hancock

Bill Miller didn't just make amazing amounts of money for himself, his firm and his clients for a while. He helped fill a hole in Baltimore's financial services industry.

In the 1990s, the city was losing banking pillars such as Alex Brown and Maryland National Bank. But Legg Mason was building what would become a trillion-dollar money-management portfolio, thanks partly to Miller's ability to beat the stock market year after year.

Thursday's announcement that he'll no longer pilot Legg Mason's flagship mutual fund starting April 30 underscores a plunge in fortunes for the firm and a question mark for Baltimore. Sam Peters is taking the helm from Miller at the Legg Mason Value Trust fund. Both the fund's shareholders and the city have a stake in the fresh start.

Legg had previously said that Miller would leave Value Trust but hadn't set a date. He remains chairman of Legg Mason Capital Management, a subsidiary of Baltimore-based Legg Mason Inc. And he'll continue to manage money for the firm's clients.

But he'll no longer be LMCM's chief investment officer. And he's leaving the vehicle that made him Baltimore's most famous mutual fund jockey.

"He beat the S&P 500 for 15 years in a row," said Jeff Tjornehoj, U.S. and Canada research manager for Lipper Inc. "That made him a front-page personality. He was single-handedly responsible for the success of Legg Mason through the year 2005 or so. You couldn't escape a conversation about the best funds without mentioning Value Trust."

One thousand dollars invested in Value Trust at the end of 1990 was worth $10,000 at the end of 2006, counting reinvested dividends. Miller beat the S&P index for large-company shares from 1991 through 2005, a feat that defied statistical odds and led to Miller and his team managing more than $40 billion in Value Trust and other funds.

Starting as an orthodox "value" manager, buying traditional companies at beaten-down prices, Miller began buying technology stocks such as Amazon. What looked like expensive price tags on those companies' shares were really bargains based on their long-term prospects, he argued.

"Part of what got him so much attention was that other value managers were skittish on tech companies whereas Miller embraced them," said Russel Kinnel, director of fund research at Morningstar. "He loved financials and tech, the best two places to be in the '90s and the worst places to be" in the 2000s.

Miller got himself a huge yacht. He rubbed elbows with technology rock stars such as Google's Larry Page and Amazon's Jeff Bezos. Money magazine called Miller "The Greatest Money Manager of the 1990s."

Legg Mason itself, built by Raymond A. "Chip" Mason from a small brokerage firm, was directing more than $1 trillion in investments by mid-2007, thanks to internal growth and the firm's 2005 acquisition of Smith Barney's asset-management business. That year, the firm agreed to move from downtown Baltimore to a shiny new tower on the east side of the harbor.

But Miller, it turned out, was a bull market investor at his core. He launched Value Trust in 1982, at the beginning of the greatest bull market in history. It was no coincidence that his streak of beating the S&P 500 began with the 1990s boom. When markets began to drift downward after mid-2007, he must have assumed it was a short-term correction, just like so many he had witnessed.

He did what value investors do during short-term corrections, buying depressed stocks and waiting for the comeback. But the bull market was over. Miller's holdings in housing and finance plunged even further. Value Trust outraced the market on the way down, just as it had on the way up.

A thousand dollars invested in Value Trust in mid-2007 is now worth about $600. Miller beat the S&P again in 2009, when the market bounced back from the financial crisis. But despite huge winners such as Apple, bets on banking companies as well as Eastman Kodak haven't worked out, as the European financial crisis challenged the global economy anew.

Last year, Value Trust trailed 98 percent of its mutual fund peers. This year, the fund continues to perform worse than the S&P benchmark. Investors have fled, helping send Value Trust's assets from more than $20 billion in 2007 to less than $3 billion now.

Miller politely objected to my portrayal of him as a bull-market guy.

His 15-year streak "included the worst three years in the market since the Great Depression — 2000, 2001 and 2002," he said in an interview last week. "We outperformed every year. It's not the case that we don't do well in bear markets."

Rather, he said, it was the end of a multidecade buildup of debt that coincided with Value Trust's increasing difficulty in beating the market.

"It's more accurate to say that when the credit cycle changed and deleveraging happened, that's when our ability to navigate came apart," he said.

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