Nov. 17, 2011
By MarketWatch
BOSTON (MarketWatch) — The forthcoming retirement of legendary mutual fund manager Bill Miller will stop the clock on his track record, but the real question is whether the lasting image will be his legendary successes or his epic failures.
Legg Mason's Bill Miller steps down
After running Legg Mason Value Trust mutual fund for nearly 30 years, Bill Miller is stepping down at the end of April and will be succeeded by Sam Peters, WSJ's Mark Gongloff reports on Markets Hub. Photo: AP.
Over almost three decades at the helm of Legg Mason Value TrustLMVTX +1.72% , Miller made his mark with a 15-year steak of beating the Standard & Poor’s 500 index SPX +1.34% . It’s not that Miller’s fund made money every year from 1991 through 2005, but he was the anomaly, the active manager who did better than an index fund in all conditions. As mutual funds became mainstream investments through the 1990s, investors flocked to him.
Even as the Internet bubble burst, Miller was able to top the index despite big bets made on Enron and other troubled stocks, convincing investors that he had enough star power to overcome his mistakes.
Legg Mason said Thursday that Miller will retire from fund management in April, 30 years after he started running Value Trust. But in fact, most people wondered what had taken Miller so long.
When his market-beating streak ended, Miller went from the guy who could do no wrong to one who did no right. In 2007, when the market was up, Miller was down; in 2008, Legg Mason Value Trust lost a stunning 55% of its value. (His other fund, Legg Mason Opportunity LMOPX +2.21% lost 65.5% that year.)
The mutual-fund press made him the poster boy for star managers letting their egos take over while their performance suffers, believing that they can somehow bend the market to the power of their will and their investment style.
It doesn’t work that way.
Miller’s 2009 gains of more than 40% for the Value Trust (and 83% for Opportunity) were too late; in four of the last five calendar years, Value Trust finished in the bottom 2% of its peer group, according to investment researcher Morningstar Inc.
While the fund still has $2.8 billion in assets, you’d be hard-pressed to find anyone who would buy it now; new helmsman Sam Peters has been Miller’s co-manager for about a year now, but expecting him to be “the next Bill Miller” is unrealistic, if you are pegging that hope to Miller’s stretch run. No one who followed Fidelity Magellan legend Peter Lynch ever truly proved to be “the next Peter Lynch,” and the number of top managers who have been succeeded by bright stars is tiny.
End of an era
While Miller won’t be the last star manager, he will be the guy known for killing off the genre. The next time someone has a hot streak or a run of great performance, it will be Miller’s heyday they are compared to, and Miller’s fall from grace that is the cautionary tale used to scare investors away.
That’s not entirely fair. A $10,000 investment in Legg Mason Value Trust from when Miller took over in April 1982 is worth $235,089 today, a cumulative return of 2,251%, an annualized average return of 11.26%. The fund was one of just 14 large-blend funds to beat the S&P 500 over Miller’s management tenure (from April 1982 until now), tying for 10th place in the category over that time.
By comparison, a $10,000 investment in the Vanguard Index 500 VFINX +1.34% is up 10.97% annualized (turning $10,000 into $217,457), and an investment in the average large-cap blend fund gained 9.76% over the last 30 years, according to Morningstar, turning $10,000 into $157,175.
The sad problem is that few people enjoyed that long record of performance. Instead, they bought in after Miller’s reputation was made, and lost money while he lost his edge. Over the last 15 years, the fund ranks in the bottom 30% of its Morningstar peer group, despite the fact that it beat the market in roughly half of those calendar years.
Evaluated by his long-term track record, Miller’s departure represents the end of an era of success that few managers have ever enjoyed. Few investors will remember him that way; instead, he’s the guy they were told was great who wound up disappointing them perhaps more than any star manager in history.
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