No video this week. We have guests and other dogs with us for the holiday.
The chart is YTD for the Legg Mason Value Trust (LMVTX) versus the S&P 500.
You know the fund for its very long streak of beating the S&P 500. A look at the stale holdings on Yahoo Finance shows that it makes what I think are big bets and sometimes big bets do not work out.
It has United Healthcare (UNH) which has a 4.45% weight after a 41% drop. The fund is overweight financials versus SPX and it has zero in energy. Zero?
This is a good example of how actively managed funds can be problematic. A contrarian might have guessed that after a long run of outperformance the fund would lag. That makes sense. But the issue that I see and have articulated before is that there is no way to do any forward looking analysis on an actively managed fund. This is because no one can know what the manager will do six months from now.
I always say that I don't go zero anything because that is a bigger bet then I am willing to make. LMVTX' zero weight to energy makes the point. Even an underweight to an energy ETF would have helped the performance numbers.
This is not to pick on the fund because it is a good bet that the fund will outperform at some point in the future but that the lag came at the worst possible time (into the the teeth of a bear market) is either bad luck or something else but either way it was bad timing.
4 comments:
I think that rather than being a comment on active management in general, Millers' fall illustrates how rare truly good management is... Miller, along with many other respected "value" managers were taken down by forces that they did not understand, as no one understood the balance sheets of the companies that they were judging to be "undervalued"... so they were feeling their way around in the dark just as everyone else was, which of course is not what you are paying an active manager to do... you are paying them to understand the balance sheets that produce the cash flows they are valuing and using as the basis for the investments they are making with your money... and if those balance sheets are not understandable, then you are paying them to put your money into a company that they can understand or withhold investing... there were managers who steered entirely clear of the entire sub prime meltdown as they sold financial companies when they could no longer understand the balance sheets... and there were managers who profited from the knowledge that if they could not understand them, that eventually others would realize that and those companies would suffer...
There are two ways to do it when you are really not sure of what an investment is worth... you can underweight that investment or you can withhold all investment... if I am paying an active manager I only want him to invest when he truly knows the company inside and out and is extremely confident that the outcome will exceed that of risk-free alternatives by enough of a margin to make it worth the risk... and that means spending more time in getting to know companies than most managers can really devote...
But the good news is that the recent subprime situation has exposed those managers who were swimming naked and made it glaringly evident who has their scuba gear on... and although there might be more of those managers in the private money management world, there are a couple available to everyday mutual fund investors... and those managers have returned far more to their shareholders than Bill Miller, Nygren and the usual suspects even when those managers' "style" of uninformed guessing was favored... the layperson only has to seek them out and benefit from their expertise and wisdom...
Selling the fund when it went down through its 200 dma would have been a smart thing to do too!
OG
I'm struggling with the forward looking analysis of any investment. What are the variables that you or Geoff Considine are using that allow you to do a forward analysis of an asset with any meaning ful probability of being right? I've been reading your blog for quite a while( maybe over a year) and find your views valuable. I realize your are not a crystal ball gazer, and try to use some basic technical factors and themes, along with diversification into 40 to 50 positions. How does this interplay with forward looking analysis?
Thanks,
Sam
no idea what Geoff does. i'll try to do a post to answer your question but it is a whole lot simpler than you think, at least the way i try to do it.
Post a Comment