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Fund Research & Insights

Is Bill Miller Washed Up?

Two North America funds we like the looks of, and a word of caution.

Christopher J. Traulsen, CFA 18 June, 2007 | 4:04PM
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Bill Miller’s Legg Mason US Equity has underperformed the sector average badly over the past three years, and lagged its benchmark S&P 500 index for the first time in 15 years in 2006. I’ve spent considerable time talking to Miller and his team over the years, and retain confidence in their abilities. The one thing to understand up front with this fund is that it’s of necessity going to be focused on large-cap stocks—Miller is running north of $40 billion US in this style, so his ability to take meaningful position in small- or mid-cap issues is curtailed. He is also more than willing to make enormous bets against his benchmark—the fund holds just 40 names, and has had almost no exposure to the surgin

g resources area in recent years (Click here to see details on the fund's portfolio).

All of that said, Miller is supported by a well organised, strong analyst staff, and is one of the most original thinkers in the business. Moreover, it’s his very willingness to stake out bold positions that has allowed him to build an astounding record over time (the U.S. sold version of his fund has beaten the S&P 500 index by an annualised 3.4 percentage points in dollar terms over the past 10 years, even after its recent struggles). For example, he snapped up shares in AOL back when it was languishing in the mid 1990s, rode it to huge returns later that decade, then sold it in timely fashion. He also purchased a sizable amount of Google on its IPO, and has done extremely well with the position. Not everything Miller does works—his decision to avoid resources proved dead wrong in the near term--but we believe he has the research assets, the experience, and the bold portfolio construction needed for success over the long haul.

A less contrarian choice that we admire is Tom Walker’s Martin Currie North American. Like Miller, Walker runs a compact portfolio, with just 40 holdings, and he has managed to succeed despite a clear large-cap bias and without taking on overly large concentrations in economic sectors. With over 80% in large-caps, the fund should also be well positioned to participate in a large-cap rally should market leadership change.

It’s worth noting at this point that we believe investors focus far too much on past performance alone when selecting funds (as may be apparent from some of our picks). Past performance isn’t particularly predictive of future results and can lead you to take unintended risks. For example, Neptune US Opportunities is the top performing fund in the sector over the past three years, but as of 30 April, it had 25% of equities in healthcare (almost all in small-cap biotech and medical equipment firms), 24% in industrials, about half of which is in metals and mining firms, 45% in mid-caps, and another 21% in small-caps (click here for portfolio details). The fund may be very good at what it does (and the Neptune offering is not alone—Threadneedle American Select and GAM North American Growth, among others, carry big mid-cap stakes, for example), but its weightings mean that it is extremely beholden to some very volatile areas of the market. Investors who buy such funds based on performance may find the ride far rockier than they bargained for.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.

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