Calendar year 2006 was the first year since I took over sole management of the Legg Mason Value Trust in the late fall of 1990 that the Fund trailed the return of the S&P 500. Those 15 consecutive years of outperformance led to a lot of publicity, commentary, and questions about "the streak," with comparisons being made to Cal Ripken's consecutive games played streak, or Joe DiMaggio's hitting streak, or Greg Maddux's 17 consecutive years with 15 or more wins, among others. Now that it is over, I thought shareholders might be interested in a few reflections on it, and on what significance, if any, it has.
A common question I've gotten is whether I am in some sense relieved that it is over. The answer is no. Active managers are paid to add value over what can be earned at low cost from passive investing, and failure to do that is failure. We underperformed the S&P 500 in 2006 and did not add value for our clients and shareholders. It is little consolation that most mutual fund managers failed to beat the index in 2006, or that most managers of US large- capitalization stocks fail to outperform in most years, or that under 25% of them can outperform over long periods such as 10 years, or that the next longest streak among active managers going into 2006 - 8 years - also ended this year, or that it is believed that no one else has outperformed for 15 consecutive calendar years.(1) We are paid to do a job and we didn't do it this year, which is what the end of the streak means, and I am not at all happy or relieved about that.
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A common question I've gotten is whether I am in some sense relieved that it is over. The answer is no. Active managers are paid to add value over what can be earned at low cost from passive investing, and failure to do that is failure. We underperformed the S&P 500 in 2006 and did not add value for our clients and shareholders. It is little consolation that most mutual fund managers failed to beat the index in 2006, or that most managers of US large- capitalization stocks fail to outperform in most years, or that under 25% of them can outperform over long periods such as 10 years, or that the next longest streak among active managers going into 2006 - 8 years - also ended this year, or that it is believed that no one else has outperformed for 15 consecutive calendar years.(1) We are paid to do a job and we didn't do it this year, which is what the end of the streak means, and I am not at all happy or relieved about that.
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