Bill Miller’s big bet

I see that Bill Miller made it to the cover of Barrons this week. His fund, LMVTX, has made a remarkable comeback after several years of poor performance.


Miller sticks to his guns
Given the headlines I thought that it would be a useful exercise to analyze Miller’s macro bets and see what he did to achieve his returns this year. The chart below shows the fund’s exposure to the Financial sector. Miller had known to be a big believer in Financials and had been overweight the sector going into the Lehman crisis and out. The bet in the sector was responsible for the freefall in returns but the recovery of the sector also contributed to his turnaround in 2009.



Miller’s critics might accuse him of being a stopped clock, but the next chart, which shows his fund’s exposure to the cyclical sector, indicates that he was prescient in his timing. LMVTX began to increase its cyclical exposure in mid-2008, pulled back and then went all-in with its pro-cyclical bet in early 2009. That bet has paid off handsomely in 2009. The timing of the cyclical bet was remarkable given the low level of turnover the fund has historically exhibited.



Is Miller a genius or just lucky? You tell me.

Bill Miller & Ken Heebner: A study in contrasts

Both Bill Miller’s Legg Mason Value Trust (LMVTX) and Ken Heebner’s CGM Focus Fund (CGMFX) have great long-term track record that would be the envy of most equity fund managers. While Miller has underperformed recently, he is still sticking to his guns in his latest commentary and he continues to focus on long-term value and a low-turnover philosophy. By contrast, Heebner has the hot hand right now (see Fortune article here) and runs a high-turnover portfolio.

Using the techniques shown in the sidebar titled Reverse engineering a manager's macro exposures, I estimated both Miller and Heebner’s sector and other exposures.


Miller is Value and Heebner Growth
I pointed out before that Bill Miller started to tilt towards Value in a significant way back in December 2007 and his bias is unchanged. As shown by the chart below, Bill Miller’s portfolio remains tilted towards Value, while Heebner is tilted towards Growth.

Miller buying Financials and Heebner owns Resources
Much of their style differences are attributable to sector weightings as the Russell 1000 Value Index is significantly overweight Financials compared to the Russell 1000 Growth. Bill Miller main overweight is in the beaten down financial sector of the market, while Heebner is underweight the sector.

Heebner, on the other hand, is still devoted to the resources sector with overweight positions in Energy…

…and Materials:

Both hold high beta portfolios
When considering these two managers one might be tempted to conclude that they are polar opposites of each other, they do agree on some points. Both managers’ portfolios have above average market betas, indicating that they expect the market to rise. Moreover, they are both underweight the traditional defensive sectors of the market such as Health Care and Consumer Staples.

Investment thesis and risks
Not to put words into each manager’s mouth, it seems that Bill Miller believes that despite the financial stresses evident in the system, the large financial franchises remain intact and have real lasting value. Miller’s investment thesis depends on no other hidden landmines blowing up in the financial sector.

By contrast, Ken Heebner believes that the commodity cycle is not over and is betting big on their continued rise. His thesis depends on continued US Dollar weakness and, to a lesser extent, that a US slowdown will not significantly drag down world growth. So far, he has been right, as evidenced by the new recovery high seen in the Baltic Dry Index. However, Heebner’s portfolio is a high-turnover portfolio and Heebner has shown himself to be flexible to reverse himself should the situation change.

The views of both of these investors deserve our respect.

Is Bill Miller becoming a (gasp) Value manager?

Bill Miller’s Legg Mason Value Trust (LMVTX) has had a great long-term track record that would be the envy of most managers. Unfortunately the fund lagged the S&P 500 in 2006 and it looks like it will lag again in 2007, barring a last minute recovery.

Using the techniques shown in the sidebar titled Reverse engineering a manager's macro exposures, I estimated his style (Value/Growth) exposures. Despite the “value” label in LMVTX, Miller has long been thought of as tilting towards the Growth style (remember his big holdings in AOL in the fund?) However the fund has tilted more towards the Value style and has tended to outperform when Value outperforms Growth and underperformed when Growth outperforms Value.

Using the same form of analysis, his other macro exposures are:

- Long market beta
- Short oil and USD
- Long emerging markets vs. the US market

In future posts I will use the same technique to examine what other investors (hedge funds, mutual funds, etc.) are doing in the market.