Bill Miller’s management approach
The case represents several constituents of Miller’s management approach that allowed him to successfully beat the market for 14 years. First, Miller considers that it is possible to purchase stock on its way down, as the lowest average cost wins. The above assumption is relevant if the fundamentals are strong. Second, Miller buys low-expectation stocks, rejecting popular opinion in the context of a contrarian approach. Third, he purchases high intrinsic value stocks, focusing on their fundamentals. Fourth, Miller follows an outlook involving a long-term perspective, preventing high turnover rates. Fifth, with regard to taking risks, Miller achieves higher results than when “playing a small ball” (Bill Miller and Value Trust, n.d., p. 10). Furthermore, Miller emphasizes that looking for both cyclical and secular underpricing is better than considering them separately. The mentioned aspects illustrate that Miller’s approach can be regarded as a value-oriented, contrarian, and diversified.
Performance of Value Trust in recent years
In recent years, the performance of Value Trust has continuously improved according to various indicators. For our purposes, exhibits presented in the case help to evaluate the performance efficiency of the fund. There are two ways to measure investment performance: the percentage of annual growth rate representing the total return, and the absolute dollar value. The above indicators are to be compared with those of the Russell 1000 index or the Standard & Poor’s (S&P 500) index.
Thus, the S&P 500 and the Russell 1000 indices were beaten by Value Trust for the past one, three, five, 10, and 15 years. Speaking more broadly, in the context of the Legg Mason Value Trust (LMVTX) fund family, Value Trust presented the best average annual return. The period of 1994-2005 clearly shows the growth of net assets by 26 percent, in comparison with 11 percent for the S&P 500. At the same time, the turnover rate did not exceed 30 percent in 1992, decreasing to four percent in 2004. It should be noted that cumulative return constituted more than 830 percent. Finally, Value Trust received a five-star rating from Morningstar, an independent investment research agency.
Caution about Value Trust’s current and future performance
However, there are several alarming indicators as well. The volatile internet area, namely, eBay and Amazon, raises concerns related to the fund’s high fliers. The greater part of Value Trust’s investment area of cheap stocks consists of companies that experience turnarounds or restructurings that also sound alarming. Despite the above indicators, the fund’s beta of 1.31 assumes that the risk is not superfluous.
It is also essential to point out the fact that another factor inviting caution is that the growing size of the fund is likely to threaten the sustainability of Miller’s approach in the future. The increasing size also makes Value Trust look like the index fund is conveying the market on the whole. The larger the fund, the more challenging it would be for the company to follow its initial strategy.
The factors of the fund’s performance
In my opinion, both the investment strategy and Miller’s competencies contribute to the remarkable performance of the fund. The first competence employed by Miller, the portfolio manager working for Legg Mason Value Trust (LMVTX), is the speed of information. There is a professional team of analysts supplemented by additional experts from outside the company. In effect, the fund accurately evaluates every trend occurring in the market area, to be informed to the full extent. Furthermore, Miller encourages personal research to ensure the appropriate and timely education of employees. Reputation is an integral part of Miller’s success, as his ongoing success record significantly affects the market. Following the above assumption, some market members tend to pay close attention to their actions. It is possible to suggest that this influence can help Miller to manipulate the market, to some extent, to achieve better results.
Nevertheless, it should be stressed that a successful experience cannot guarantee outstanding performance in the future. In this respect, investment strategy should be considered as an essential factor in determining the efficiency of the fund as well. In particular, there should be investors ready to buy and sell information asymmetries in the context of the asset market. Miller’s value investment strategy presumes to stay completely invested rather than looking for better directions. As the portfolio manager, he applies diversification to construct efficient portfolios. This strategy is different from many others in terms of an in-depth analysis identifying what is actually expensive and what is not. Another factor is a concentration of assets with a focus on ten large-capitalization firms. Thereby, the excellent recipe for success of Value Trust consists of appropriate investment management and Miller’s competencies.
Rationale for investment in Value Trust
Seeing the information in the case, I would invest in Value Trust for a number of reasons. The excellent performance of the fund, along with its positive background, is what attracts above all else. At this point, I would consider the fact that Value Trust corresponded to and even exceeded the S&P 500 and the Russell 1000 indices several times, which sounds impressive. Furthermore, Miller’s investment style seems to be one of the most effective approaches, due to its contrarian approach that focuses on discount stocks and their intrinsic value.
Reference
Bill Miller and Value Trust. (n.d.). PDF file.