“In this paradoxical world, the risky assets are now safe and safe is risky,” he said.
“The behaviour is risk averse, so riskier assets will give you a limited risk for a high return, while safer assets give you high risk for a low return.”
The Legg Mason manager famously beat the S&P 500 index for 15 consecutive years from 1991 to 2005 – the only manager to do so.
His value style has suffered a setback in recent years, but the manager has stuck to his guns and continued to buy cheaply valued companies he believes are set for a re-rating.
He says investors aren’t making logical decisions because they are still nervous about 2008 – something the manager says he understands as his flagship Legg Mason Capital Management Opportunity fund was hard hit when the market tanked.
“No matter how much money I have, I’m always worried about having none, especially after the crisis because I lost a lot of money,” he said.
“I was the biggest personal investor in the fund and it lost a lot of money [in 2008].”
But Miller isn’t backing away from rising markets; instead he is plowing cash into out of favour areas, putting his money where his mouth is on a bullish view of the market.
The manager especially likes airlines, housing and a few financials, such as Bank of America.
“Airlines are not obviously safe,” he said, “but they are a perfect example of higher volatility being lower risk.”
“They have been everything you don’t want in an industry [from regulation to fuel cost]. They were a recipe for prize competition and serial bankruptcy.”
However, he says the rising cost of fuel has forced many airlines to merge or take over smaller operators, giving them larger market share and making the few remaining companies much more competitive.
“We’re in the early days of the airline renaissance,” he said.
Miller is backing Delta, US Air and United Airlines in his fund.
After the housing bubble burst, sending the entire global economy into the abyss, investors have steered clear of the sector, but it is another Miller is tipping for a resurgence.
“It’s critical for the US economy continuing to grow. Housing is recovering,” he said.
He expects the existing house starts to double with the in the next one to two years.
“Home building stocks are nowhere near their highs. There’s a long way to go in my projection.”
Miller says from the early 80s to mid-90s, the fund management industry increasingly came out with specialised, and therefore inflexible, products to ride the rising market tide.
However, when the Legg Mason Capital Management Opportunity fund was launched in the US, he was after an unconstrained product that could operate across a wider market spectrum.
“We wanted to have something that would not fit into a style box, that was not correlated with anything and could fit into almost any asset allocation because it wouldn’t be able to be benchmarked,” he said.
The fund, which was made available to UK investors in February 2009, is the best performing fund in the IMA North America sector over the last year, returning 74.65 per cent. The sector averaged just 33.7 per cent over the last 12 months.
The $81.1m fund also smashed the performance of the rallying S&P 500, which made 34.48 per cent.
Performance of fund vs sector and index over 1 yr
Source: FE Analytics
However, Miller’s high-conviction value management style led the fund astray in the down-markets of 2011 when the fund sustained a loss of 33.12 per cent. The single year loss is entirely responsible for the fund’s bottom-quartile returns of 33.81 per cent over the three year period.
Year on year performance of fund vs sector and index
| Name | 2013 (%) | 2012 (%) | 2011 (%) | 2010 (%) |
|---|---|---|---|---|
| Legg Mason Capital Management Opportunity | 45.26 | 31.87 | -33.12 | 20.53 |
| S&P 500 | 26.38 | 10.16 | 2.23 | 17.97 |
| IMA North America | 26.14 | 6.9 | -1.55 | 17.4 |
Source: FE Analytics
The major difference between the Dublin-domiciled fund and the longer-running US version is that it is not able to leverage, while the US-based fund is leveraged at 6 per cent.
Cazenove fund of funds manager Robin McDonald says he’s been backing the stalwart investor in spite of poor 2011 performance because he believes his style will return to favour and be proven right over the long run.
“The market did badly in 2011, but those who got it badly got absolutely killed. Look at someone like Bill Miller, one of the best US managers out there. His Legg Mason Opps fund was down 40 per cent in 2011. It was the same story for a lot of the pro-cyclical portfolios.”
“We’re comfortable with the cash cyclical barbell. We don’t want to be fully invested in higher risk shares, but we don’t like bonds. This worked well in 2012. Miller has outperformed by 50 per cent since 2012.”
The fund requires a minimum investment of $1,000 and has ongoing charges of 1.82 per cent.