Most financial pundits will tell you it’s impossible to consistently beat the stock market. And fund flows into passive index funds help to corroborate this. But don’t tell that to legendary fund manager Bill Miller, who did just that.
The former Legg Mason fund star has outperformed almost every one of his peers, earning a spot on Barron’s ‘All-Century Team’, a list of the best investors of the entire 20th century.1 Miller and his fund were direct beneficiaries of the famous bull market of the 1990s.
Bill Miller Background
Miller’s path to Wall Street is a little different than most. He was born in North Carolina, not New York City, like other Masters of Finance profiles like Carl Icahn and Ray Dalio. Miller earned an economics degree from Washington and Lee University in 1972 but he really owes his keen analytical skills from his time as a military intelligence officer in the U.S. Army.2 Perhaps it was this unique perspective that helped him spot winning stocks.
The Dotcom Boom
The 1990s was an amazing time in financial markets. It was the heyday of investing, with the public fully onboard. Day traders were popping up everywhere and cocktail parties were buzzing with talk of which internet stock people owned. Bill Miller was also riding the wave, to the pleasure of investors in Legg Mason’s Value Trust mutual fund which he skippered. Miller’s Value Trust Fund ended the decade on a high, finishing 1999 with an amazing 26.71% return.3 For that effort, Miller earned himself millions.
Bill Miller’s fund beat its benchmark, the S&P 500, for a remarkable 15 straight years, from 1991 to 2005, even after fees.4 This streak, which may never be equaled, is a testament to his intensive focus on a value-oriented investing style focusing on a company’s intrinsic value. Miller learned many of these investment tools while in the CFA Program, earning his charter in 1985.5
Such outperformance is supposed to be impossible by subscribers to the Efficient Market hypothesis. The theory basically states that stocks reflect all available information and thus are always ‘fairly’ valued. In other words, it’s impossible to consistently beat the market on a risk-adjusted basis.
The only caveat is the ‘risk-adjusted’ qualifier. The hypothesis infers the only way to beat the market (outside of luck) is to take on more risk. This is where the EMH defenders have a leg to stand on. One of the ways Miller was able to beat the S&P 500 was with a high allocation to higher risk technology stocks. Miller’s fund had large positions in such high-fliers of the day as America Online, Dell Computers and Amazon (which continues to outperform to this day).6 His investment in AOL alone increased 50-fold for Miller’s fund.7
This is a bit of a paradox, since technology stocks are traditionally viewed as high beta growth stocks, the antithesis of value investing. Was the Value Trust fund really a growth fund in value clothing? Miller and his defenders will say no. Even staunch financial analysts will admit the determination of value can include very subjective inputs, despite well-defined financial models such as the Capital Asset Pricing model (CAPM) and the DuPont ROE breakdown.
Bill Miller Criticisms
Value Trust’s overall track record is amazing, with the fund averaging 16.45% over the streak.8 But its doubtful many investors profited in similar fashion. It’s common for individual investors, even some financial advisors, to “chase” performance. That means they start investing after the annual results have been reported. The longer the fund outperformed, the more investors jumped on board-late.
Morningstar analyzed the annual “investor return” in Value trust fund during ‘the streak’. This is the return the average investor likely received after reviewing annual fund flows and annual returns. In a Fortune article, they revealed the investor return was just 11.34%, a full 5 percentage points lower than the actual return of the fund over the course of the streak, 16.44%.9 In fact, if the analysis is accurate, the average investor in the Value Trust fund actually underperformed the S&P 500 index over the course of the streak 11.34% versus the S&P 500’s 11.5%.10
Now, this certainly isn’t Bill Miller’s fault, but it does reinforce a common perception that most investors don’t profit like the financial professionals themselves. While Legg Mason didn’t release the figures, the Wall Street Journal guesstimates Bill Miller’s was earning upwards of $10 million per year before the financial crisis hit.11 Miller even splurged on a 235-foot yacht, appropriately named ‘Utopia’.12 But all good things must come to an end.
The performance of Miller and the Value Trust fund wasn’t so good after the streak. From 2006-2011, Miller’s Legg Mason Value Trust Fund (symbol: LMVTX) underperformed the S&P 500 in 5 out of those 6 years, getting hammered 55% in 2008, thanks to the financial crisis.13 The market’s swoon ravaged some of the fund’s major holdings including insurance giant AIG, Countrywide and Bear Stearns, which were held way too long. Critics soon questioned Miller’s abilities.
Of course, hindsight is always 20/20 but that’s the reality of working in asset management. There is a lot of money to be made, but you have to be able to stomach the gyrations and the criticism. If you are interested in a well-paid, fast-paced career in finance, consider asset management.