By Chuck Jaffe, MarketWatch
As a general rule, fallen angels don’t get up.
Whether it’s a mutual-fund manager, a sports star, a politician or anyone else revered for the good they have done, once a person falls from grace, he or she doesn’t typically regain public trust and reclaim their good name.
Bill Miller is trying.
The question for investors is whether they should believe what their eyes — and Miller’s recent results — are showing them now. Or whether they should remind themselves what Miller was like at his worst.
Miller, of course, is one of the last great investment legends, having built a reputation by recording one of the longest “winning streaks” in mutual-fund history. Between 1991 and2005, Miller’s Legg Mason Value Trust /zigman2/quotes/203623666/realtime LMVTX +3.48% beat Standard & Poor’s 500 on a total-return basis for 15 consecutive years. In that time, Miller’s fund grew from roughly $750 million in assets to $20-plus billion.
When the winning streak ended, however, Miller went from the guy who seemingly could do no wrong to the one who couldn’t get anything right. Legg Mason Opportunity /zigman2/quotes/210095275/realtime LMOPX +5.97% was in the bottom 10% of its Morningstar peer group in 2007, 2008 and 2010, before finishing dead last in 2011.
Miller went into semi-retirement last year, giving up the Value Trust fund but staying on with Opportunity, and he would have faded away except that Opportunity kept knocking. In 2012, it was up nearly 40%, ranking in the top 2% of large-cap value category; that was good, but it could be looked at as an anomaly because Miller had managed one good year (2009) amid his miseries.
But the fund has gained nearly 40% again already this year, putting Miller close enough to the top that investors are thinking this hot streak might be the start of something big.
In fact, an unemotional momentum investor would suggest that Miller’s rebirth is worth buying, if only cautiously.
Stephen McKee of the No-Load Mutual Fund Selections & Timing Newsletter currently gives Legg Mason Opportunity four “comets,” on his five-point ranking system, making the fund a top performer worthy of consideration.
“He’s got huge volatility, but right now he’s surpassing,” McKee said this week during an appearance on my show MoneyLife . “So he’s taking, apparently, a very aggressive stance and, so far, in a bull market, that tends to pay off; in a bear market, that’s going to be a whole different story so … I would urge everybody to keep a close trigger finger and watch the exits.”
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But that’s from a momentum player; for a fund investor with a longer-term perspective, Miller’s rise from the ashes is just another chance to get burned. Some, like David Snowball of MutualFundObserver.com , note that even Miller’s fans should give him no credit until he finishes 2013, as he hasn’t put together two full consecutive above-average calendar years for over a decade.
Morningstar gives Opportunity just one star, and has a neutral analyst rating on the issue, all despite the last 18 months.
And while recent performance has been strong, the last decade still has Miller’s fund ranked in the bottom 2% of its peer group, during which time it produced half the annualized return of the S&P 500.
What’s more, during the periods where Miller has struggled, it looked to most outsiders like he had trouble accepting data that showed that his investment premises were in trouble on distressed stocks.
He rode Enron to the basement, for example, staying long after other managers — even those that supported the company — were finally cowed into selling; that’s an extreme example, but there’s no shortage of others.
If Miller is now more of a feast-or-famine, streaky stock-picker — rather than the manager known for his consistency — that’s a big change, and a look at his portfolio makes one wonder when the next hunger strike could happen.
MutualFundObserver.com’s Snowball called Miller’s portfolio “junky,” noting that six names have more than doubled in the past year, but that all six of those companies get an F profitability grade from Morningstar, and none has a competitive advantage, known as an economic moat, implying “that they’re all likely short-term wonders rather than long-term winners.”
If that take applies to Miller’s fund, then the harder he tries to fly back to the top, the more investors need to be wary, rather than trusting.
“Unless someone could get into his head and know that he has a new ability to adjust to changing circumstances, I would still stay away,” said Mark Salzinger, editor of the No-Load Fund Investor newsletter. “While performance can be great for certain short and even long stretches, it matters not if the ride is too winding for typical investors to hang on.”
In short, Miller’s recent strong run makes him more of a rising devil than a fallen angel, and that’s something most investors just don’t need to deal with.