Bill Miller and Value Trust

Bill Miller and Value Trust

Relevant facts

Value Trust is an $11.2 billion mutual fund managed by Bill Miller; as of 2005, it had outperformed its benchmark index, the S&P 500, for 14 years in a row. The average annual total return over the previous 15 years was 14.6%, which was higher than the total return on the S&P 500 by 3.67%. Value Trust had 36 holdings, 10 of which accounted for nearly 50% of the fund’s assets. Morningstar gave Value Trust a five-star rating. Miller followed a contrarian strategy, with several key elements. The main element was that he bought low-price, high-intrinsic value stocks.

Problem

Although Value Trust had an enviable track record of returns, it is coupled with high risk. Future superior performance can never be guaranteed, relative to the benchmark index. In fact the fund lagged behind the S&P 500 in 32 12-month periods out of a total of 152 12-month periods through July 2004, as reported by Morningstar.

Bill Miller also acknowledged that the sheer success of the fund could just as easily have been an accident of the calendar.

Investors and other observers had begun to observe how long Miller would remain at the helm of Value trust and whether his successor could sustain his exemplary record

Evaluation

Miller’s approach was research intensive and highly concentrated. Nearly 50% of assets were invested in just 10 large-capitalization companies. However these 10 companies were in diverse sectors like Telecom, Health, Industrial materials, Utilities, Consumer. Therefore there is diversification of the portfolio, which leads to better returns.

Since the efficient Markets hypothesis does not always hold in practice, it cannot be said that it is impossible to beat the market with superior skill or intellect. Behavioral finance suggests that greed, fear and panic are significant factors that set the stock price, which the EMH does not recognize. The success of Value Trust can in part be attributed to the...