End of an era: Bill Miller parts ways with Legg Mason

Bill Miller, Legg Mason

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Bill Miller

The dissolution of the longtime union reinforces the changes sweeping through the mutual fund industry. Investors are losing faith in star managers who say they can beat the market and are instead placing their money with cheaper funds that mimic stock and bond indexes.

Hundreds of billions of dollars has been pulled from actively managed firms like Miller’s, whose assets dropped 38% over the first seven months of the year to $ 1.8 billion. Miller’s Legg Mason Opportunity Trust is among the worst performers in the industry this year, though his Miller Income Opportunity is up more than 9%.

“The days of expecting a manager to outperform the S&P have come and gone,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Global Market Intelligence. “Most investors either don’t know or don’t care who their fund managers are.”

Investors pulled $ 317 billion from actively managed funds over the year ending June 30, while pouring $ 373.3 billion into passive funds, according to Morningstar.

In the deal announced Thursday, Miller agreed to buy out Legg Mason’s 50% stake in their joint venture, LMM, which houses the funds he manages. The terms weren’t disclosed. The agreement leaves Miller in sole control of the company and moves Legg Mason further away from its history as a firm that relied on individual managers to bet on plain vanilla stocks and bonds.

LMM takes with it the $ 1.25 billion Legg Mason Opportunity Trust, which Miller manages with former Legg Mason portfolio manager Samantha McLemore, and the Miller Income Opportunity Trust, run by Miller and his son Bill.

As a stand-alone firm, LMM would be free to seek an independent distribution arrangement that would keep the relatively small funds from “getting lost in the shuffle,” Miller said in an interview.

He added that although active funds are under pressure industrywide, investors have fled Legg Mason Opportunity Trust because of its recent trailing returns. “There’s a certain constituency for this kind of fund,” he said, “but it’s not a very big constituency, maybe.”

A spokeswoman for Miller said the firm planned to rebrand the funds and may launch additional funds in the future.

His own career is a cautionary tale about the ups and downs of active money management. Miller rose to fame by notching a series of remarkable gains during the 1990s tech boom and bust, only to post distressing losses during the financial crisis.

While running Legg Mason Capital Management Value Trust, Miller outperformed the S&P 500 every year from 1991 to 2005, an unmatched streak made by winning then-contrarian bets on Amazon.com, Google and eBay. In 1999, Morningstar named him mutual fund manager of the decade.

“He had a phenomenal run,” said Legg Mason co-founder and former chief executive officer Raymond “Chip” Mason, who hired Miller in 1981 and put him on a research team. “He’ll probably always be one of the best investors in his day.”

His reputation took a beating when bets that the financial and housing sectors were due for a rebound going into the crisis proved disastrously wrong. Miller held losers like Bear Stearns and American International Group to the bitter end, only for the investments to be nearly wiped out.

Value Trust sank to the bottom of the rankings during the financial crisis, plummeting 55% in 2008, even worse than the S&P 500 index’s decline of 37%. Its assets shrank to $ 2.8 billion from $ 21 billion, as investors fled.

“He was intense in his analysis,” said Mason, 79 years old, noting that many of the stocks Miller held did ultimately recover over a long period. “Even when the market collapsed, his view was the market was wrong, he hadn’t analszed it wrong.”

Miller stepped down as Value Trust’s manager in April 2012 but stayed in charge of the smaller Legg Mason Opportunity Trust fund, where he mounted a brief comeback. The fund places bets on a relatively small number of undervalued stocks. It was No. 1 in its category in 2012 and second best in 2013, according to Morningstar.

More recently, however, it hasn’t done as well. According to Morningstar, the Legg Mason Opportunity Trust is at the bottom of comparable funds this year with a drop of 8.5%, though it ranks near the top over the past five years.

The final split from Legg Mason has been under discussion for at least two years, representatives from both firms said.

Legg Mason itself didn’t escape the financial crisis unscathed. Weak performance at some of its most popular mutual funds during the crisis led to severe withdrawals and continued share-price declines. By 2009, activist investor Nelson Peltz had acquired a large stake in the firm and snagged a seat on its board. The firm named Joseph Sullivan chief executive in 2012 after pressure from Peltz’s firm forced the departure of Mark Fetting.

As investor preferences have shifted, traditional mutual fund companies like Legg Mason have had to reinvent themselves. Legg Mason still has a host of other funds run by stock and bond pickers, but Sullivan has pursued a series of acquisitions that have pushed the money manager into a more diverse lineup of passively managed ETFs, international equities, infrastructure and real estate.

The firm had $ 742 billion in assets under management at the end of June, up from $ 699.2 billion the same time a year earlier.

Sullivan said Miller’s plan to pursue more concentrated, sizable bets differs from Legg Mason’s more diversified approach.

“It’s tough to think about Legg Mason without Bill Miller,” Sullivan added. “We owe him a lot. He put us on the map.”

Miller isn’t wistful. “My main regret is not doing better around the financial crisis, but there isn’t much I can do about that now. We’re very happy with the way this has come out.”

Write to Sarah Krouse at sarah.krouse@wsj.com and Jason Zweig at intelligentinvestor@wsj.com

This article was published by The Wall Street Journal

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