Bill Miller, portfolio manager supreme at Legg Mason, is telling investors to buy the banks.   This doesn’t come as a big shocker.  Mr. Miller is talking his book.  Financials now make up his second largest portfolio weighting so he’s betting big that they continue to rise.  A quick glance at the Legg Mason Value Trust’s latest SEC filing shows that he is loaded with a virtual who’s who of financial garbage:

As the article describes, the financials have been the primary cause of Miller’s amazing unraveling last year (the fund was down 55%) so it’s difficult to take him seriously.  But I went a little further.  Miller was unbelievably famous for outperforming the S&P 500 for 15 years running.  You could almost say he built Legg Mason’s reputation by himself.  But what I am going to disclose is exhibit A in the case against mutual fund managers and the environment that Wall Street has sold to retail investors for 30 years.

Miller’s fund is called a “value” fund, but it’s actually more of a hybrid value/growth fund.   Some of his largest holdings include AMZN, EBAY, GOOG, YHOO – not exactly your traditional “value” names.  But the numbers speak even louder.  The beta on Miller’s fund is roughly 1.4 (the S&P of course has a beta of 1) so his fund certainly has the volatility of a growth fund.  But I went a little further.  I ran 3 different scenarios for the Legg Mason Value fund to calculate the real risk adjusted returns going back 10 years.  I should add that this 10 year period is particularly useful because, due to the lack of index performance,  you can easily differentiate the men from the boys, i.e., those that added real value and those that just charged high fees to mimic an index.  John Hussman’s Strategic Growth Fund is one of the few examples of funds with high risk adjusted returns even though he started his fund at the most inopportune of times.  Miller’s fund has not performed well over the last 10 years when compared to the S&P 500 on a relative basis:

The numbers are even worse when you run the risk adjusted figures.  I used the Sharpe ratio for ease.  I generally prefer to use a Sortino Ratio, but the math is much more arduous and isn’t exactly relevant in this case because Sortino’s account for good and bad vol (of which there is little good vol here).  I used three different scenarios.  All three assume a risk free rate of approximately 3% (about the average over the last 1o years).  Scenario 1 uses an expected return of 0%, scenario 2 uses an expected return of 5% and scenario 3 uses a VERY generous expected return of 10%.   The standard deviation on LMVTX of the prior 10 years is 26.61 vs 20.3 for the S&P.  Of course, when grading Sharpe ratios it’s preferable to see something over 0.5 with 1.0+ being superior.   The results are not good:

On a risk adjusted basis the Legg Mason Value Trust adds almost zero real value over an index.  Bill Miller might be telling you to buy bank stocks, but don’t expect that to help you outperform an index fund….

Cullen Roche

Bio - Coming Soon.

More Posts - Website

Follow Me: