Streak ends for Legg Mason's star manager
The bad news streamed down via satellite to a private yacht cruising somewhere off the Leeward Islands.
On board, Legg Mason Inc. money manager Bill Miller was bracing for the blow: The market, he knew, had beaten him at last. His streak -- 15 years of besting the Standard & Poor's 500 index -- had come to an end. The final numbers show he returned 5.9 percent in 2006, trailing a 15.8 percent gain by the S&P 500.
There was little cheer at Baltimore-based Legg Mason when Miller returned from his late December sail. Miller says there was no buck-up message waiting for him from his boss, Raymond "Chip" Mason. Nor were there condolences from his friend Warren Buffett.
Miller, the mastermind behind the $21 billion Legg Mason Value Trust mutual fund, says people often ask if he's somehow relieved that his run, one of the greatest in the history of investing, is finally over.
"The answer is: no," Miller, 57, told Value Trust shareholders in a January letter discussing his 2006 performance. "We are paid to do a job, and we didn't do it this year -- which is what the end of the streak means -- and I am not at all happy or relieved about that."
Miller has stumbled at a critical time for his firm. Legg Mason, which manages about $945 billion, has been trying to meld itself with the fund management arm of Citigroup Inc. Legg Mason swapped its brokerage arm for Citigroup's money-management division in 2005, doubling its assets. Miller's Value Trust has fallen further behind the S&P 500 in 2007, with a 1.7 percent loss through March 29, compared with a 0.23 percent decline for the index.
"It's happened at a very key moment, just when sales of that fund could have really exploded," says James Schmidt, who oversees $4 billion for rival money manager John Hancock Funds Advisers in Boston.
Colleagues say Miller has been feeling the strain. After Value Trust fell behind the S&P 500 during the first quarter of 2006, David Nelson, senior vice president of Legg Mason Funds Management Inc., sent Miller an e-mail saying "Hang in there."
"The pressure on Bill is enormous," Nelson says.
Ryan Caldwell, an analyst at Overland Park, Kan.-based Waddell & Reed Financial Corp., says most investors have written off Miller's 2006 performance. A second year of poor returns would hurt the Legg Mason money manager, he says. "There will be some cachet issues," he says.
It hardly helps that Legg Mason shareholders have taken a roller coaster ride of late. On Oct. 11, the stock took its biggest dive ever, tumbling 17 percent in a day, after Legg Mason said quarterly earnings would fall short of analyst estimates.
The shares ended 2006 down 20 percent for the year. The stock has bounced back in 2007, gaining 2 percent through March 29, after a late-2006 rally in world stock markets boosted mutual fund fees at the company.
Sitting in his 22 d-floor office overlooking Baltimore Inner Harbor, Miller refuses to mope over his mistakes. He's made his name by buying stocks other people shun and holding them for years. His picks of Dec. 31 included Arlington, Va.-based power producer AES Corp.; Reston, Va.-based mobile phone company Sprint Nextel Corp.; and Bermuda-based conglomerate Tyco International Ltd.
Miller looks for investment ideas just about everywhere. His office bookcase covers an entire wall and holds works ranging from the Koran to "Moneyball: The Art of Winning an Unfair Game." Books are stacked atop Miller's desk, and he has thousands of volumes at home.
Miller says he has no plans to change tack just because he's had one bad year. He realized as early as July 2006 that his streak was in jeopardy. All year, nervous clients kept calling.
"I got asked, 'How do you go about analyzing your mistakes?' "Miller says. "I said, 'I don't. I don't analyze my mistakes.' We will analyze spectacular errors, but not garden variety errors."
Miller has picked some doozies in his day. In the center of his bookcase sit framed stock certificates of past bloopers, including Enron Corp. and WorldCom Inc.
Value Trust pick Sprint Nextel fell 10.4 percent in 2006. UnitedHealth Group Inc., another of his favorites, lost 13.5 percent. A third choice, Amazon.com Inc., sank 16.3 percent last year. Miller's bets on home builders soured in 2006, too.
His recent showing was a rare misstep for Miller, who posted an average annual return of 16.2 percent from 1990, when he became sole manager of Value Trust, to 2005.
His record puts him in the same league as his friend Buffett, whose Berkshire Hathaway Inc. delivered an average annual return to shareholders of 18.8 percent from 1991 to 2005. Buffett, unlike Miller, beat the S&P 500 in 2006, with a 24.2 percent return.
"It still would be hard not to see Miller as one of the best investment managers of his generation," says Christine Benz, director of fund analysis at Chicago-based Morningstar Inc. "Many of the best managers run into periods of weakness."
Such assurances don't change the fact that Miller is mired in the worst slump of his career. He's the first to say his streak was partly luck anyway. For starters, his run reflects a fluke of the calendar: If Pope Gregory XIII hadn't tweaked the Julian calendar in 1582 to shorten the average number of days in a year, Miller wouldn't have beaten the S&P 500 for 15 years. Sometimes, he scraped by in the final days of December. In 2005, for example, he beat the index by a mere 0.4 of a percentage point. Two weeks later, Value Trust's return sank below that of the S&P 500.
In his January letter to investors, Miller said that if beating the market were purely random, like tossing a coin, the odds of beating the S&P 500 for 15 consecutive years would be the same as the odds of tossing heads 15 times in a row. Using the actual probabilities of beating the market in each of the years from 1991 to 2005, he put his odds at 1 in 2.3 million.
"So there was probably some skill involved," Miller said. "On the other hand, something with odds of 1 in 2.3 million happens to about 130 people per day in the US, so you never know." 