I was shocked to see the front page of Barron’s with the image of investing legend Bill Miller titled “He’s Back!  –  It’s Miller Time”.   The article says Miller is back at the top of his game after a disastrous 2 year run.   A closer look at Miller’s fund and the mutual fund industry actually shows a pervasive and destructive problem on Wall Street - a total and complete lack of risk management.

The Barrons interview claims that Miller’s fund is worth taking a look at again.  Miller himself even says that his patient investors have been rewarded:

“The shareholders who stuck with us believed in our process and have seen us underperform; it has happened before,” Miller told Barron’s in a recent interview. At least “we built up large tax-loss carry forwards, which will mean no capital-gains taxes, which may go up.”

In 2007 Miller lost 6.7% and then lost an astounding 55% in 2008.  His fund is up over 36% this year.  $100,000 invested with Miller over the last two years would leave you with roughly $60,000 today.  Glad you stuck with Miller?  Miller goes on to claim that his performance this year is due to superb risk management:

But this time was different. “This turned out to be a collateral-driven crisis caused by underperforming debt,” also known as toxic assets, Miller says. “We’ve analyzed that mistake and tried to make adjustments to risk management and the portfolio-construction process.”

Risk management?  Hardly.  Read on….Bill Miller is infamous for supposedly outperforming the S&P 500 for 15 straight years.  He has made hundreds of millions of dollars due to this performance and essentially built the Legg Mason brand by himself.  But a look under the hood shows a massive Wall Street problem.   See, Miller is a part of an industry that has been proven to underperform a standard index fund (more than a handful of studies show that over 80% of all mutual funds underperform a comparable apples to apples index).

What mutual funds like Miller’s do is this: they come up with fancy sounding names that give investors the impression they are investing in one thing when in fact they are investing in an index fund clone – meanwhile, they charge you 1-2% more than the index and more often than not, they underperform that index.  Miller’s Legg Mason “Value Trust” is a great example.  You hear “Value Trust” and you think “ahh, value investing – isn’t that the super safe strategy that Warren Buffett uses?”   Well, not exactly.  Miller’s fund, like many funds, isn’t exactly a value fund.  In fact, at times it is highly aggressive and more comparable to a growth fund.  Many of his largest holdings are classic high beta names – Google, Ebay, etc.

Let’s dig a little deeper.  What investors don’t account for is risk adjusted returns.  You hear “Value Trust” or “Large Cap Blend” and you think it’s safe to do an apples to apples comparison with the S&P 500, right?  Wrong.  Miller’s fund actually has atrocious risk adjusted returns.  His fund has returned 6.8% since inception which is actually slightly worse than the 8% return of the S&P 500 during the same period.  To be fair, let’s cherry pick the years and see what we get.

I ran a regression on the last 17 years of performance (in order to include many of Miller’s best performing years in an attempt to overweight the positive results).  The results speak for themselves.  In a period where the S&P 500 averaged a standard deviation of 21 Miller’s fund averaged 27.5.   His 8.4% return during this period sounds remarkable compared to the S&P’s 5.5% return, but the end result of a Sharpe ratio of 0.34 is actually less than impressive.  In fact, it proves that Miller is adding little to no value for his investors after you account for risk.   I also obtained results using slightly more aggressive future return assumptions.  The conclusions are the same.  (I should also add that I chose to run a Sharpe ratio over a Sortino ratio because Miller’s fund  over the period had a fairly balanced level of positive and negative volatility.)


I don’t mean to pick on Miller, but he represents a much larger problem with the current investment world.   The Barron’s article is highly misleading and makes the same mistake that most investors make when picking a fund – they don’t actually look under the hood.  They just drive the car off the lot and assume that because the MPG and price looked good then the engine must be better than most.

Funds like these are almost always a poor choice over a standard index fund.  There are only a handful of funds that actually exercise true risk management and have proven that their performance is better than flipping coins.  The problem with this business is that there are more than $26 trillion invested in mutual funds.  This means a staggering amount of assets are held hostage to higher fees and poor performance.  Many of these assets are in retirement plans where unwitting investors have no choice but to invest in a high fee perennial group of underachievers.  Why hasn’t the business evolved beyond this after so many reports have proven that the mutual fund business underperforms?

The financial crisis has unearthed some serious problems with Wall Street and this one shouldn’t be overlooked.  The big fund companies are no different than the big banks.  They are in the pockets of the insiders, the government and the corporations.  As a result the loser is the taxpayer and the little guy.   Investors have options in today’s evolving investment world and they deserve to have their hands untied and the gun removed from their temples.  Why does this industry continue to wield so much power over the investment world?  Investors deserve better.

Sources: Barrons, Morningstar


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    And to think that Miller has become a near billionaire from this. I have lost all faith in wall st.

  • HUO15

    It borders on a scam. They just trick investors into investing with them.

  • CF

    Agree – the real tragedy is that most of our 401ks don’t have index funds. If they do, generally it is only S&P 500. Most probably our plan sponsors are getting kickbacks from these mutual fund companies…

  • xxxxxL

    Fund managers are very prescient, they look forward alltogather, nothing better than to perform in line.Few would say it is only a game,although this game has serious impacts when fund managers are left without supervision.
    Estimated pension funds losses in the U.S. and the U.K during 2008 are, respectively, 22 percent and 31 percent of GDP as both countries fund managers overprovided on the equities funds.

    John dos pasos 42nd Parallel
    Any crook working in Wall street can become a millionaire ( a millionaire at the time)

    More seriously,when states,their appointed public servants have no moral alternative but to work in collusion with the financial world,it may be time to review the constitutions.

  • Frederick

    The Mutual Fund Industry does a fantastic job of obfuscating for 401k investors and participants in all qualified tax deferred plans, the distictions between ‘The Plan Itself’ (which is just the shell account on how the plan is registered for IRS purposes which grants the tax deferall and the company match, which is great for participants), and the actual investments which go inside the plan (which should be low cost index funds for 99% of these people).

    Basically they stranglehold these unwitting company based participants and herd them into higher cost internal funds (or revenue sharing external funds) because they have no other choices and the plan rep pulls out charts telling how much stocks have gone up over the last 100 years. They essentially trick people, by not aggressively presenting the index option (or not presenting it at all) into thinking that the only way to get this ‘great growth potential’ is through their ideas.

    Bill Miller and his ilk are essentially useless.

  • Mark Wolfinger

    Investors don’t understand risk-adjusted returns.

    They only understand returns and chasing the hot managers.

    With so many salespeople pushing funds such as Millers, the situation is not going to change.

    Very sad situation

  • John Woods

    You are full of bull crap. I used Bill Miller’s Value Trust, his philosophy, and skillful planning for my personal accounts since 1983. You guys sound like amateurs seeking quick, option-like returns. A little more experience and maturity is in order here. Are you or any of your followers more than 8 years old? 18 maybe? There is risk in any investment (as johnnycomelatelies who bought a house with govt. guaranteed loans. Grow up.

  • TPC

    The point is John Woods, as my analysis shows, you would have done better with an index fund. You would have paid lower fees, obtained better returns and taken less risk. There is no disputing that fact….

    You would be wise to read up on risk adjusted returns as you clearly don’t understand the concept.

  • HankB


    You’ve done 1.6% worse than the S&P 500 PER YEAR since 1983 and you’ve paid about 1% more in fees. Plus, you’ve shelled out your annual cap gains taxes every year. How can you feel good about that?

  • HankB

    Exactly TPC! Dead on.

  • Bob G.

    TPC, excellent article! I was aghast seeing Bill Miller make the cover of Barron’s. I’m sure he’s a wonderful man, but he was obviously a recipient of extremely good luck during that 15 year period where he beat the S&P 500 every single year. His eventual downfall makes him a poster child for the efficient market theorists for he has now been relegated to the status of a monkey throwing darts (a very fortunate monkey).

    I’ve written my own scathing review (but without your revealing data) at:

  • TPC

    I should add – I don’t mean my comment to sound condescending. I think it’s a serious problem that the investing public does not understand these topics before they invest their hard earned money in these funds. It would help you greatly to learn more about this topic….

  • Katy H

    Nice analysis but really, why is volatility equated with risk. What we are really taling about here, is volatility adjusted returns. Unless you are a pension fund with liabilities to match, why would you give a toot about volatility year by year?

    On Bill Miller, he will be the first to admit that his 15 year streak was a complete freak – if you base his record off calendar year ends (say, running to end May or August) there werte plenty of down “years”.

    Also, tell me there is no risk in a benchamrk -I’ll point to financials being almost 27% of most global benchmarks start ofg 2008 and notables such as Japan and Nortel. You held onto the slug on those suggested by the index at the peak and you would have regretted it.

    The problem with comparing “apples” and “apples” is it assumes one is good and one is bad. its not, one is cheaper to track and may prove less volatile. Its not necessarily more likely to make you money because of that.

    Risk adjusted returns won’t pay for your Aston Martin.

  • Mark Wolfinger

    John Woods:

    Your use of the term ‘option-like returns’ shows you know nothing about options. Before you criticize the maturity of others, it you who needs to get out of kindergarten.

    Options are risk-reducing investment tools. That’s their purpose. That’s how intelligent investors use them.

  • TPC

    Exactly Mark!

  • Stuart Gray

    Good article in that is highlights a common error with mutual fund salespeople — if a portfolio manager lost 6.7% in 2007 and 55% in 2008, he will need to show outstanding performance (124% gain) just to get his investors back to where they started in 2007. So I am not happy with a 34% return in 2009 when I have cumulative losses over 62%, and there is no way to sugarcoat my losses. I would simply remind investors that investment returns (up and down) are not additive. Second, what you call risk management, other investors refer to as “margin of safety”. However, I wouldn’t jump to the conclusion that all active managers are bad and therefore index funds are the way to go. That sounds like an advertisement for index funds. There is still one great active manager who practices “margin of safety” and for $12 per trade you can buy his diversified portfolio of companies (Berkshire Hathaway). Someone reading this post will probably invent a Bershire Hathaway ETF and why not? The bottom line is after-tax capital appreciation. If the goal of most active managers is to beat the S&P500 index fund, then the goal of most S&P500 index funds should be to beat the Berkshire Hathaway index (and this we know for certain — over the last 10 years, 100% of S&P500 index funds have failed to reach that benchmark). Enough said about index funds.

    Stuart Gray
    Franklin Business Practices
    Baltimore, MD