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Sep 25, 2015

A Look at Bill's Record

Samantha McLemore

I started working for Bill Miller slightly over 13 years ago right out of college. We attended the same university, Washington & Lee, and he happened to come speak my senior year. All I knew about Bill at the time was that my professors thought he was a sort of investment god for accomplishing what no one else ever had: consistently beating the market every year for many years in a row (that streak ultimately lasted for 15 years). He defied conventional wisdom that the efficient market couldn’t be beaten.

Over the past decade plus working for Bill, I have learned more than I ever could have hoped. He has been a great mentor. I’ve also seen firsthand how immensely difficult it is to outperform the market over the long-term. The more I’ve learned, the more awed I am by those who manage to accomplish this feat. So I was a little disappointed to read a recent Bloomberg article on Bill that posed the question of whether he was a truly great investor or just a manager who does well in good times. Since very few people know the details of Bill’s investment record, I thought it was important to publish it.

Bill started managing money in 1982, serving as portfolio manager on the Legg Mason Value Equity Strategy from its inception through 2011 – a 30 year period.  Additionally, Bill launched the Opportunity Equity strategy in 1999 and has served as its lead portfolio manager to present day.  Bill also managed the Special Investment Strategy for 14 years and he currently manages the Income Opportunity Strategy. He has a long track record managing these four investment strategies, each with different objectives1.

I am obviously biased on the matter, but the facts of Bill’s long-term performance record are not. Here are the facts.

When Bill managed the Legg Mason Value Equity Strategy, he outperformed the S&P 500 Index, the strategy’s benchmark, for 15 consecutive calendar years (1991 – 2005). The next longest streak on record is 11 years2. Some contend the streak was pure luck, but as the late Harvard paleontologist Stephen Jay Gould noted, long streaks are always a combination of skill and luck. Bill often remarked that there was luck involved in his streak. We can actually calculate the odds of Bill’s outperforming the market due to luck alone during his streak, since we know the percentage of active managers who outperformed in each of those 15 years. Michael Mauboussin, a former colleague of ours now at CSFB, did the calculation and the answer is 1 in 2.3 million3. So if Bill was just lucky, he was unbelievably lucky!

Bill has also beaten the market the majority of the time. Across all four investment strategies, Bill has outperformed 68% of the years. According to one research paper2, on average, mutual funds have outperformed 38% of the time and even the best (those with streaks) did it only 55% of the time.

Most importantly, Bill has generated super long-term returns for investors. During his 30 years managing Value Equity, the strategy gained 12.39% (net of fees) per year on average vs. the S&P 500’s 11.09%, so he beat it by 130 basis points per year. If someone invested $10,000 in the Value Equity Strategy when Bill started, it would have been $321,461 when he finished versus $227,576 in the S&P 500. So Bill would have made them over $93,000 (41%) more over his tenure (note, this is net of fees). Opportunity Equity is up 7.35% (as of 6/30/15, net of fees) per year on average in the approximately 15.5 years since inception while the S&P 500 has earned 4.19% per year, so Bill did 316 basis points better per year. Since this was over a lower return period for the market, that outperformance is more significant, beating the index by 75% per year! An investor in the Opportunity Equity strategy that invested $10,000 at the outset would have made $30,009 over the strategy’s life vs. $18,952 in the index, or an additional $11,056 (58%).

While Value Equity and Opportunity Equity have been his flagship investment strategies, Bill also managed the Legg Mason Special Investment Strategy, a small cap strategy, from its inception (1986) through 1999 and that strategy gained 18.03% (net of fees) per year on average during this period vs. the Russell 2000’s 12.06%, so he beat that index by 597 basis points per year. Bill also currently manages the Income Opportunity Strategy which was launched in 2009 and has gained 19.81% (net of fees) per year on average vs. the Merrill Lynch High Yield Index’s 14.54%, so he beat that index by 527 basis points per year. This strategy also outperformed the S&P 500, which gained 18.91% during the same time period, so he beat it by 90 basis points. In all four strategies, Bill has outperformed.

So what about the accusation that Bill only does well in good times? Well, it’s just not true. Bill’s track record in down markets is solid. Bill outperformed in 8 of 12 (67%) down years across all four strategies during the time he was managing them. Yes, we did horribly in the 2008 financial crisis. Bill is the first to admit it. He does not downplay this error. The reporter in the aforementioned article said to Bill, “You have a great track record with one mistake,” to which Bill replied, “One REALLY BIG mistake.” The emphasis was on the big not the one.

Those are the facts, but what about the man behind the facts? Again, I couldn’t be luckier to work with someone like Bill. Investing is his life, and he’s brilliant. Ask him about any topic on earth and he will know something interesting about it. He also is constantly trying to improve and adapt. He’s always willing to admit when he’s wrong. But what I admire the most about Bill: despite his fame, fortune and success he’s a genuinely good person who always tries to do the right thing. It would have been easier to switch to a closet-indexing strategy after his 15 year streak, preserving a nice fee stream but ensuring investors underperform consistently. Bill didn’t do this. He kept trying to earn the best returns possible. As long as I’ve known him, Bill has always tried to do what’s right.

Obviously, I’m biased but I think there’s no doubt that Bill Miller has proven himself a great investor.

For more details on the strategy performance discussed above, click on the following:
Value Equity and Special Investment
Opportunity Equity
Income Opportunity

1Bill managed another investment strategy, but only for two years so I am not including it in this discussion of longer-term performance.
2Andrew Mauboussin and Samuel Arbesman, Differentiating Skill and Luck in Financial Markets With Streaks, February 3, 2011, available here.
3More Than You Know. Michael Mauboussin

Investing involves risk of loss and past performance is no guarantee of future results. The views expressed in this commentary reflect those of LMM LLC (LMM) portfolio managers as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and LMM disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Because investment decisions are based on numerous factors, these views may not be relied upon as an indication of trading intent on behalf of any portfolio. Any data cited herein is from sources believed to be reliable, but is not guaranteed as to accuracy or completeness.

©2015 LMM LLC. LMM LLC is owned by Bill Miller and Legg Mason, Inc.