Bill Miller and Value Trust Case Study

Bill Miller and Value Trust Case Study

Summary of the Case

        William H. (Bill) Miller III, who managed Value Trust, a very successful mutual fund, consistently beat its Standard & Poor’s 500 Index (S&P 500) benchmark for 14 years in a row. This was a record in the industry that no other managers has ever been able to perform. The case describes that over the 15 years period, Value Fund had a much higher average total return of 14.6% as compared to S&P 500 with an average total return of 10.93% in which this $11.2- billion mutual fund surpassed the S&P 500 by 3.67% per year while also earning a five-star rating from Morningstar for its highest investment performance. S&P 500 comprises of 500 widely held common stocks which in other words are large cap stocks. Value trust has 36 holdings, 10 of which accounted for 50% of its assets. As seen in Exhibit 1, the beta of Value Trust is 1.31 which is higher than S&P 500’s beta indicating that it was riskier. Despite not having the best overall performance results among fund managers over short-periods, Miller had a remarkable consistent record in beating the index.

        By 2005, the U.S had the largest mutual-fund market with a mutual-fund asset that grew from $2.8 trillion to $8.1 trillion. Mutual funds served individual investors many functions that afforded them the opportunity to diversify their portfolio without having sizable amount of capital, and also provided the individual investor with the professional expertise that was necessary to beat the market with higher returns through an analysis of securities and also isolated individual investors the painful vicissitudes of the marketplace. The case then later states Bill Miller’s eight strategies which includes: Buy low-price, high intrinsic-value stocks; to take heart in pessimistic markets; to remember that the lowest average cost wins; be wary of valuation illusions; take the long view; look for cyclical and secular underpricing; buy low-expectation stocks; and, take risks. Many people wondered about Miller’s superior performance and sustainability because it defies experts in the industry and goes against theories such as the Efficient Market Hypothesis (EMH).

Problem of the Case

        The problem that this case presents is how Bill Miller consistently beat the market for 14 years in a row. Many people assume that is it because he got miraculously lucky and others believe that he was a skillful man that read the mutual fund’s market incredibly well and was good at what he did. Did it make sense for an investor to buy shares of the Value Trust mutual fund? Many financial analyst argue Bill Miller’s approach and we can develop our ideas by looking into the stock pricing model, Efficiency Market Hypothesis (EMH), and the mutual fund industry overall.

Conclusion

        Value Trust’s outstanding performance can be seen and affirmed by Bill Miller’s strategic investment philosophy. Miller relied on the combination of the technical and fundamental approach with the knowledge of the overall economy and a long-term vision. Miller’s investments were value stocks, he believed in judging a stock based on its intrinsic value as opposed to the opinion of the market. Many times, this meant that when companies were not worth anything, Miller would figure out why the business was broken and buy it at a low price if it had a high intrinsic-value stock. He was also a very optimistic man that had a futuristic mindset and made sure that he was wary of valuation illusions. He invested in stocks that he believe would earn him high returns even if they looked expensive. Value Trust only had 36 stocks which meant that it only bought and sold specific ones that they wanted to hold long-term. This clearly shows that he viewed his gains as long-term returns rather than short-term returns. Miller was a firm supporter of cyclical and secular underpricing and was careful to capture mispricing along both of those dimensions so they could hedge the risk and not lose out. This enabled him to take risks and buy growth stocks. As Warren Buffet suggested “you need to be fearful when others are greedy, and greedy when others are fearful.” Miller learned that he needed to be more aggressive when the market has been down for a while and looks bad. All this to say that even though Miller’s strategies and approach was research-intensive and highly concentrated, there was definitely some form of luck along the way and timing played a major part in his success.

The mutual fund industry overall is a highly competitive market and entry to it is not difficult. The difference between technical and fundamental securities analysis is the former deals with identification of profitable investment opportunities based on stock price trends, volume trends and market sentiments. The latter deals with economic fundamentals of the company itself and thus its industry look at factors that affect the company economically like the supply and demand costs, and growth prospects. The mutual fund is a long-term investment which has a higher rate of return than the Treasury bond which can be measured as the increase or decrease in net asset value plus the fund’s income distributions, expressed as a percentage of the fund’s NAV at the beginning of its investment period. This calculation gives an understanding of the Mutual-Fund market performance as it considers all the aspects of portfolio that is income, dividend, and capital gains on the funds. However, this performance measures failed to adjust for the relative risk of the mutual fund. From Exhibit 2, we can find that the Domestic category owns more funds than others, S&P 500 index gives us a fair reference on how the market was doing compared to the Board market indices.

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