Bill Miller's new streak
The Legg Mason fund manager is on track to lag the S&P 500 for the second year in a row. Here's why. Plus: The funds that now have the longest winning streak.
NEW YORK (CNNMoney.com) -- Bill Miller, the Legg Mason Value Trust manager who is an investing legend for beating the S&P 500 for fifteen consecutive years, is likely to start a new streak this year: a losing one.
Miller's fund failed to outperform the S&P 500 in 2006. And as of Dec. 3, Miller's chances of beating the market this year do not look promising. The Legg Mason Value Trust fund is down 6.1 percent year-to-date compared to a 5.8 percent total return for the S&P 500. (Total return includes the reinvestment of dividends.)
Although Miller has had some big successes this year -- Amazon.com (Charts, Fortune 500), which has more than doubled in 2007, is his top holding, while Google (Charts, Fortune 500), which is up nearly 50 percent, is the fund's fourth-largest investment -- the fund's performance has been hurt by exposure to struggling telecoms and the troubled financial services industry.
Sprint Nextel (Charts, Fortune 500) and Qwest (Charts, Fortune 500) are both top five holdings and each stock has fallen more than 15 percent so far this year. But it is Miller's bets on financial stocks that have really hurt him in the wake of this year's subprime mortgage meltdown.
Insurer American International Group (Charts, Fortune 500), mega bank Citigroup (Charts, Fortune 500) and mortgage lender Countrywide Financial (Charts, Fortune 500) are all among Miller's twenty-largest investments. AIG has fallen 20 percent this year. Citigroup has plunged almost 40 percent and Countrywide has been eviscerated, losing nearly three-quarters of its market value.
Miller's investments in media conglomerates IAC (Charts, Fortune 500) and Time Warner (Charts, Fortune 500) also have not helped him. Shares of both companies, which are also top 20 holdings in the fund, have fallen more than 20 percent. (Time Warner is the parent company of CNNMoney.com.)
Nonetheless, Miller is confident that his fund will eventually bounce back. In his most recent quarterly letter to shareholders, published last month, he did not apologize for his investments in some of the market's more battered sectors or his unwillingness to invest in hot momentum areas such as energy and basic materials.
"We have been taking advantage of the market's current turmoil to make adjustments as the market misprices some securities in relation to others," he wrote.
"Here is what you can expect: the fund will become more of what it already is, large capitalization US, as we systematically reduce our mid-cap names in favor of those with larger market values. As I noted elsewhere, I think large-cap US is the cheapest part of the equity market and so we will have more of those names," he added.
But Miller also said that he planned to reduce the stakes in his ten largest holdings in order to reduce risk -- the fund is famous for having a heavy concentration in just a handful of stocks -- and also to buy stocks in other industries.
To be fair, two down years for Miller should not tarnish his status as one of the most astute investors of the past twenty years. To that end, Legg Mason Value Trust has had an annualized return of 8.3 percent over the past ten years, ranking it in the top 14 percent of funds in its category, according to fund research firm Morningstar.
And Miller acknowledged that even though he is likely to lag the market this year, he sees some similarities between current market conditions and the investing environment in 1990...just before his 15-year streak of topping the market began.
"This is the first time since 1990 we have had two calendar years behind the S&P 500. Perhaps not surprisingly, that was also a time of panic due to a housing market recession, soaring oil prices, banks and financials collapsing. We were able to take advantage of the values then offered to begin a pretty good period of excess returns," he noted.
The new Bill Millers?
Still, we realize that for many investors, the present is more important than the past. As such, we asked Morningstar to provide us with a list of the actively managed U.S. equity funds that currently have the longest winning record of beating the market.
According to Morningstar, eight diversified funds, i.e. funds that aren't focused on one specific sector, are on track to beat the market for the ninth straight year. The full list is in a table to the top right of this page. But funds from well-known asset managers such as The Hartford, American Funds and T Rowe Price all made the cut.
In addition, five natural resources funds are also on track to beat the market for the ninth straight year, according to Morningstar, including two energy funds from Fidelity. This shouldn't come as a huge surprise considering the bull run in oil and other commodities over the past few years. A list of these five funds is also included to the right.
But can any of these funds top Bill Miller's streak? After all, as impressive is it is to top the market nine years in a row, these thirteen funds would all have to outperform the S&P 500 from 2008-2013 in order to just tie Miller's record.