Baltimore fund whiz tells how some bungle when running money


BILL MILLER, manager of the Legg Mason Value Trust fund, is too much of a gentleman to speak ill of the competition and name names.

But at the Morningstar Investor Conference in Chicago, Miller did the next best thing: He laid out the mistakes that put the typical fund manager behind both the proverbial eight ball and their requisite benchmark index.

Miller knows a bit about beating those indexes. For the past 13 years, his fund has outperformed the Standard & Poor's 500 - a winning streak that is the envy of other managers because no one else out there can claim similar success.

This year, the fund is up more than 25 percent, or more than 12 percentage points better than the index, which should be enough to ensure that the streak continues.

Miller's success is predicated on his personal spin on traditional value investing. He's unafraid to throw tech stocks and fallen angels in with traditional value picks. He'll make big bets based on his brand of bottoms-up research.

While Miller's fund is certainly not for everyone (it has an above-average expense ratio that is a real turn-off to traditional value investors), the mistakes he said fund managers are making bear scrutiny by everyone.

If you have a fund that is lagging behind its benchmark consistently and that shows signs of making these errors, it might be time to find a new manager.

According to Miller, too many fund managers make mistakes by:

Spending too much time thinking about the economy.

Miller paraphrased legendary Fidelity Magellan manager Peter Lynch, noting that anyone who spends 15 minutes per year worrying about the big picture has wasted too much time.

While growth and momentum investors, as well as managers who practice sector rotation in order to be in the right part of the market at all times, would beg to differ, virtually every outstanding manager I've ever talked to has said that bull market or bear markets are irrelevant because there is always something to buy or some strategy to pursue.

Trading too much.

Miller's fund has annual turnover of about 25 percent, or less than one-third of the average stock funds. Trading costs add up in ways that most fund investors don't see.

According to Lipper Inc., trading costs at the average stock fund amount to 0.46 percent on top of the expense ratio. That means that the average equity fund - with an expense ratio of roughly 1.4 percent - would be adding about one-third to its costs in order to cover trading costs, and that the first 1.86 percent of return would go to the fund firm and to the brokers handling the firm's trades, rather than to investors.

Congress is currently considering legislation that would force disclosure of trading costs, but Miller's point doesn't change even if you know the numbers involved: Fund managers who trade stocks like crazy don't necessarily bring back bigger returns for their shareholders.

Owning too many stocks.

Concentrating a portfolio can make it more volatile, but it also goes a long way toward helping to beat the index, particularly if the stock picking is good.

Failing to anticipate news.

While warning against trading too much, Miller was quick to point out that managers who own a lot of stocks tend to cross into areas of the market that are ailing, thus becoming "automatically committed to being in the worst sectors."

Miller clearly has not always anticipated correctly - he bought Enron stock on the way down, when no one was forecasting the dire future that company was facing - but he suggested that managers who fail to forecast what happens next are letting shareholders down.

Oversimplifying valuations.

This is a common mistake among individual investors too, where many people find one number - price/earnings ratio, for instance - and focus on that instead of doing more complex considerations.

Clearly, Miller was indicting the many growth and momentum managers who bought more on the strength of rising sales and profit numbers than on the underlying fundamentals.

Too much following of the trend.

Funds can benefit by not following the herd. While Miller has made his reputation buying some of the same big-name stocks that seemingly showed up in every large-cap fund, he has obviously done enough movement on his own to be the only guy to whip the S&P; for so long.

"[Miller] doesn't do anything that's so different or unusual, except for beating the index year in and year out," said Russel Kinnel, director of fund analysis at Morningstar Inc. "But this is an industry where common sense and consistency stand out, and a lot of fund managers could learn something from that."

Chuck Jaffe is senior columnist for CBS Marketwatch. He can be reached at or Box 70, Cohasset, Mass. 02025-0070.

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