Case 1

BILL MILLER AND VALUE TRUST

Teaching Note

Synopsis and Objectives

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Suggested complementary case in investment management and financial performance: “Warren E. Buffett, 2005” (UVA-F-1483).

Set in the autumn of 2005, the case recounts the remarkable performance record of Value Trust, a mutual fund managed by William H. (Bill) Miller III at Legg Mason, Inc. The case describes the investment style of Miller, whose record with Value Trust had beaten the S&P 500 fourteen years in a row. The tasks for the student are to assess the performance of the fund, consider the sources of that success, and to decide on the sustainability of Miller’s performance. Consistent with the introductory nature of this case, the analysis requires no numerical calculations. The instructor should not be deceived, however, because the absorption of the capital-market background and the implications of the finance concepts in the case will fully occupy the novice. This case updates and replaces “Peter Lynch and the Fidelity Magellan Fund,” (UVA-F-0777) and “The Fidelity Magellan Fund, 1995” (UVA-F-1126).

The case is intended for use in the opening stages of a finance course. It provides a nontechnical introduction to the U.S. equity markets and sets the foundation for some basic concepts in finance. Specific teaching objectives are to:

* Motivate a discussion of the concept of capital-market efficiency.

* Impart some recent capital-market history—in particular, regarding the Internet bubble of the late 1990s and early 2000s, and the market crash of 1987.

* Convey a perspective on the role of large institutions (lead steers) in setting securities’ prices.

* Introduce the basic concept of value additivity. As illustrated by the net asset valuation of mutual funds, the value of a firm will be equal to the sum of the values of its parts.

* Affirm the notion of using market benchmarks to assess performance....