Bill Miller: Revenge of the Dunce?
Bill Miller’s Legg Mason Value Trust Fund (LMVTX) was down more than -55% in 2008 and many people considered him the industry dunce – due in part to his heavily concentrated stock positions and stubborn belief of holding onto his sinking “Financial” picks. Unfortunately this stance cratered results to abysmal depths – earning his fund the infamous Morningstar 1-Star Rating. But let’s not forget Mr. Miller did not become stupid over night. From 1991 through 2005 he beat the S&P 500 every year before hitting a rough patch in 2006-2008. His previous 15 year streak was the equivalent of me hitting .400 off Randy Johnson – very few, if any, can replicate. So, is the dunce back? Thus far in 2009, his fund is up about 25% through July 26th, handily trouncing the S&P 500 by more than 14% (Morningstar). Miller remains bullish on his outlook for financial markets although he caveats his prediction with three endogenous risks:
“Rising interest rates, a sharp rise in commodity prices (especially oil), and policy errors.”
Miller also brings up a topic I have brought up on numerous occasions in my monthly newsletter, which is that investors are sitting on piles of low earning cash:
“Assets in money market funds recently exceeded those in general equity funds for the first time in over 15 years. In contrast, at the market peak in October 2007, assets in equity funds were more than 3x greater than the assets in money market funds. The return on this mountain of cash rounds to zero, which is good when stocks and bonds are falling, but far from optimal when they are rising. Although I expect credit spreads and risk aversion to remain well above the averages of the past decade, there is plenty of room for them to narrow and for equities to move higher as this cash gradually moves out the curve in search of better returns.”
The average investor is late to both coming and going from the game. Don Hays, Strategist at Hays Advisory Services, notes, “We believe all good news at the top, and we doubt and disbelieve any good news at the bottom.” I think Bill concurs when he states the following:
“The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won’t work. When the markets start up and the economic forecasts begin to be revised up — where we are now — the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained.”
Miller also makes some thoughtful points on the attractiveness of the financial sector, pointing to the disappearance of many competitors, appealing valuations, and rising pre-provision earnings. On the topic of inflation, Miller remains unworried about prices spiking up. He argues, logically, that rising unemployment and excess capacity will keep a lid on prices. True, however, with exploding debt levels and deficits, coupled with the insatiable appetites of emerging markets for commodities, not to mention spiraling healthcare prices, I believe inflation concerns may be here sooner than anticipated. Let’s not forget the stagflation experienced in the 1970s.
Bill Miller is still in a deep hole that he dug for himself, but I would not count this dunce out. Mean reversion is one of the most powerful principles of finance and if you ride Bill Miller’s coat-tails on any continued rebound, it could be a prosperous, memorable ride.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.