Bill Miller, the famed money manager well known for outperforming the Standard & Poor’s (S&P) 500 Index for a record 15 years through 2005, will transfer management of the Value Trust investment fund after managing the fund since its inception in 1982. Out of the last four of the past five years, the fund has underperformed the same index. Miller will remain chairman of the firm, and will continue to manage the Legg Mason Capital Management Opportunity Trust.
Miller was a devoted value investor, thought of in the same circles as Warren Buffet and Benjamin Graham, who was known for his positive views of the economy and stock markets. In recent years, he became bogged down in the worst slide of his career as he bet significantly on financial stocks during the 2008 credit crisis. His main mutual fund declined 55 per cent that year as the S&P 500 Index dropped 37 per cent, prompting a wave of client withdrawals from his fund. Assets at his firm have continued to decline by $18 billion because of slumping stock markets and client withdrawals.
In another high-profile case of active money managers getting squeezed in the current economic crisis, Duke Buchan of Hunter Global Investors is closing his $1-billion hedge fund. Buchan actually outperformed the S&P 500 by 46 per cent in the decade through March, a period that included the steepest equity-market losses since the 1930s. Then came the sell-off in August when global stock markets experienced their worst nine-day decline since the 2008 financial meltdown. “Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects,” Buchan, 48, said in a Dec. 8 investor letter. “We have not weathered the ensuing volatility well.”
The inability of famed stock pickers such as Miller and Buchan to protect their investors from the recent market declines has spurred $537 billion in withdrawals from actively managed U.S. equity mutual funds since 2006, as clients have shifted money into market index tracking investments, or index funds. And investors have a good reason for doing so; approximately 95 per cent of traditional active mutual fund managers underperform their broad market index over a five-year period. The five per cent who do outperform the market are not consistent outperformers, and tend to be at the bottom of the heap during the next five-year period.
From a statistical standpoint, it is difficult, if not impossible, to determine active money manager skill. In other words, both positive and negative results tend to flunk the test for statistical significance; in neither case can most managers’ investment performance be attributed to anything more than chance. So even with over 20 years of data, we cannot find conclusive evidence of money manager skill — or lack thereof. This is the inconvenient truth that every investor must confront: The time required to distinguish luck from skill is usually measured in decades, and often far exceeds the span of an entire investment career.
Where does this leave investors seeking the best strategy to grow their savings? The best approach is to avoid the gurus and have a balanced, broadly diversified portfolio of index-tracking investment products, forgoing active money mangers altogether. This will lower your management fees, reduce your taxes, and ultimately should improve your portfolio returns.
Update Jan. 10. Error regarding ongoing role of Bill Miller corrected.