Fund Legend Bill Miller Inherits a Finance-Heavy Fund as He Seeks Redemption
Bill Miller, the legendary mutual fund manager at Legg Mason Inc. (LM), is switching hats from a portfolio of about 50 large-capitalization stocks (Legg Mason Capital Management Value Trust, LMVTX) to a portfolio of about 50 mostly mid-cap stocks (Legg Mason Capital Management Opportunity Trust, LMOPX).
Both funds have performed poorly since the end of 2007, in absolute terms and in comparison to relevant benchmarks. A critical factor in the outsized volatility of both funds is their concentration of holdings at about 50 stocks.
Miller’s reputation rests on the fact that the annual return on the Value Trust beat the annual return of the Standard & Poor’s 500 index 15 years in a row, from 1991 through 2005. His success relied on bets on a few big-name stocks. The bets went south in 2008, largely because Miller failed to recognize the decades-old lemming instinct of major banks.
At Opportunity Trust, Miller will have a chance to transform a fund that investment researcher Morningstar calls “an ugly duckling,” and redeem himself for a poor recent performance. His transition within Legg Mason, announced last month, has been in works for a while. A comparison of Value Trust and Opportunity Trust shows where this former star stock picker is starting if he wants to regain his luster, which at one time rewarded Legg Mason investors as well as Value Trust shareholders.
Although financial service stocks account for much of Value Trust’s problems in recent years, Opportunity Trust has an even greater concentration in the sector. Thirty-six percent of the fund represents financial companies, compared to 22% at Value Trust. You won’t find the big-name banks like Wells Fargo & Co. (WFC), JP Morgan Chase (JPM) and Bank of America (BAC) that helped lead Value Trust into the woods.
Instead, the largest holding in Opportunity Trust, as of its latest report at the end of September, was Ellington Financial (EFC), a mortgage securities investor headed by former Lehman Brothers executive Laurence Penn. Ellington swung into loss this summer as it bulked up on high-risk securities back by sub-prime mortgages. The stock, which began trading 2009, is not rated by YCharts.
The second largest holding at Opportunity Trust is airline United Continental Holdings (UAL), rated “avoid” by YCharts. United suffers from the same cascade of woes affecting all airline stocks – fuel and labor costs combined with reduced passenger traffic. UAL net income in the first nine months dropped 24%. The fund also owns shares of Delta Air Lines (DAL) and US Airways Group (LCC).
The next largest holdings as Opportunity Trust are two private equity firms not traded in the United States, Pangaea One, LP, and AP Alternative Assets, LP.
Unlike Value Trust, Miller's new assignment plays the options market. In short, Bill Miller seems to have moved out of the frying pan and into the fire. Opportunity Trust’s bets might outperform the Value Trust portfolio as Miller finishes his career. But it’s hard to see how Miller can retain his avuncular, sage-like media image with his new collection of high-risk investments.
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