August 31, 2004  Email this  Print this
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A Record to Run On
by Steven Goldberg  After a record 13 straight years of beating the Standard & Poor's 500-stock index, is this the year Bill Miller finally falls on his keister? It may well be. As of August 30, Legg Mason Value (LMVTX) was trailing the benchmark by 4%. Legg Mason Opportunity (LMOPX) -- the highly volatile, free-wheeling Miller fund that I like even more -- is lagging the S&P by 5%.
But no matter what happens this year, don't count Miller out. To start with, Value has returned an annualized 17% over the last ten years -- beating the S&P by a staggering annualized ten percentage points. And that's in spite of a hugely high expense ratio that, even after declining in recent years, totals 1.7%.
Still got it
More important, there's no sign that Miller has lost his touch. He's one of the most competitive money managers I've ever known. He shows no signs of settling comfortably into middle age. If anything, his desire to turn in superior numbers has increased with time. He puts in longer hours than any manager I know.
Miller is the most intelligent manager I've ever come across. He doesn't focus his energies only on stocks. Indeed, he initially planned to be a philosopher and completed all his Ph.D. course work. He reads omnivorously.
A recent, but not atypical, Miller shareholder report talked about a renegade scientist's theory that most oil doesn't come from fossil material after all, and, therefore, oil in the ground isn't nearly as limited as most experts believe. Miller concluded by expressing some healthy skepticism, and saying, in fact, that he might be ready to buy oil stocks.
His view of the market
So what does Miller think of this market? While admitting he's been wrong so far this year, he thinks stocks are going up. "We keep expecting better from the market and keep being disappointed."
In Miller's view, investors are overly concerned about Iraq, the economy, terrorism and the presidential election and are ignoring "powerful underlying corporate fundamentals."
Earnings are up sharply. Corporate debt is down. Companies are awash in cash. The S&P 500 companies had $550 billion in cash last March -- more than double what they held at the end of 1999.
At the same time, short selling is up. "As is typical, most investors are getting more bearish as the market declines. We, on the other hand, are getting more bullish." The S&P, he notes, trades at a reasonable P/E of 15 on 2005 earnings estimates.
Two of Value's biggest holdings, Amazon (AMZN), at 6% of assets, and Nextel (NXTL), at 7%, have been creamed this year. Miller calls them "among the most attractive stocks in the portfolio." IAC/InterActiveCorp. (IACI) and Qwest Communications (Q) have also been big losers.
I wouldn't expect Miller to give up easily on any of them. In fact, he says that the biggest single contributor to his superior performance has been his willingness to keep buying more of a stock as it declines. This isn't just a matter of guts; it comes from knowing companies inside out.
No, I wouldn't bet on Miller keeping his streak alive this year. But I would wager that he continues to be one of the best money managers around. Value makes sense for the heart of your portfolio. Opportunity, because of its riskiness, is a great supplemental holding.
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