A few weeks ago, I had a post about the dismal recent performance of Legg Mason Value Trust and its legendary manager Bill Miller. It seems that Miller has fared much better recently. But has his touch returned, or is it simply a change in luck?
Another of Miller’s funds, the Legg Mason Opportunity Trust, returned a stunning 48 percent in the second quarter, making it the No. 1 performing U.S. stock fund for the period. His much touted Legg Mason Value Trust is also showing impressive numbers, beating the S&P 500 Index by 12 percent in the first half of the year.
The financial media is constantly touting the results of the latest hot manager, despite an overwhelming body of evidence from academic studies demonstrating that there is no persistence of performance in mutual funds beyond the randomly expected. As Nassim Nicholas Taleb explains in his book Fooled by Randomness: “Prominent media journalism is a thoughtless process of providing the noise that can capture people’s attention.”
Miller became the “poster boy” for believers in active management when he managed to do what no other active manager had ever done before. His Legg Mason Value Trust beat the market for 15 consecutive years. This caused him to receive guru status from the financial media.
Was it skill, or was it luck? If you believe it was skill, how do you explain his performance over the past couple of years? Legg Mason Opportunity Trust lost 65.5 percent in 2008 and 1.6 percent in 2007, underperforming the S&P 500 by 28.5 percent and 7.1 percent, respectively. According to Morningstar, the fund has underperformed its benchmark by 10 percent a year for the past five years.
The Legg Mason Value Trust has a similar story. In 2006, 2007 and 2008, the fund underperformed the S&P 500 Index by 10.4, 12 and 18 percent, respectively. According to Morningstar, as of year-end 2008, the fund was in the bottom quartile of one-, three-, five-, and 10-year trailing returns among large-cap blend stock funds.
You should ask yourself which is more likely:
- Miller’s 15 years of outperformance was the result of good luck, the next three years were bad luck, and his luck has turned again.
- He is a genius who mistakenly took a “stupid pill” for three years, then realized his mistake and began taking vitamins again.
The fact is that with so many people trying, the odds that someone would have beaten the market 15 years in a row were very high. And there was no way to know ahead of time that Miller would be the one. The problem for investors is that because there is no persistence in performance beyond the randomly expected, there is no way to separate skill from luck.
