I am especially pleased to present today’s Think Tank piece by James Bianco.
Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.
Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).
- The Wall Street Journal – Legg Mason’s Bill Miller On The Prowl Again After several years of heavy losses, Bill Miller’s diehard investors are breathing a tentative sigh of relief. The famous Legg Mason value investor, who stumbled so badly during the stock market turmoil of the past few years, is off to a much more promising 2009. Indeed, it’s been the best first half for his mutual funds since 2003, when his 15-year streak of beating the Standard & Poor’s 500 still had 2 1/2 more years to run. Mr. Miller’s flagship Legg Mason Value Trust is up 15% through the halfway mark, compared to about 3% for the Standard & Poor’s 500. And his smaller, more flexible, and more volatile Legg Mason Opportunity Trust is up 33%. The explanation is simple. Mr. Miller has stuck with the same kinds of bullish bets on an economic recovery that got him into hot water earlier. In the spring’s stock market rally, they’ve done well. … “I underestimated the crisis,” Mr. Miller admits. He thought the extra liquidity being pumped into the system would turn things around. He never thought house prices, or share prices, would fall as far as they did. But he still pins a lot of blame on federal policy blunders. Not just the bungled bankruptcy of Lehman Brothers, but also the earlier move to Fannie and Freddie preferred shareholders. Mr. Miller calls that “a disastrous error” that turned the economic crisis into a meltdown. Mr. Miller says he personally lost a lot of money on Freddie Mac preferred stock, as did friends and colleagues.
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A pattern that jumps out to us is that the managers that are doing well YTD, did horrible in 2008. Many of this year’s winners lost 40% and 50% last year.
Highlighted in the story above, Mr. Miller has stuck with the same kinds of bullish bets on an economic recovery that got him into hot water earlier. In the spring’s stock market rally, they’ve done well. It appears that Miller is not unique. Many seasoned professionals did the same thing, held their losers so long they became winners again, but not before seriously impairing their longer-term (5-Year) record.
How about the rest of the crowd? The first table below details overall mutual fund performance through June 1. The second table is the same thing through July 1.
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Returns highlighted in red are funds that have underperformed the S&P 500 equal-weighted average. Since fund calculations are done on a equal-weighted basis, the S&P equal-weighted average is the better benchmark.
In the first table (June 1) note that no categories are highlighted in red for either MTD or 3-month returns. This means that every category had outperformed the S&P equal-weighted average (and handily outperformed the S&P 500 cap-weighted and Russell 2000) over these periods. However, looking further back at YTD and 10-year returns shows the vast majority of fund categories have underperformed.
In the second table (July 1), almost all of the return categories were red for MTD and 3-month time periods, meaning they underperformed the S&P equal weighted average.
Why the difference? Maybe because in May (June 1 table) the MTD return of the S&P equal weighted average was 6.39%, a heady number for just one month and in June (July 1 table) the MTD return for the same index was -0.91%.
So, when the market advances strongly (May), the average mutual fund outperforms. When the market returns stall (June) they underperform.
If Bill Miller is winning because he held his losers so long they are coming back (again, not before they impaired his longer-term record), and the same is true of many celebrity managers (first table), do these tables show that the we can extend this idea to all mutual fund managers? We believe so.
Bill Miller is not unique. There might actually be 8,893 managers just like him.
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