Mutual Funds

Mutual Funds, Bill Miller, and Value Trust

Value Trust, an $11.2 billion mutual fund managed by Bill Miller III, and one of a family of funds managed by Legg Mason., a leading Global Asset Management Firm headquartered in Baltimore, Maryland has achieved uncanny success. The Fund invests primarily in large-cap equity securities, is benchmarked against the S&P 500, and as of 2005, has outperformed its benchmark for a record 14 consecutive years. This amazing streak has brought much attention to this highly rated fund and what exactly is behind its excellent success and management. An example of performance for 2001-2004 follows:

ANNUAL TOTAL RETURN (%) HISTORY

Year Value Trust S&P 500 Differential

2001 -9.29 -11.89 2.6

2002 -18.92 -22.10 3.18

2003 43.53 28.68 14.85

2004 11.96 10.88 1.08

A mutual fund is a professionally managed fund of collective investments that pools money from many investors and puts it in various securities such as stocks, bonds, and money markets. The mutual fund will have a fund manager, that trades the pooled money on a regular basis, and after realizing capital gains or losses they will be passed out in the form of dividends to the individual investors. These funds provide key advantages for investors when compared to individual stocks: automatic diversification, professional management, and convenience, while maintaining liquidity.

Mutual-fund managers generally rely on some variation of the two classic schools of stock analysis: fundamental and technical. Fundamental analysis relies on information such as economic supply and demand, and the company's financial health. These investors use information such as annual growth rate, earnings records, and key ratios to make decisions and focus on consistent, steady growth. Alternatively, technical analysis focuses more on the study of timing, price fluxuation, and investor sentiment. A common method of technical analysis is the usage of a chart of the stock’s price history to predict market sentiment and stock price trends.

Despite the popularity of the two schools of stock analysis, there is no guarantee that either will pay off consistently. A sentiment shared by many professionals states that any information available to investors will already be built into the price of the stock. This notion is known as the efficient market hypothesis (EMH) and is widely accepted by financial economists. If EMH is correct in that all current prices reflect all available information, it would be impossible to beat the market relying on superior knowledge and skill, meaning most success would be due to luck.

Bill Miller’s success in consistently beating what is thought to be an efficient market is unusual and many wondered what could explain Miller’s performance.