The Fate of One of the World’s Greatest Investors

He was described as “one of the greatest investors of our time” by Fortune magazine in 2006. His record of beating the S&P 500 Index for 15 consecutive years through 2005 is unmatched. And yet his mutual fund, the $2.8 billion Legg Mason Value Trust, has suffered poor returns since 2006, landing him near the bottom of the pack in 2010 out of almost 1200 large cap U.S. stock funds.  In 2011, the fund was off by 5.5%, trailing the bulk of its peers. And so the much-talked-about Bill Miller stepped down as portfolio manager of Legg Mason’s flagship fund.

Miller’s record has often provoked arguments over whether his record demonstrated great skill or just good luck. Statisticians say that whenever a large group of people competes, some will come out ahead by luck, some will lag behind, and the majority will be average. Miller stood out among investment managers because no one had come close to his record of consecutive annual outperformance.

To his credit, Miller rarely bragged about his performance. He even noted that when measured by annual periods that did not follow the calendar, his fund lagged behind the S&P 500 Index.

He also had a formidable hurdle to overcome: His mutual fund’s expenses, at 1.75% annually, were well above the average of big U.S. stock funds. He also used a concentrated investment approach, making bold and large purchases of individual stocks.

However, his post-2005 performance affected his long-term record. MarketWatch.com reported that his fund lagged the S&P 500 Index for the entire 21 years that he ran it, all due to the fund’s results since 2005. In 2008, the fund lost 55%.

Investors who can’t stand that type of volatility would do better to give up on looking for a “star” manager and stick to a passive, low-cost, diversified portfolio of stock and bond asset-class funds.

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