Bill Miller: "Toughest Market I've Seen"

I've written about Bill Miller in the past [Apr 9: Bill Miller is #596! Ouch] not to criticize but to show just how hard it is to stay on top...

How far the mighty have fallen ... Bill Miller is a mutual fund manager who had an incredible streak of 15 years in a row of beating the S&P 500 (this ended in 2006). He took large contrarian bets in concentrated fashion so hence why I have followed him with interest. I saw an article a few months ago about how he was buying financials, homebuilders, and the like and I just felt bad. Maybe over a 4-6 year time frame, but for the short term.... not so much (although I can at least understand the homebuilders because about 2 months ago they stopped going down no matter how bad the news was - but he was buying 2 years ago, not 2 months ago).

That said, I am not posting this to criticize him; I can only hope one day to have a mutual fund (hint hint) that other people can criticize me for my strange ideas.... but it has been a mighty fall, he only beat 4 of his 600 peers this last quarter in his mutual fund category. It just shows why it is not worth it to bottom fish too early in my book; when stocks do turn up from a very beaten down sector, if you miss the first 20-30% move, no big deal - if it's truly a new bull market there should be years of gains ahead...

Just like Ken Heebner is celebrated today, so was Bill Miller about 5 years ago. How quickly things can change. I disagreed (and continue to) with his insistence on sticking with the homebuilders, financials (obviously) but I still respect anyone who chooses to play against the typical mutual fund grain of buying 100s of stocks, which effectively makes you into an index destined to perform in a mediocre fashion. Running a concentrated portfolio means you will have a much better chance of shining through... or under performing. Fortune has a blurb on Miller this week...

• Shareholders of the battered Legg Mason Value Trust mutual fund won't find many answers in manager Bill Miller's second-quarter letter to investors.
• In his note this week, Miller, who famously beat the S&P 500 for 15 consecutive years until stumbling in 2006, deplores market conditions that continue to punish value investors, but doesn't discuss his strategy. His $9.7 billion LMVTX (LMVTX) fund has dropped 34% since last July, while the S&P 500 fell 12%, and suffered outsized losses as financial stocks plummeted.
  
• Investors have responded by pulling out $2.4 billion from the fund in the first six months of the year, according to Financial Research Corp. The impact has been felt throughout Legg Mason (LM), which announced its second straight quarterly loss last week. Miller is not only the firm's star manager, but also chairman and chief investment officer of its stock investing arm, Legg Mason Capital Management.
• Unlike his missive after the first quarter, in which he suggested the worst was over after the collapse of Bear Stearns, he also offers no timelines. (another in the "the worst is over" camp - unlike the pundits who scream it daily on TV for months on end, those who actually manage money have to put money where their mouth is, and you can see from his fund the results - it very easy to "say" it on TV or in the print media like many love to do)
• Instead he writes that the crisis around Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), which have dropped over 65% this year, has convinced him that this market is the most difficult he's faced.
• Still, he seems to dismiss critics who suggest that his bad bets on housing and banking stocks were foreseeable, or that he should have anticipated the commodities boom driven by growth in China and India.
• While it's true that value investors - who look for beaten down stocks that they think the market has misjudged - have suffered this year, Miller has been hurt more than most. Large value funds have fallen an average of 16% since last July, according to Morningstar. The research firm lists LMVTX as a large blend fund, but Miller trails his peers there too: on average, those funds have dropped 11%.
• LMVTX has been so hard hit partly because the fund is highly concentrated, with only 35 stocks at present. When bets sour, as they did with Miller's large crop of financials, including Citigroup (C, Fortune 500) (down 33% for the year), the whole portfolio reels. Two of Miller's other top ten holdings, Unitedhealth Group (UNH, Fortune 500) and Aetna have also been pummeled this year, down 51% and 29%, respectively. (healthcare - get some, it's a "safe" place to hide)
• But there's another reason why Miller's losses have outpaced other value managers. He's never toed the traditional value line and is famous for scooping up high-multiple stocks like Ebay and Google, now two of his top 10 holdings. Both have fallen this year, with Ebay down 18% and Google off 26% (technology - get some, it's a "safe" place to hide)

I think a lot of people have very short memories - it was less than 8 years ago that we learned there truly is no "safe place to hide" in a bear market. It's just a matter of relative losses - where do you lose less. After my own scathing at the time, I remember vividly :) At least in this era those in IRAs and even regular accounts have very easy instruments to partially offset their long positions on the short side (short ETFs) so there is always some silver lining.

For those interested, the full letter is here.