Bill Miller's fund is beating the market once more

Bill Miller is chairman of Legg Mason Capital Management.
Bill Miller is chairman of Legg Mason Capital Management. (Kenneth K. Lam, Baltimore Sun)

During the depth of the 2008 financial crisis when Bill Miller's funds were in free fall, a colleague advised him to get a dog.

"I needed to change my luck," said the Legg Mason money manager, famous for beating the market 15 years in a row. "I reasoned that to have a bull market, you need a 'bull' dog of some sort."


Miller, 63, settled on an English bulldog he named after boxer Jake "Raging Bull" LaMotta. "The bulldog was the reason the market recovered," Miller said during a recent interview at Legg's headquarters in Baltimore's Harbor East.

It's not just the market that's up these days. Miller's Legg Mason Opportunity Trust, which he has managed since its inception in 1999, also is on top. The mid-cap value fund, with about $1.5 billion in assets, rose nearly 40 percent last year, counting reinvested dividends, and so far this year has gained 41.6 percent — each time at least doubling the performance of the market.


For three quarters in a row, Opportunity Trust was the top-ranked U.S. diversified stock fund with more than $50 million in assets, according to a Wall Street Journal survey.

And after about five years when more money has moved out of Opportunity Trust than in, the trend started to reverse in late June, Miller said. Net inflows for July were nearly $68 million.

Analysts, though, warn that the fund isn't for the fainthearted or meant to be a core holding in an investor's portfolio. Opportunity Trust has wide performance swings, they say, and its long-term investors have yet to recover from losses in 2008.

The fund generally invests in companies whose shares are selling below what Miller believes is their true value. It's a strategy similar to the one Miller employed at the better-known Value Trust fund, which he managed for decades before relinquishing the reins last year.

Bridget Hughes, associate director of fund research at Morningstar, said the Opportunity Trust "is back" — "kind of what you would expect from an aggressive, contrarian style in a bull market."

As for Miller himself, she said: "It's tough to say whether he's back."

Even today, Miller's market-beating record with the Value Trust stands. The closest other fund managers have gotten was 11 consecutive years of outperforming the market, according to Morningstar.

At its peak, the Value Trust's assets ballooned to more than $20 billion. Around that time, Miller bought a 235-foot yacht for his then-wife, although he rarely used it.

"I'm probably the only person in history that bought a boat even remotely that size never having been on one," he said.

Only later he heard that yachts make for bad karma. "That's when our performance started down," Miller said.

His winning streak ended in 2006, and things went quickly from bad to worse with both funds. He made big bets in financial and housing stocks, sectors that bore the brunt of the 2008 crisis.For instance, he continued to plow money into investment firm Bear Stearns right before its collapse and into mortgage financier Freddie Mac prior to a government takeover.

"In 2008, I made a lot of mistakes," he said. "The world was getting worse, and the decisions that we made typically were decisions that turned out to be bad."


Miller said that at the time, he hadn't realized 2006 was the beginning of the end of a 60-year credit cycle in which debt — government, personal and private sector — drove economic growth. The end came in 2008 with the collapse of the housing market, he said.

Value Trust lost 55 percent that year, while Opportunity Trust plunged nearly 66 percent, compared with a 37 percent drop for the market.

Investors pulled billions out of both funds. Speculation grew about whether Legg would keep its one-time star manager.

"To Legg Mason's credit, they didn't fire him," said Hughes, adding that Miller became "very contrite, humbled" after 2008.

"You have to give the man credit. He just didn't roll up his tent and take all of the money he clearly made and put aside and go home," said James Hardesty, chairman of Hardesty Capital Management in Baltimore. "He said he was determined to come back, and he's made an interesting investing comeback."

After the financial crisis, Miller turned to the writings of Depression-era economists for answers and started paying more attention to the impact of government policies on companies. The lessons from 2008 guide his decisions today, he said.

Also, a few years ago after his marriage ended, Miller sold the yacht and put the proceeds into stocks.

Opportunity Trust rebounded in 2009 and 2010, gaining 83 percent and nearly 17 percent respectively, then dropped 35 percent the next year. The market in 2011 feared another 2008, Miller said, but when that didn't happen, his portfolio's housing and financial stocks took off in 2012.

"Risk aversion is extremely high right now," he added. "Things that are perceived to be risky are probably not as risky."

Opportunity Trust owns housing, airlines and financial services stocks that to most investors seem shaky, but are "basic, down the middle of the fairway" picks, Miller said. Housing data is positive, airlines are reporting record profits and financial companies are among the biggest beneficiaries of the improving economy, he said.

Miller said most other equity managers are so terrified of underperforming since the crisis that they've become "closet indexers," secretly mirroring the benchmark they're supposed to beat.

You can't say that about Miller, who tends to buy fewer stocks than other managers and holds on to them longer.

"His favorite names will get larger positions than a lot of managers are generally comfortable with, and he will let them ride until his thesis is worn out or refuted," said Jeff Tjornehoj, senior research analyst at Lipper Inc. "Some of the names he stood by for a long time have roared to life."

That includes Netflix, MGIC Investment Corp., Best Buy and Pandora Media, all of which are up well over 100 percent — just this year.

"He's got these triple-digit performances in the portfolio that the benchmark doesn't own much of or not at all," Tjornehoj said.

Even with recent strong returns, though, long-term investors haven't recovered their losses, Tjornehoj said. For example, $10,000 invested a decade ago in the fund was worth $20,000 in 2007, but only $15,500 today.

Opportunity Trust received a low one-star rating on Morningstar's scale of one to five, and a neutral rating from analysts. Most investors likely would feel more comfortable if the fund didn't have such high returns, Hughes said.

"You know that it's not sustainable," she said. "The only way to go is down. And there has been a pattern of hot and cold returns."

The fund may be appropriate for a small piece of an investor's portfolio, but it's not a core holding, Hughes said. "It's just too aggressive."


Besides, the reason to buy Opportunity Trust is Miller, and there's a risk that he could retire, Hughes said.


Miller joined Legg Mason in 1981, and their fortunes have been entwined. As Miller racked up successes and headlines, Legg's profile grew, too. And when Miller stumbled, so did Legg. The company for years hasn't been able to stop investors from pulling out of its other funds, contributing to the abrupt resignation of its CEO last year.

Miller had been chairman of the Legg Mason Capital Management unit, which in its heyday managed $70 billion in assets and had 180 employees. But assets shrunk to $7 billion, and this year, Legg's new CEO, Joseph A. Sullivan, merged Capital Management into a New York subsidiary.

"I thought LMCM had a unique culture and unique style that it would have been preferable to preserve," Miller said. "But that wasn't the call that was made. So being a good soldier, I expressed my opinion, and then salute and move on."

Miller now is chairman of LMM LLC, a separate entity he owns with Legg. It has $1.6 billion in assets, including Opportunity Trust, and only a handful of employees. One of them is Miller's son, Bill Miller IV, a 32-year-old analyst and portfolio manager on a high-income product LMM has developed.

The younger Miller has been trying to get his dad to join Twitter like billionaire investor Warren Buffett. That's unlikely to happen, at least in the near future, but the elder Miller plans to resume writing an open letter to investors at the end of next month.

He has no plans to retire.

"From the time I was 9 years old, I liked the market," he said. He grew up in Florida and recalls how his father explained that a stock was owning a piece of a company, and its value could go up without any work by the investor.

The young Miller had just earned a quarter for cutting grass with a push mower in the Miami heat. He recalls thinking, "If I can go to sleep or sit in a chair and make 25 cents, that's what I wanted to do."


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