Bill Miller Does It Again
As a nation, we are fascinated by streaks of any kind. Many baseball fans still consider Joe DiMaggio's 56-game hitting streak with the 1941 Yankees to be the crowning achievement in sports history. More recently, Ken Jennings' remarkable run as Jeopardy champion captivated us for 74 straight contests, until the trivia king was dethroned after failing to identify H&R Block as the correct response in that fateful last round. In the investing world, the closest equivalent is Bill Miller, the renowned manager of the Legg Mason Value Trust fund.
Miller garnered his superstar money manager status by accomplishing the unthinkable: outperforming the Standard & Poor's 500 index -- year after year after year. Miller began 2004 with a 13-year winning streak on the line. During that time, his fund (including an onerous 1.7% expense ratio) racked up a cumulative gain of 680%, more than double the return of the popular index.
Last year, though, the acclaimed Miller began to falter. In a statement to shareholders written after the end of the third quarter, he acknowledged a few tactical missteps, such as failing to capitalize on the short-term supply-demand imbalance that sent oil prices -- as well as stocks in the energy sector -- soaring.
At the time, the fund's year-to-date loss of 2.7% was trailing the S&P's 1.5% gain. Some also questioned whether Miller might have hung on to the prior year's big winners, like Nextel (Nasdaq: NXTL), IAC InterActiveCorp (Nasdaq: IACI), and Motley Fool Stock Advisor pick Amazon.com (Nasdaq: AMZN), a little too long. Those three stocks, each among the fund's top six holdings, were down 10%, 43%, and 34% on the year, respectively.
Toward the end of the year the race began to tighten, but entering December, Miller's 5.5% return still trailed the S&P (including reinvested dividends) by nearly two points. Miller, though, isn't afraid to take risks. His concentrated portfolio only contains about three dozen stocks, with the top 10 positions soaking up more than half of the fund's assets -- and some of his biggest bets were about to pay off at the wire.
Within two weeks, Nextel -- Miller's largest single position -- rallied after announcing a blockbuster deal with Sprint (NYSE: FON). On the strength of a robust e-commerce holiday shopping season, Amazon also closed out the year strong. Finally, after announcing a massive corporate restructuring, InterActiveCorp also staged an impressive comeback. Throw in a few more big winners like eBay (Nasdaq: EBAY) and Electronic Arts (NYSE: EA), and the streak remains safely intact for another year. The margin of victory was the slimmest in the last five years, but Miller's 2004 return of 12% was enough to confound his detractors and extend his streak to an amazing 14 years.
During DiMaggio's unparalleled hitting streak, he received all the acclaim (the league MVP trophy) even though Ted Williams outhit him during that stretch, .412 to .409, and finished the year with a higher batting average -- .406. Not to disparage Miller's success in any way, but likewise he too lagged behind some of his peers in the large-cap blend category last year. Moreover, funds managed by Fidelity, Vanguard, and American Funds have topped the S&P every year since 1999 -- not quite 14 years, but still an impressive stretch. So while congratulations are in order for the Legg Mason Value Trust -- truly an exceptional fund -- there is no shortage of compelling choices out there in the actively managed universe.
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Fool contributor Nathan Slaughter owns none of the companies mentioned, but he does own shares of American Funds and Fidelity funds.