Famous investors Bruce Berkowitz, Ken Heebner and Bill Miller have now each ascended to the top of the rankings at one point, and dropped to the bottom thereafter. According to Morningstar, their three funds are the poorest performers among large diversified U.S. mutual funds through June 9, down 11 to 12 percent, compared to the S&P 500 Index gain of 3.4 percent.
Though Heebner and Miller have still not achieved the remarkable returns they made before the housing crisis, Berkowitz has always had a good track record until this year. The three may be in the bottom together this year, but they did not get there for the same reasons, and they might not remain there the same length of time – they each have different investing strategies.
Miller has the distinction of being the only investor in history to beat the S&P 500 for 15 years straight, from 1991 through 2005. But from 2006-2008, he collected some other distinctions – he underperformed the S&P 500 Index in all three of those years, with a 55 percent loss in 2008. Though he made a 43 percent return in 2009, over the last 3 and 5 years, he ranks in the 99th percentile for fund managers.
What went wrong? First, Miller has his own value investing style. Many value investors consider Miller a “growth investor in value sheep clothing.” While the majority of value mutual fund managers believe that the prospect of a great return should only be pursued if there is little risk involved, Miller runs a highly concentrated portfolio and has bet the farm based on his predictions of financial markets.
In a GuruFocus article contrasting Bill Miller and Warren Buffett’s investing styles, author Davy Bui wrote, “Warren Buffett ran a hedge fund in his early days, delivering results every bit as impressive as Miller’s famous streak. Yet he didn’t explicitly set out to outgain his benchmark index. As he stated to his investors every year, Buffett thought the key to superior investment returns was to lose less than the Dow in bad years at the risk of lagging the market in good years. Using this philosophy, Buffett managed to outperform in both bull and bear markets in every year of his hedge fund operation.”
Miller also made the mistake of underestimating the extent of the financial crisis. If the government cut interest rates, the Fed delivered a stimulus package, and other reasonable measures were taken, the crisis could correct with minimal damage and ample opportunity, he believed.
Although Berkowitz did not lose big during the financial crisis and only bought into financials for the first time in late 2009 and early 2010, he still thinks he was a bit early. Miller invested a considerable portion of his fund in 2008 – several years too early. At the end of 2007 Miller asserted, “Financials appear to have bottomed.”
Also, like Berkowitz, he said his experience with similar market downturns gave him confidence to do what did then or wishes he had done then in retrospect. “About the only advantage of being old in this business is that you have seen a lot of markets, and sometimes market patterns recur that you believe you have seen before. It is not an accident that our last period of poor performance was 1989 and 1990. The past two years are a lot like 1989 and 1990, and I think there is a reasonable probability the next few years will look like what followed those years,” Miller said.
By the end of 2008, 19.1% of his portfolio was financials. Only two of his stocks had positive returns, and financials performed miserably, e.g., Capital One Financial Corp. lost 72.8 percent. He also owned Bear Stearns, Washington Mutual, Citigroup, Merrill Lynch, Freddie Mac, AIG and Countrywide before the worst of the crisis hit. Bear Stearns went bankrupt, and Freddie Mac was bought out by the government. In comparison, Berkowitz’s AIG has fallen 23% over the last year.
Ken Heebner also achieved investing glory – his fund gained 80 percent in 2007. But his next year’s loss of 48.2 percent all but eclipsed that feat. In 2009 he had a 10 percent return, while the S&P 500 gained 26.5 percent; in 2010 his 16 percent return beat the S&P by one point.
Heebner typically invests with more concern for risk than Bill Miller, but he also has his own brand of “value investing” in which he integrates macroeconomic factors into his stock analysis. He attempts to identify global trends and then find companies he believes will benefit from them.
According to Fortune, Heebner shorted technology stocks in 2000 and 2001 when the bubble burst. He began buying homebuilder stocks in 2000 as that sector burgeoned and had over 79% of his portfolio concentrated in real estate by 2004. By January 2005, he sold out of every homebuilder in his portfolio on a suspicion about subprime mortgages, just before the sector began to cave in.
But Heebner’s ability to navigate into the right sectors came to an end in 2008, when he bought into financials and insurance. "The escalating financial crisis took its toll on these issues during the fall," he said in his 2008 annual report. For instance, in the third quarter 2008, he bought 15,640,000 Bank of America for almost $40 per share at almost the worst time imaginable, just as the stock fell to under $4 per share. He also bought Citigroup (C, Financial) at what seemed to be a bargain at under $200 (split adjusted), just before it fell to almost $10.
Berkowitz’s approach to financials differs in that he has analyzed the balance sheets of his holdings and believes they are good companies. Rather than investing based on beliefs about the short-term future of the market, an analyst at Bank of America called Berkowitz’s largest holding, AIG, a “classic value idea.”
Berkowitz also did not buy into financials until he believed they were true bargains. He bought Citigroup when it was at about $40 and Bank of America at about $16.
When asked on Bloomberg whether he had the same level of conviction about his Bank of America (BAC, Financial), Morgan Stanley (MS), Goldman Sachs (GS, Financial), Regions (RF, Financial), Citigroup (C) and AIG (AIG, Financial) holdings (which have yet to recover), he responded, “More so. Because I’ve been able to see their earnings for the past few quarters, the trends are getting better, the balance sheets are building, tangible book value is growing, cash flow, the pre-tax, pre-provision income is there to take care of the problem, the problems from 2007, 2008 still have a ways to burn through, but I would say we’re more than half way through the problem now. Now we just have to get rid of the uncertainty of the environment, give people the confidence to move forward.”
“I’m not good on the macroeconomics,” he added.
Of course, both he and Heebner could be suffering from their appearances in Fortune Magazine – Heebner made the cover at the top of his game in 2008, and his troubles began immediately after. Berkowitz was featured in an in-depth interview in the magazine in December 2010, also at a career peak and just before the negative returns began.
This year, Ken Heebner’s portfolio of 82 stocks is 29.7 percent financials, and his fund has lost 12 percent. Most of Berkowitz’s fund is being dragged down by a few struggling companies, particularly AIG, which is down 51.75 percent year to date. Heebner’s portfolio this quarter is far more diversified than usual, and he bought into 40 new companies in the first quarter. His largest holding, Tata Motors Limited, accounts for only 4.14 percent of his portfolio and has fallen almost 24 percent year to date.
Financials account for 28 percent, or $1.1 billion, of Bill Miller’s portfolio, which is down 11 percent.
Berkowitz is 80.6% financials, and his largest holding, AIG, which accounts for 10.76 percent of his portfolio, is down 51 percent year to date. In addition, three out of four of his other top-five stocks are down about 20 percent.
To be fair, the annualized average 10-year return of Heebner’s CGM Focus Fund is 11.6 percent, and Berkowitz’s Fairholme Fund is 10.1 percent. For Bill Miller’s Legg Mason Value Trust, it is negative 2 percent, although he still has the longest track record of beating the market.
Though Heebner and Miller have still not achieved the remarkable returns they made before the housing crisis, Berkowitz has always had a good track record until this year. The three may be in the bottom together this year, but they did not get there for the same reasons, and they might not remain there the same length of time – they each have different investing strategies.
Miller has the distinction of being the only investor in history to beat the S&P 500 for 15 years straight, from 1991 through 2005. But from 2006-2008, he collected some other distinctions – he underperformed the S&P 500 Index in all three of those years, with a 55 percent loss in 2008. Though he made a 43 percent return in 2009, over the last 3 and 5 years, he ranks in the 99th percentile for fund managers.
What went wrong? First, Miller has his own value investing style. Many value investors consider Miller a “growth investor in value sheep clothing.” While the majority of value mutual fund managers believe that the prospect of a great return should only be pursued if there is little risk involved, Miller runs a highly concentrated portfolio and has bet the farm based on his predictions of financial markets.
In a GuruFocus article contrasting Bill Miller and Warren Buffett’s investing styles, author Davy Bui wrote, “Warren Buffett ran a hedge fund in his early days, delivering results every bit as impressive as Miller’s famous streak. Yet he didn’t explicitly set out to outgain his benchmark index. As he stated to his investors every year, Buffett thought the key to superior investment returns was to lose less than the Dow in bad years at the risk of lagging the market in good years. Using this philosophy, Buffett managed to outperform in both bull and bear markets in every year of his hedge fund operation.”
Miller also made the mistake of underestimating the extent of the financial crisis. If the government cut interest rates, the Fed delivered a stimulus package, and other reasonable measures were taken, the crisis could correct with minimal damage and ample opportunity, he believed.
Although Berkowitz did not lose big during the financial crisis and only bought into financials for the first time in late 2009 and early 2010, he still thinks he was a bit early. Miller invested a considerable portion of his fund in 2008 – several years too early. At the end of 2007 Miller asserted, “Financials appear to have bottomed.”
Also, like Berkowitz, he said his experience with similar market downturns gave him confidence to do what did then or wishes he had done then in retrospect. “About the only advantage of being old in this business is that you have seen a lot of markets, and sometimes market patterns recur that you believe you have seen before. It is not an accident that our last period of poor performance was 1989 and 1990. The past two years are a lot like 1989 and 1990, and I think there is a reasonable probability the next few years will look like what followed those years,” Miller said.
By the end of 2008, 19.1% of his portfolio was financials. Only two of his stocks had positive returns, and financials performed miserably, e.g., Capital One Financial Corp. lost 72.8 percent. He also owned Bear Stearns, Washington Mutual, Citigroup, Merrill Lynch, Freddie Mac, AIG and Countrywide before the worst of the crisis hit. Bear Stearns went bankrupt, and Freddie Mac was bought out by the government. In comparison, Berkowitz’s AIG has fallen 23% over the last year.
Ken Heebner also achieved investing glory – his fund gained 80 percent in 2007. But his next year’s loss of 48.2 percent all but eclipsed that feat. In 2009 he had a 10 percent return, while the S&P 500 gained 26.5 percent; in 2010 his 16 percent return beat the S&P by one point.
Heebner typically invests with more concern for risk than Bill Miller, but he also has his own brand of “value investing” in which he integrates macroeconomic factors into his stock analysis. He attempts to identify global trends and then find companies he believes will benefit from them.
According to Fortune, Heebner shorted technology stocks in 2000 and 2001 when the bubble burst. He began buying homebuilder stocks in 2000 as that sector burgeoned and had over 79% of his portfolio concentrated in real estate by 2004. By January 2005, he sold out of every homebuilder in his portfolio on a suspicion about subprime mortgages, just before the sector began to cave in.
But Heebner’s ability to navigate into the right sectors came to an end in 2008, when he bought into financials and insurance. "The escalating financial crisis took its toll on these issues during the fall," he said in his 2008 annual report. For instance, in the third quarter 2008, he bought 15,640,000 Bank of America for almost $40 per share at almost the worst time imaginable, just as the stock fell to under $4 per share. He also bought Citigroup (C, Financial) at what seemed to be a bargain at under $200 (split adjusted), just before it fell to almost $10.
Berkowitz’s approach to financials differs in that he has analyzed the balance sheets of his holdings and believes they are good companies. Rather than investing based on beliefs about the short-term future of the market, an analyst at Bank of America called Berkowitz’s largest holding, AIG, a “classic value idea.”
Berkowitz also did not buy into financials until he believed they were true bargains. He bought Citigroup when it was at about $40 and Bank of America at about $16.
When asked on Bloomberg whether he had the same level of conviction about his Bank of America (BAC, Financial), Morgan Stanley (MS), Goldman Sachs (GS, Financial), Regions (RF, Financial), Citigroup (C) and AIG (AIG, Financial) holdings (which have yet to recover), he responded, “More so. Because I’ve been able to see their earnings for the past few quarters, the trends are getting better, the balance sheets are building, tangible book value is growing, cash flow, the pre-tax, pre-provision income is there to take care of the problem, the problems from 2007, 2008 still have a ways to burn through, but I would say we’re more than half way through the problem now. Now we just have to get rid of the uncertainty of the environment, give people the confidence to move forward.”
“I’m not good on the macroeconomics,” he added.
Of course, both he and Heebner could be suffering from their appearances in Fortune Magazine – Heebner made the cover at the top of his game in 2008, and his troubles began immediately after. Berkowitz was featured in an in-depth interview in the magazine in December 2010, also at a career peak and just before the negative returns began.
This year, Ken Heebner’s portfolio of 82 stocks is 29.7 percent financials, and his fund has lost 12 percent. Most of Berkowitz’s fund is being dragged down by a few struggling companies, particularly AIG, which is down 51.75 percent year to date. Heebner’s portfolio this quarter is far more diversified than usual, and he bought into 40 new companies in the first quarter. His largest holding, Tata Motors Limited, accounts for only 4.14 percent of his portfolio and has fallen almost 24 percent year to date.
Financials account for 28 percent, or $1.1 billion, of Bill Miller’s portfolio, which is down 11 percent.
Berkowitz is 80.6% financials, and his largest holding, AIG, which accounts for 10.76 percent of his portfolio, is down 51 percent year to date. In addition, three out of four of his other top-five stocks are down about 20 percent.
To be fair, the annualized average 10-year return of Heebner’s CGM Focus Fund is 11.6 percent, and Berkowitz’s Fairholme Fund is 10.1 percent. For Bill Miller’s Legg Mason Value Trust, it is negative 2 percent, although he still has the longest track record of beating the market.
