LMVTX: A Mutual Fund in Peril

Jul 10, 2008: 6:53 PM CST

We expect mutual funds to perform roughly in line with the respective average – actually, we expect mutual funds to beat their average because we pay management fees to the fund managers.  What happens when a given fund grossly underperforms its benchmark?

The famous Legg Mason Value Trust (ticker:  LMVTX) is such a fund that has grossly underperformed the S&P 500 both throughout 2008 and since the October 2007 market peak.

Let’s look at the chart before looking at the comparisons:

LMVTX Monthly:

The fund has now reached levels not seen since mid-2003 (early stock market recovery).

LMVTX Weekly:

While the S&P ‘peaked’ in mid-October 2007, LMVTX actually peaked in May.  This is consistent with the fact that breadth was weak at the actual market peak, as fewer stocks made new highs.  Nevertheless, one would expect a closer tie to the underlying benchmark.  Since October 2008, Legg Mason Value Trust has been under constant assault as it aggressively acquired shares of many financial companies as they plunged.

LMVTX vs. the S&P 500 Year to Date (percentage terms):

Bill Miller – famous for beating the S&P 15 years in a row (one of the only major fund managers to do so) – manages the fund, and his core philosophy of investment has stood the test of time, but has been slashed mercilessly in the current difficult market environment.

Miller and his team made three critical errors, which seem perfectly clear in hindsight, but at the time, were part of the core philosophy of his famed value approach to investing:

1.  Miller continuously acquired a broad base of Financial stocks as they decreased rapidly in value.

2.  LMVTX was the third largest investor in Bear Stearns on the way down and before the collapse.

3.  Miller continued to believe that oil and oil stocks (energy) was overvalued for quite some time, and had extremely little exposure to oil stocks or virtually any stock related to the commodity ‘boom.’

4.  Miller and Legg Mason are currently still large investors in Freddie Mac (FRE) and Fannie Mae (FNA), which have plunged through 2008.

It was these four critical errors that led to the slaughter of returns for investors.

For deeper analysis and information, read Steven Goldberg (of Kiplinger) article today at the Washington Post entitled “Ten Funds on the Skids.”  Goldberg singles out Mr. Miller’s fund.  He also explains the ‘value’ in value investing and why it does tend to outperform most strategies long-term.

For more on Bill Miller and the Legg Mason Value Trust specifically, Russell Kinnel (also of Kiplinger) wrote a detailed piece in the Washington Post today entitled, “Is Bill Miller Toast?”

Kinnel writes:

“… should it really come as a surprise that Miller, who was once the talk of the investing world because he beat the stock market 15 consecutive calendar years, has hit a rough patch? No. The streak merely masked Miller’s bold approach to stock picking, a strategy that was sure to run out of steam at some point.”

1 Comment

One Response to “LMVTX: A Mutual Fund in Peril”

  1. Stock Market Advantage Says:

    We should assume the stock market is largely efficient and in a land of thousands of money managers there was one who happened to flip heads 15 years in a row. Miller’s incredible run of lucky flips is now over and he is reverting back to the mean, or below.