The forthcoming retirement of legendary mutual fund manager Bill Miller will stop the clock on his track record, but the real question is whether the lasting image will be his legendary successes or his epic failures.
Over almost three decades at the helm of Legg Mason Capital Management Value Trust (LMVTX)fund, Miller made his mark with a 15-year streak of beating the Standard & Poor's 500 Index ($INX). It's not that Miller's fund made money every year from 1991 through 2005, but he was the anomaly, the active manager who did better than an index fund in all conditions.
As mutual funds became mainstream investments through the 1990s, investors flocked to him.
Even as the Internet bubble burst, Miller was able to top the index despite big bets on Enron and other troubled stocks, convincing investors that he had enough star power to overcome his mistakes.
Legg Mason said last month that Miller will retire from fund management in April, 30 years after he started running Value Trust. But in fact, most people wondered what had taken Miller so long.
When his market-beating streak ended, Miller went from the guy who could do no wrong to one who did no right. In 2007, when the market was up, Miller was down; in 2008, Legg Mason Value Trust lost a stunning 55% of its value. (His other fund, Legg Mason Capital Management Opportunity (LMOPX), lost 65.5% that year.)
The mutual-fund press made him the poster boy for star managers letting their egos take over while their performance suffers, believing that they can somehow bend the market to the power of their will and their investment style.
It doesn't work that way.
Miller's 2009 gains of more than 40% for the Value Trust (and 83% for Opportunity) were too late; in four of the five most recent calendar years, Value Trust finished in the bottom 2% of its peer group, according to investment researcher Morningstar.
While the fund still has $2.8 billion in assets, you'd be hard-pressed to find anyone who would buy it now. New helmsman Sam Peters has been Miller's co-manager for about a year, but expecting Peters to be "the next Bill Miller" is unrealistic if you are pegging that hope to Miller's stretch run.
No one who followed Fidelity Magellan legend Peter Lynch ever truly proved to be "the next Peter Lynch," and the number of top managers who have been succeeded by bright stars is tiny.
While Miller won't be the last star manager, he will be the guy known for killing off the genre. The next time someone has a hot streak or a run of great performance, he will be compared to Miller in his heyday, and Miller's fall from grace will provide the cautionary tale used to scare away investors.
That's not entirely fair. A $10,000 investment in Legg Mason Value Trust from when Miller took over in April 1982 was worth $235,089 in mid-November, a cumulative return of 2,251% and an annualized average return of 11.26%.
The fund was one of just 14 large-blend funds to beat the S&P 500 over Miller's management tenure, tying for 10th place in the category over that time.
By comparison, a $10,000 investment in the Vanguard 500 Index Investor (VFINX)fund is up 10.97% annualized (turning $10,000 into $217,457). An investment in the average large-cap blend fund gained 9.76% over the past 30 years, according to Morningstar, turning $10,000 into $157,175.
The sad problem is that few people enjoyed that long record of performance. Instead, they bought in after Miller's reputation was made, and lost money when he lost his edge. Over the past 15 years, the fund ranks in the bottom 30% of its Morningstar peer group, despite the fact that it beat the market in roughly half of those calendar years.
Evaluated by his long-term track record, Miller's departure represents the end of an era of success that few managers have enjoyed. But few investors will remember him that way; instead, he's the guy they were told was great who wound up disappointing them perhaps more than any other star manager in history.
