By Chuck Jaffe, MarketWatch
Almost five years ago, when Bill Miller left the Legg Mason Value Trust — the mutual fund he once led to an astounding 15 straight calendar years of beating the S&P 500 — the question was whether the lasting memory of his career would be one of legendary success or epic failure.
Last week, when it was announced that Miller would formally break ties with Legg Mason after more than three decades, the answer was clear: the pains speak louder than the achievements.
There’s a lot of symbolism and a few lessons in the break-up between the veteran manager and the fund company that rode his star to success.
The agreement calls for Miller to buy out Legg Mason’s 50% stake in their joint venture that oversees the funds he still manages. Miller’s company winds up running the $1.25 billion Legg Mason Opportunity Trust /zigman2/quotes/207790111/realtime LGOAX -2.38% — which he has managed since 1999, with a co-manager for nearly a decade – and Miller Income Opportunity Trust /zigman2/quotes/203092789/realtime LMCJX -0.66% a small fund that the star manager runs with his son, also named Bill.
Legg Mason Opportunity itself shows the two sides of active management that Miller’s career personified. The fund tops its midcap-blend peer group over the past five years, according to investment researcher Morningstar Inc., but finishes close to last in the category year-to-date and over the last 12 months.
In an investing world that is often hyper-focused on “What have you done for me lately?” the long-term results are easily overlooked.
Genuine management stars always were rare creatures, but today investors focus on their shortcomings because it justifies using cheaper index funds. Through June of this year, investors removed $317 billion from actively managed funds, but pumped $373 billion into passive funds, according to Morningstar.
Miller’s career shows both the appeal and the ugliness of active management.
For 15 consecutive calendar years from 1991 through 2005, Miller’s flagship fund — since renamed ClearBridge Value Trust /zigman2/quotes/203623666/realtime LMVTX -1.59% — topped its S&P 500 /zigman2/quotes/210599714/realtime SPX -1.08% benchmark. Only 12 other funds even achieved a double-digit streak since 1980; the second-longest such streak, by Matthews Asian Growth & Income /zigman2/quotes/209008633/realtime MACSX -0.99% , ended at 12 years in 2010.
Currently, according to Morningstar Inc., the longest streak of consecutive calendar years beating the S&P 500 is nine, with four different health-care funds sharing that distinction. Fewer than 30 funds have topped the index for the past five years running.
Miller’s streak did not mean the fund made money in each of those 15 years, just that he beat the benchmark. Still, that made him the anomaly — the active manager who did better than an index fund in all conditions.
When it all went south, investors woke up to the folly of chasing unicorns, looking for the guy who always topped the benchmark.
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In 2007, when the market was up, Miller was down; in 2008, Legg Mason Value Trust lost 55% of its value (Legg Mason Opportunity lost a stunning 65% that year).
Miller became the poster boy for star managers letting egos take over while performance suffers, believing that they can somehow bend the market to the power of their will and their investment style.