Don't Get Enamored With This Fund's Mind-Blowing 2020
It had a spectacular year, but Miller Opportunity is too volatile for what it delivers.
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Miller Opportunity is too volatile for what it delivers over the long term. The fund's Morningstar Analyst Rating remains Neutral across all share classes.
This fund has shot the lights out so far in 2020. Through November, its I shares were up 26.5%, more than double the Russell Midcap Index's 11.9% for the year to date. Since the market hit bottom on March 23, the fund is up an astonishing 136%. Such a result isn't totally unexpected from a fund with an upside capture of nearly 150% since Bill Miller and Samantha McLemore's shared tenure began in August 2008. Top-10 holdings Amazon.com (AMZN), Facebook (FB), and Alphabet (GOOG) have helped, but those stocks have been tortoises compared with top holding Farfetch (FTCH), which is up more than 400% in 2020. Miller and McLemore bought the British luxury marketplace in 2019's fourth quarter after it made some acquisitions the market didn't like. But it has benefited massively from the shift to online retail.
Unfortunately, risk tends to swing both ways and, on balance, it hasn't worked out in this fund's favor. As well as it has done during rallies, the fund has performed worse during corrections, with a downside capture of 167% relative to the Russell Midcap Index during Miller and McLemore's shared tenure. In fact, over the past 10 years this fund was the most volatile U.S. equity offering with a standard deviation of 27.2. Yet, for all of that volatility, the fund only matched the Russell Midcap Index during the duo's shared tenure through November 2020. Thus, on a risk-adjusted basis, the fund trailed the index by a wide margin.
The volatility stems from the team's aggressive contrarian approach, which manifests in a concentrated portfolio with leverage equal to 6% of assets as of November. Despite holdings like Amazon, Facebook, and Alphabet, the portfolio has turned toward value in recent quarters as Miller believes growth's luster will finally fade. The fund's September portfolio had an average P/E ratio of just 12, which was less than half the index's.
Don't chase this fund's strong recent results.
Process | Average
This fund's flexible, contrarian approach courts significant risk, earning it an Average Process rating.
Comanagers Miller and McLemore have made some process tweaks to reduce risk over the years, such as being quicker to sell when fundamentals don't improve as expected and avoiding private investments for liquidity reasons. Yet, the portfolio's highly volatile nature raises questions about the strategy's long-term efficacy.
Miller and McLemore's approach is valuation-driven. They seek companies that they believe have solid, long-term fundamental outlooks but are facing temporary headwinds that have caused earnings and future expectations to fall. The approach has historically led the managers to scoop up firms whose stock prices are plunging. They estimate firms' long-term potential free cash flows and returns on invested capital versus their costs of capital, while also evaluating management teams when conducting analysis.
The managers have few constraints in constructing the portfolio. The fund is fairly concentrated, holding 40-50 names. The managers invest up and down the market-cap ladder depending on where they see opportunities, although on balance the fund tends to land in mid-cap territory. The team also uses leverage and options contracts as sources of liquidity and to amplify returns.
People | Average
This fund's lead manager is experienced, but his record is mixed and he has limited analyst support, meriting an Average People rating.
Miller, who has managed this fund since its late 1999 inception, made his name by leading Legg Mason Capital Management Value Trust (now named ClearBridge Value Trust (LMVTX)) to a record that beat the S&P 500 for 15 consecutive years, from 1991 until 2005, before going through a terrible stretch of underperformance in 2006-08 and again in 2010-11 and 2016. Miller relinquished his portfolio management duties on that fund in April 2012 but remains this fund's lead manager.
Miller works with a small investment staff, including comanager McLemore. McLemore started working with Miller in 2002 and became a comanager on this fund in 2008. McLemore plays a significant role here and is clearly Miller's heir apparent. Both Miller and McLemore invest more than $1 million in this fund alongside shareholders. The team also includes analyst Christina Siegel, who was hired in 2013.
In February 2017, Miller completed the purchase of Legg Mason's remaining stake in LMM, the investment advisor overseeing this fund, and rebranded the mutual fund family as Miller Value Funds. The firm is now in charge of its own distribution.
Parent | Average
Famed portfolio manager Bill Miller spent more than 35 years at Legg Mason, which is now a division of Franklin Templeton (BEN), and made his name by leading Legg Mason Value Trust to a record that beat the S&P 500 for 15 consecutive years (1991-2005) before going through a terrible stretch of underperformance in 2006-08 and again in 2010-11. Miller came off that fund (now named ClearBridge Value) in 2012 and had been working under a joint venture (formed in 1999 between Legg Mason and Miller) since Legg Mason Capital Management was merged into Legg Mason affiliate ClearBridge Investments in 2013.
In February 2017, Miller purchased Legg Mason's remaining stake and rebranded his firm as Miller Value. Miller has maintained a culture that's unique in its contrarian focus. McLemore, who has worked with Miller since 2002 and became a portfolio manager in 2008, joined Miller in his independent venture, as did his son, Bill Miller IV, who has worked with Miller since 2008. Although the investment team is stable, and it's clear that McLemore is well-versed in the strategy that she and Miller have practiced for years, key-person risk remains, especially considering the team's limited personnel.
Separated from Legg Mason, Miller Value now handles its own distribution. The firm has roughly $2.5 billion in assets under management.
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar Category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.
This fund has delivered very strong returns in bull markets, but its elevated risk levels make it prone to substantial declines during market downturns.
While the fund’s prospectus benchmark is the S&P 500, its all-cap portfolio makes the Russell Midcap Index more appropriate. Yet, given how eclectic this strategy is, no index offers a tight fit. The fund's R-squared relative to the Russell index is just 80 since inception.
Since June 2000, the I shares' 8.4% annualized gain trails the Russell Midcap Index's 9.1% gain through November 2020. The fund took on significant risk to achieve those returns. Its standard deviation since inception was a whopping 28.6 through November 2020. So, its risk-adjusted returns were even more disappointing. The fund's Sortino ratio--a measure of risk-adjusted returns that emphasizes downside risk--was 0.35, massively trailing the index's 0.62.
The fund has delivered strong performance in rising markets, capturing 141% of the Russell Midcap Index's gains since inception. But its volatile nature leaves it prone to substantial underperformance in down markets, as seen again during 2018's fourth quarter, falling 26.6% versus the index's 15.4% drop. During 2020's first-quarter bear market, the fund fell 48.7% versus the index's 40.3% decline. Overall, the fund has captured an incredible 161% of the Russell Midcap Index's losses during downturns.
Consistent with managers Miller and McLemore's contrarian nature, this fund's average price multiples are much lower than the Russell Midcap Index's. Their instincts also show in the September 2020 portfolio's quality metrics, which reflect a portfolio of of companies trading at low price multiples due to operational challenges. Its average net margin and return on assets were both negative. The portfolio's average debt/capital ratio was well above the index's (49.4% versus 43.5%).
The fund's flexible mandate leads to sector weightings that deviate substantially from the bogy's. As of September 2020, the fund's 36.5% consumer discretionary weighting was more than triple the index's. This stake included the three top holdings: Internet retailers Farfetch, Amazon, and China's Alibaba (BABA). This weighting also included Peloton (PTON), which the fund bought in 2019's third quarter and was well-positioned for 2020's coronavirus quarantine.
Miller and McLemore have also added a few housing-related stocks in 2020, including homebuilder Taylor Morrison Home (TMHC) and mortgage company Rocket (RKT). Within financial services, they still like banks as they believe they are over-reserved, and they expect the yield curve to steepen, which would help net interest margins.
Net portfolio leverage was equal to 6% of assets as of November 2020.
Kevin McDevitt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.