Harris, who heads up the firms multi-manager range, says buying the $81.1m Legg Mason fund was a fairly contrarian purchase, as the fund had performed poorly over previous years. However, having nearly doubled his money since he bought it, Harris says he is happy he took the plunge.
“Legg Mason Capital Management Opportunity is in essence Bill Miller’s best ideas fund, so he is free to invest in wherever he wants,” he said.
“The fund had been struggling for some time before I bought it in early 2012. Financial publications had really downgraded the fund, however since then it has performed very well,” he added.
According to FE Analytics, since January 2012 Legg Mason Capital Management Opportunity Trust has returned 90.45 per cent while its benchmark – the S&P 500 index – has returned 39.70 per cent.
Performance of fund versus index since January 2012
Source: FE Analytics
Miller is famous for beating the S&P 500 15 years in a row between 1991 to 2005, having been the only manager to have achieved that feat.
His style of buying undervalued stocks has meant that his fund has struggled in recent years, as the portfolio has underperformed the index by more than 20 percentage points over three years.
However, Miller recently told FE Trustnet that he will continue to maintain the same approach as the US market recovers and said that investors need to have a greater appetite for risk in the current environment.
Though the fund had underperformed prior to Harris’ purchase, he says that rating agencies weren’t forward thinking when they were analysing Miller’s fund.
He says the fund’s bias towards mid-caps and cyclical stocks meant the fund was in a prime position to capitalise from an uptick in the US equity market.
“Rating agencies had down-graded the fund citing prior poor performance, however that looked like a rear view mirror way of thinking,” he said.
“To me it looked like the perfect time to buy the fund as it has it had a mid-cap and cyclical bias. Markets were at rock bottom at that stage and equities were pricing in a continuation of those low levels.”
“That meant they were highly sensitive to good news and as equity markets began to recover the fund performed fantastically well since. We bought the fund when it was sub $10m and now it has attracted attention and is up to $80m.”
“It was a real case of taking a long term approach and backing a manager who has demonstrated skill in the past. Though it had a brutal couple of years before that, it has performed very well since,” Harris added.
Miller runs a concentrated portfolio of 51 holdings, with 38.18 per cent of Legg Mason Capital Management Opportunity Trust assets weighted in its top 10 holdings.
The fund’s largest sector weighting is in financials, making up 32.68 per cent, but Miller also has a high weighting to consumer discretionary stocks.
The fund’s largest individual holding is Bank of America, as Miller holds 3.7 per cent of the portfolio in company.
Our data shows Robin McDonald and Marcus Brookes’ Cazenove Multi Manager Diversity Tactical fund is the only portfolio in the IMA Universe that counts Legg Mason Capital Management Opportunity as top 10 holding.
The Legg Mason fund requires a minimum investment of $1,000 and has ongoing charges of 1.82 per cent.
Though Harris is still optimistic over the prospects for Miller’s fund, he says he is also upping his exposure to Europe.
“I’ve got two big themes within my portfolios at the moment,” he said.
“The first theme is income, which isn’t very controversial. However, it is less about yield but more about dividend growth as I think a lot of the high yielding stocks are now overbought.”
“However the other theme is using both fixed income and equities to gain exposure to European banks. The headlines around Europe have been very negative recently, but if you dig a little deeper there has been a better change in trade data.”
“There has been more and more deleveraging in Europe, basically a clearing up process.”
“When you look at the US, they started this process a long time ago and it is improving. Lending has increased, mortgage rates have been pushed down and banks are starting to perform well.”
“I think that Europe is now at the start of that process, so though European banks may be controversial, I do expect it to make me a lot of money,” he added.
Harris says that though buying gold in 2002 and selling it at the start of this year was his most profitable investment, from a fund point of you Legg Mason Capital Management Opportunity Trust has been the most successful.
Mark Harris heads up a number of multi asset portfolios at City Financial and has been running funds in the IMA Universe since 2002.
He joined City Financial in January 2013, having previously managed funds at CF Eden and Henderson Global Investors.