Bill Miller of Legg Mason Value Trust: Buy Battered Financial & Housing Stocks
Kurt Brouwer December 13th, 2007
How fast things can change for mutual fund portfolio managers. Not long ago, Legg Mason’s Bill Miller was acclaimed for a streak of beating the S&P 500 15 years in a row. Now, shareholders in his fund, Legg Mason Value Trust, are getting restive after a couple of subpar years. As this MarketWatch article spells out, Miller is busy even though the fund is lagging the market this year [emphasis added below]:
Legg Mason’s Miller: Buy Financials, Housing Stocks (MarketWatch, November 2, 2007, Jonathan Burton )
‘…Bill Miller, the veteran Legg Mason mutual-fund manager whose remarkable 15-year streak of market-beating performance ended in 2006, says that battered brokerage, housing and consumer stocks are poised to become big winners. And he says he’s trimming many of his fund’s largest holdings in order to buy more of them.
“The greatest gains over the next five years will be made in those securities people are panicked about today,” Miller, manager of Legg Mason Value Trust (LMVTX) wrote in a letter to the fund’s shareholders dated Nov. 1 and published Friday.
“Today fear dominates the pricing of housing stocks, of mortgage related securities, of financials, and of many consumer stocks,” Miller added.
This is the part of investing that really separates the long-term investors from short-term investors. As Baron Rothschild reputedly said two hundred years ago, “Buy when the blood is running in the street.” For more on this, see Buy When The Bonds Are Flooding the Street.
But, this type of investing is also the hardest to do. That is, to buy when stocks or bonds have been pummeled. We all nod our heads and agree that the name of the game is buying low. Well, Citigroup, Washington Mutual and many more financial, housing and mortgage stocks have clearly fallen to low points. Miller, for one, is stepping up and buying them.
The article continues…
‘…Miller’s commentary offers a revealing look at how a celebrated contrarian stock investor views a market that hasn’t been kind to his stock selection and value-based investing bias for the past couple of years.
In his letter, Miller notes that Value Trust has been taking advantage of what the fund manager perceives as the market’s mispricing of some stocks. The only company he mentions is mortgage lender Countrywide Financial Corp. (CFC), which has seen its share price tumble to around $14 from a high in January above $45. It’s in that upper tier where Miller pegs Countrywide’s long-term value, he writes. Countrywide was a top Value Trust holding at Sept. 30, reflecting about 2% of assets. According to a Countrywide filing on Sept. 10, Value Trust as of Aug. 31 owned 53.4 million shares of the company, or 9.25% of the shares outstanding.
Miller is also making broad alterations to the portfolio, according to the investor letter. The fund will buy more large-cap stocks and reduce the number of midcap names held. The market’s new leaders will be big U.S. companies, in Miller’s view, particularly those in the financial-services and consumer sectors.
“Large-cap U.S. is the cheapest part of the equity market,” he wrote.
Value Trust will also delve into sectors in which it’s been absent, according to Miller. As to which sectors, Miller wasn’t saying, but portfolio data as of June 30 shows the fund is underexposed compared with its benchmark S&P 500 to financials, manufacturing, technology, computer software and hardware…
Significantly, the fund also has had no investments in energy companies, a valuation call that has hurt performance.
Miller also wrote that the fund is likely to trim many of its top 10 positions. While he didn’t single out any names, the portfolio has been considerably overweight in comparison to the S&P 500 in telecom, media, utilities and consumer stocks.
“They still will be among our largest holdings, we will just have less,” Miller wrote of the top 10, which represents almost half of the fund’s recent $19 billion in assets. “This is being done to reduce risk in the overall portfolio, and to fund some of the new names we are buying.”
“The stock market rally has been led by the same groups that have led for five years: energy, materials, industrials, and technology,” Miller wrote. Meanwhile, the laggards have included consumer, financials and health care.
“Confidence and optimism underlay the pricing of energy, materials, industrials and non-U.S. stocks,” he said, “especially those of emerging markets, and China in particular.”
Those sectors worked tremendously well in the past few years as global economic growth accelerated, Miller said. But now credit is tighter, spreads between high-quality and low-quality debt are wider, and growth is slowing, and those factors signal a shift in the making.
“It seems to me the leadership is about to change,” Miller noted. “Where will the new leadership come from? The same place it usually does: the old laggards.”
Value Trust has eked out a 0.6% gain so far this year, more than seven percentage points behind the S&P 500, and it appears destined to lag the U.S. market for a second calendar year. Yet if Miller is discouraged by an “extreme” market where “valuation has not mattered at all,” as he put it, he’s encouraged by what he sees ahead.
“This is the first time since 1990 we have had two calendar years behind the S&P 500,” Miller acknowledged. “Perhaps not surprisingly, that was also a time of panic due to a housing market recession, soaring oil prices, banks and financials collapsing.”
He added: “We were able to take advantage of the values then offered to begin a pretty good period of excess returns.”
As human beings, we have an aversion for those investments that are doing poorly. We want to get rid of them. Yet, as Miller pointed out, the new leadership in stocks generally comes from those areas that have been laggards for years. It will be fascinating to look back in a couple of years on this article. I think Miller will look pretty good by then.
Moody’s Downgrades Ratings On Legg Mason (Dow Jones Newswire, December 14, 2007, Mike Barris)
‘ Moody’s Investors Service changed its outlook on
Legg Mason Inc.’s (LM) senior unsecured debt to negative from stable, citing possible losses resulting from investors pulling money from the company’s money-market funds…… Last month, Fitch Ratings Inc. changed
Legg Mason’s outlook to negative from stable on concerns that its troubled money-market funds could require a larger than expected cash infusion, which could strain the firm’s financial health.At issue is
Legg Mason’s exposure through its money-market accounts to SIVs, or structured investment vehicles, which have been struggling due to exposure to risky subprime mortgage debt. The concern is whether troubled SIVs will need to discount the value of underlying assets to sell them when buying and selling resumes.Legg Mason Chairman and CEO Raymond “Chip” Mason has said that while he can’t speak definitively, he thinks
Legg Mason would step in to stabilize its money- market funds if it came to that. As ofSept. 30 ,Legg Mason had$1.38 billion in cash or cash equivalents on its ledger.In November,
Legg Mason announced that it had procured a$238 million bank line of credit to support credit ratings on two SIVs. The credit is backed by$ 178 million in cash collateral, which will be increased to the full$238 million by the end of December.On Friday, Moody’s said it affirmed the A2 senior unsecured debt rating on
Legg Mason , but changed the rating outlook to negative from stable.“The outlook change was driven by challenges the company currently faces with regards to the uncertainty of impending losses that
Legg Mason may incur in order to protect the net asset values of several money-market funds,” Moody’s said…’
This downgrade should not directly affect shareholders of Legg Mason Value Trust or the other mutual funds managed by Legg Mason itself. It may impact the parent company and it could result in some distraction on the part of management.
- Economy , Investing , Mutual Funds , Personal Finance
- Comments(5)
Did you enjoy this article?
Following years of outperformance versus the S&P, it’s reversion to the mean time for Bill Miller. Expect continued poor performance as he struggles to grasp why his stock selection is so poor and misguided. CFC is a perfect example of this. It was a top position in the fund at the end of the third quarter as Bill claimed it was cheap and “mispriced”. Since that time, it’s fallen another 48% in value. Other financials have performed similarly and buying hmebuilders now is more of the same folly as they go through long cycles too. Is really bad timing synonymous with being just wrong?
Penelope–Yes, I think really bad timing is synonyomous with being wrong. At least, at a given point in time. Any time a portfolio manager buys a stock that goes down considerably, he or she was wrong on the market’s perception of value — over the short run. The question remains though, over what period of time are we measuring? Miller clearly has a superb record, yet he is being tested right now. Let’s convene again in a year or so and see how he is doing.
Miller is much too early with his call on these stocks. They’re a value trap. They look cheap, but the full extent of the damage is still unknown and unfolding. I wonder if his large allocation to these names is a knee-jerk reaction to recent poor performance, hoping to catch a bounce in the stocks. It’s looking more like it may take years for him to just break even on these stocks instead. I agree with your idea to “convene again in a year or so and see how he is doing”. At that time, his long term record may no longer look so stellar…
Agreed that Miller has been early in some cases. However, this is not the first time the fund has gone through a situation like this. For example, 1990 was a similar time period in which financials got hit, housing was weak etc. Though he may have been viewed as ‘early’ at that time, the fund also began its 15-year run at that very point.
A year has passed and the results are bad…