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Jul 22, 2016

Three Things You Need to Know about Opportunity Equity

Bill Miller

Our results often differ materially from the S&P 500, sometimes on the downside as in 2008, 2011, and this year, and more often on the upside over our 16 year history. There are several reasons. First, we have what the academics call very high active share, meaning our portfolio does not look at all like the S&P 500. Most active managers are not that active. They construct their portfolios with an eye toward how the S&P is constructed and typically keep their sector or industry weightings close to that of the market. That way they won't vary too much either way from the market and will never appear on a list of worst or best performing funds. We believe if people want active management they should get it and not get closet indexing instead.

Second, Opportunity is high beta, meaning our individual stocks vary more on the upside and downside than the market. High beta names tend to be riskier than low beta names, and we believe the financial crisis has led to extreme risk and volatility aversion among investors, so that there is a big gap between perceived and real risk in the market. Put differently, stocks perceived as risky are very cheap, and those thought safe such as utilities and consumer staples are very expensive. We believe that creates an opportunity for long term, patient, value investors.

Third, and perhaps most importantly, whenever the market is primarily preoccupied and driven by macro fears as it was in 2008, in 2011 with the Euro crisis, and this year with a host of worries, such as China and oil earlier in the year, then global recession and Brexit more recently, we tend to do poorly as all stocks get correlated by where they stand relative to the macro worry du jour and individual security analysis and stock selection do not matter. In the second quarter for example, as interest rates in the US collapsed to all time lows as people scrambled for safety: they sold everything perceived as risky in the stock market and bought bond proxies.

Fortunately, these macro storms blow over and individual stock fundamentals begin to matter again. When that happens (2009, 2012 & 2013) we tend to be among the best performers. This current macro storm appears to be subsiding and since the recent market lows our performance is double that of the market.

We believe that past is once again prologue and we are optimistic about our ability to again deliver strong results as macro fears recede.

For important additional information on Opportunity Equity strategy performance, please click on the Opportunity Equity GIPS Composite Disclosure. This additional information applies to such performance for all time periods. Past performance is no guarantee of future results.

Active share represents the share of strategy holdings that differs from the benchmark index holdings. The greater the difference between the asset composition of the strategy and its benchmark, the greater the active share.

Investment Risks: All investments are subject to risk, including possible loss of principal.

The views expressed in this report reflect those of the LMM LLC (LMM) as of the date of the report. Any views are subject to change at any time based on market or other conditions, and LMM disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results.

©2016 LMM LLC. LMM LLC is owned by Bill Miller and Legg Mason, Inc.