Why pay high fees to have somebody else gamble with your money?
Money manager Bill Miller just bought "job security." He now owns his fund management company. You can’t fire the boss. That doesn’t mean, though, that you should buy his mutual fund.
Legends and reputations tend to persist, often well past their natural expiration dates. Miller became famous when Legg Mason Value Trust, then his flagship mutual fund, managed to outperform the Standard & Poor's 500 for 15 straight years (1991 to 2005).
Mom-and-Pop fund buyers tend to chase good results. Despite a hefty load and high expenses, the great publicity from his streak lured more and more money through the door. Assets under management (AUM) surged from about $650 million in 1991 to almost $22 billion by early 2008.
These stories rarely end well. That enormous asset base cratered by about 55% in 2008 while the S&P 500 ETF (SPY) dropped 36.81%. Investors licked their wounds and cashed out, never to return.
More recently Miller has been co-managing the Legg Mason Opportunity Trust (LGOAX). That fund also suffered badly in 2008. Morningstar notes that, as of Aug. 12, it still failed to catch up to either the S&P 500 ETF or the Mid-Cap Blend benchmarks.
The $1.3 billion assets fund earned a 2-star rating (out of 5), carries a 5.75% sales charge and nips another 1.19% in annual expenses.
Is Legg Mason Opportunity Trust worth those high fees? You make the call. Over the decade ended July 31, the fund displayed higher volatility while delivering only 40.52% of the S&P 500 ETF’s total return.
It appears that the Legg Mason Opportunity Trust employs a huge dollop of risk.
As of June 30, its top percentage holding, at 9.85% of assets, was January 2017, in-the-money call options on Amazon (AMZN, Financial). That adds leverage and risk to the portfolio as well as a finite expiration date. There is also a guaranteed loss of time value by Jan. 20, 2017.
Two homebuilders made up a combined 8.81% of AUM. Lack of industry diversification increases risk. Does anyone believe either Quotient Technology (QUOT, Financial), with a second-quarter net loss of $3.5 million versus $9.3 million in the second quarter of 2015, or Intrexon (XON, Financial), with a median consensus 2016 estimate of $1.43 per share, qualifies as a conservative stock?
Those top five holdings were representative of the speculative nature of this “opportunity” trust.
As of Aug. 12, at least 16 of the 25 highest weighted positions showed portfolio losses year to date, averaging (-19.8%) each. Morningstar indicated no performance data for the stake in privately held Pangea One LP or for the calls and warrants listed below.
Miller’s fans are quick to point out that his five-year record through Aug. 12 was superior to returns on the S&P 500. Maybe that simply affirms that “even a broken clock is right twice a day.”
Far inferior year-to-date, one-year, three-year and 10-year numbers make that good period look like a fluke.
Thomas Macpherson’s recent GuruFocus article detailed how hard it is to overcome the gravitational effect of high fees.
It’s good to be king.
Mr. Miller will probably continue to rake in plenty of management fees. None of those will be coming out of my personal nest egg.
Disclosure: No position in any specific stock mentioned in this article.
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