Anthony Bolton isn’t the only famous fund manager whose reputation has suffered a hefty blow recently.
Bill Miller has fared worse. He stepped down this week after 29 years at the helm of the Legg Mason Value Trust. In the 15 years to 2006, Miller’s fund beat its benchmark, the S&P 500 index, every single year. Fortune dubbed him “the greatest money manager of all time”.
After that, everything went wrong. Between mid- 2007 – when the credit crunch kicked off – and now, the fund has underperformed the S&P 500 by 34%, making it the worst of 818 funds in its category. Miller’s bad bets in 2008 included crunch casualties Bear Stearns, Freddie Mac and AIG. The fund’s previous outperformance has been negated.
So what happened? Miller was lucky in that the launch of his fund in 1982 coincided with the start of the biggest secular (long-term) uptrend of all time, the 1982-2000 bull market. But “he must have been doing something right” as well, reckons John Authers in the Financial Times. His value investing style – consistently buying cheap stocks – helped him shrug off the Asian crisis and the internet bubble.
So what’s the problem? Perhaps now that the credit bubble has burst, “the virtues of a consistent value style have diminished”, says Authers. For example, Miller bought ‘cheap’ financials after the credit crunch, but later they got even cheaper. In an age of deleveraging, it makes sense for bank stocks to be derated: consumers and companies are steadily paying down their debts. Miller’s strategy was “perfect for dealing with the long years of credit expansion, when stricken financials could usually rebound”. But “it is totally inadequate” for an era of shrinking credit. “The logic of buying cheap stocks hasn’t gone away … but investors may now wait much longer for their outperformance.”