LEGG MASON’S BILL MILLER: BANK OF AMERICA(BAC) IS SUPERUNDERVALUED ECHOING MANY OTHERS
By Daniel at 4 July, 2009, 3:06 am
Legg Mason’s Bill Miller On The Prowl Again
By BRETT ARENDS
After several years of heavy losses, Bill Miller’s diehard investors are breathing a tentative sigh of relief.
The famous Legg Mason value investor, who stumbled so badly during the stock market turmoil of the past few years, is off to a much more promising 2009. Indeed, it’s been the best first half for his mutual funds since 2003, when his 15-year streak of beating the Standard & Poor’s 500 still had 2 1/2 more years to run.
Mr. Miller’s flagship Legg Mason Value Trust is up 15% through the halfway mark, about two percentage points ahead of the U.S. market overall. And his smaller, more flexible, and more volatile Legg Mason Opportunity Trust is up 33%.
The explanation is simple. Mr. Miller has stuck with the same kinds of bullish bets on an economic recovery that got him into hot water earlier. In the spring’s stock market rally, they’ve done well.
[Bill Miller] Associated Press
Bill Miller, chairman and CIO of Legg Mason Capital Management, arrives for the annual Allen & Co.’s media conference last year, in Sun Valley, Idaho.
“Both funds are tilted towards (economic) stabilization and recovery, that benefits them,” Mr. Miller said in an interview. Big holdings include Internet stocks eBay, Yahoo, Amazon and Google, retailer Sears Holdings, and certain financials like Goldman Sachs, JP Morgan Chase, State Street Corp.
It has been a tough few years, to put it mildly. Through 2007 and 2008 the U.S. stock market fell by about 32%. During that same period Legg Mason Value crashed 58%, and Legg Mason Opportunity 66%. Mr. Miller turned bullish on housing and homebuilders, plus other stocks sensitive to the economy, way too early. The nadir came last summer, when he raised his stake in mortgage giant Freddie Mac just before the government took it over, along with Fannie Mae, wiping out investors altogether.
“I underestimated the crisis,” Mr. Miller admits. He thought the extra liquidity being pumped into the system would turn things around. He never thought house prices, or share prices, would fall as far as they did.
But he still pins a lot of blame on federal policy blunders. Not just the bungled bankruptcy of Lehman Brothers, but also the earlier move to Fannie and Freddie preferred shareholders. Mr. Miller calls that “a disastrous error” that turned the economic crisis into a meltdown.
Mr. Miller says he personally lost a lot of money on Freddie Mac preferred stock, as did friends and colleagues.
He was hardly the only major investor to get caught leaning the wrong way in September. Why didn’t his Opportunity Trust, which has the flexibility to use derivatives, use them to “hedge”, or insure, against a market collapse? “It was just a big mistake not to do that,” Mr. Miller said. He said he had hedged heavily in 2003-4, and it had hurt performance when the market boomed. This time he didn’t want to make the same mistake again.
As his numbers have turned south in recent years, many investors have deserted. A few years ago his two funds had more than $25 billion under management. Today that’s shrunk to around $5.5 billion. Investors have yanked another $700 million just since January, according to fund flow analysts at the Financial Research Corporation.
Today, Mr. Miller says fair value on the Standard & Poor’s 500, currently trading around 920, is “in the 1,100 range. There’s value in most places in the market right now.” Stocks he singled out as “very cheap” include Bank of America (BAC) and the insurance company AFLAC (AFLAC). Mr. Miller insists the financials are actually “overcapitalized” today.
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