Genuine management stars always were rare creatures, but today investors focus on their shortcomings because it justifies using cheaper index funds.
Nearly five years ago, when Bill Miller left the Legg Mason Value Trust — the mutual fund he once led to an astounding 15 straight years of beating the Standard & Poor’s 500 index — the question was whether the lasting memory of his career would be legendary success or epic failure.
Last week, when it was announced that Miller would formally break ties with Legg Mason after more than three decades, the answer was clear: The pains speak louder than the achievements.
There’s a lot of symbolism and a few lessons in the breakup between the veteran manager and the fund company that rode his star to success for more than three decades.
The deal announced last week calls for Miller to buy out Legg Mason’s 50 percent stake in their joint venture that oversees the funds he still manages; Miller’s company winds up running the $1.25 billion Legg Mason Opportunity fund (LGOAX) — which he has managed since 1999, with a co-manager for nearly a decade — and Miller Income Opportunity Trust (LMCJX), a small fund that the star manager runs with his son, also named Bill.
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Legg Mason Opportunity itself shows the two sides of active management that Miller’s career personified. The fund tops the mid-cap blend peer group over the last five years, according to Morningstar but is nearly last in the category year-to-date and over the last 12 months.
In an investing world that is often hyperfocused on “What have you done for me lately?” the long-term results are easily overlooked.
Genuine management stars always were rare creatures, but today investors focus on their shortcomings because it justifies using cheaper index funds. Through June of this year, investors removed $317 billion from actively managed funds, but pumped $373 billion into passive funds, according to Morningstar.
Miller’s career shows both the appeal and the ugliness of active management.
For 15 consecutive calendar years from 1991 through 2005, Miller’s flagship fund — since renamed ClearBridge Value (LMVTX) — beat the S&P 500. Only 12 other funds even achieved a double-digit streak since 1980; the second-longest streak, by Matthews Asian Growth & Income (MACSX), ended at 12 years in 2010.
Miller’s streak did not mean the fund made money in each of those 15 years, just that he beat the benchmark.
Still, that made him the anomaly, the active manager who did better than an index fund in all conditions.
And then it all went south, and investors woke up to the folly of chasing unicorns, looking for the guy who always topped the benchmark.
In 2007, when the market was up, Miller was down; in 2008, Legg Mason Value Trust lost 55 percent of its value (Legg Mason Opportunity lost a stunning 65 percent that year). Miller became the poster boy for star managers letting egos take over while performance suffers, believing that they can somehow bend the market to the power of their will and their investment style.
While there are still a few managers who gain notoriety, Miller effectively shut the book on the genre. As that book closes, however, here are the lasting lessons investors should remember from his career:
• It’s not how you start, but how you finish.
As performance was unraveling, investors held on to Miller’s fund too long. The problem with star managers is that expectations typically call for superior performance; with an index fund, an investor simply hopes to capture the market’s movement over time. That’s how a manager like Miller can have stretches of superior performance but long-term results that ultimately aren’t much better than their benchmark, if they top it at all.
• Calendar years aren’t as meaningful as they seem.
Investors measure plenty of things based on the calendar, but they would be better off watching the trends than checking in annually for a snapshot.
Had Miller’s fund been evaluated on fiscal years ending June 30, for example, the 15-year streak never would have happened and investors might not have been lulled into thinking their manager was invincible.
• Blue lobsters exist, but you wouldn’t want to make them your primary food source.
Star managers are not mythical creatures, but they’re just extremely rare, kind of like the sapphire blue lobsters that occasionally show up — and make news when they are caught — in the waters of the Atlantic. If you tried to make a steady diet of them, you’d go hungry.
Investors can co-mingle active and passive funds in a portfolio, but if they are putting too much faith into a manager’s ability, they are headed for disappointment.
• You need performance you can believe in; you don’t need a manager for that.
The lasting problem for guys like Miller is that investors never knew what to count on. Even since his star tarnished, he has posted some great performance runs. Alas, hot-and-cold results leave investors struggling; once investors had more faith in the market than in a manager’s ability to beat it, star managers became an endangered species.