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Streak ended, so what?

January 05, 2007
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Charles Mizrahi

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Most stock mutual funds have a hard time beating the S&P 500 index. The Vanguard S&P 500 Index fund, a mutual fund that tracks the performance of the S&P 500 index, ranked in the top 20 percentile of actively managed stock mutual funds over the past 10 years. In other words, a simple S&P 500 index fund outperformed close to 80 percent of actively managed stock mutual funds.

That should put in perspective the performance of Bill Miller, portfolio manager of Legg Mason Value Trust Fund, over the past 15 years. To put it in one word: dazzling. Miller didn’t only outperform the S&P 500 index over the total 15-year period; he did so each and every year. The odds of that happening, according to Michael Mauboussin, Legg Mason’s chief investment strategist, is 1 out of 2.3 million! Statistically, Miller’s performance is greater than baseball legend Joe DiMaggio’s consecutive hitting streak of 56 games, which was a 1 out of 1.3 million event.

Manu Daftary, portfolio manager of the Quaker Strategic Growth Fund, beat the S&P 500 index eight years in a row, which would place him a distant second to Miller. Each year since 1991, Miller has outperformed the S&P 500 index; some years by a lot and some years by a hair. Over the 15-year period he outperformed the S&P 500 index by about 5 percent per annum.

Like all streaks, this one too has ended. In 2006, the S&P 500 index trounced Miller, and 99 percent of his peers beat his 5.85 percent return. Sure, it would have been great if he could have extended his streak one more year, but I don’t think Miller thought too much about it. After beating the S&P 500 index for 14 consecutive years in 2005, Miller told his shareholders that they are in for a disappointment if they think the fund will outperform the market each year. He went on to say that of course he would like nothing better than to beat the market every day, month, quarter and year, but that’s not how he manages money. His style, regardless of his streak, will stay the same:

Our goal is to construct portfolios that have the potential to outperform the market over an investment time horizon of 3–5 years without assuming undue risk. If we achieve that goal, we believe we will be doing our job, whether we beat the market each and every year or not.

Despite Miller holding a concentrated portfolio that was out of favor for most of 2006, like Internet and home builders’ stocks, he stuck to his principles. He continued to manage his portfolio according to them and not to extend his streak. The streak was great, but sticking to his principles is what truly makes Bill Miller a great investor.

Michael J. Mauboussin, More Than You Know, Columbia University Press, New York, 2006, p.215
Legg Mason Value Trust Inc., Investment commentary and quarterly report to shareholders for 2005, p.ii

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Charles Mizrahi
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