Is it Miller Time or the Market?

Bill Miller is on the front page again, but this time it is good news. The famed manager was featured in a recent cover story by Barron’s titled “It’s Miller Time”.

In the article, the author notes that the manager of the flagship Legg Mason Value Trust fund is at the top of its relative peer group for 2009, delivering a 37% YTD return compared to 19% return for the S&P 500 index. The article attributes the fund’s poor performance in 2007-2008 to both sector bets in financials along with poor security selection in names such as Lehman Brothers and JPMorgan. This year, the author concludes, the manager must be doing something right.

Several years ago we performed a detailed analysis of Mr. Miller’s fund to better understand the sources of its well documented 15-year winning streak through 2006.

This time around however our goal was to take a very top level look at the performance drivers behind the fund’s turnaround in 2009. We wanted to identify whether Mr. Miller had “passively” benefited from the market rebound or actively employed new strategies to help lift the fund’s return (or a combination of both).

We started the analysis by analyzing the fund’s monthly returns from January 2007 through September of 2009. The chart below illustrates the fund’s returns-based style analysis factor exposures using S&P 500 sector indices.

There are two immediate observations: (a) Legg Mason Value Trust has had considerable overweights in financials and technology relative to their benchmark S&P 500 index; and (b) overweights in these sectors have remained relative stable throughout the period. From an RBSA perspective, there were virtually no notable structural changes in the fund and that Mr. Miller maintained the fund’s sector composition going into 2009.

Performance attribution analysis in the chart below decomposes the fund’s excess return into timing and selection components. Mr. Miller’s 17% excess return over the index in 2009 can be attributed to both timing and selection in almost equal proportion. Sector bets accounted for roughly fifty-percent of the fund’s turnaround with the other half attributed to security selection within those sectors.

The attribution chart above shows that timing and selection components had roughly equal share in the fund’s underperformance in 2007 and 2008 by 12% and 18% respectively. Mr. Miller’s overweight in financials and associated names such as Lehman Brothers created serious problems for the fund in 2008.

This analysis is very top level and we will post a more comprehensive Performance Attribution Report shortly.