7/18/2016 Bill Miller and Value Trust

Case Analysis 3
 William Bill Miller III worked at Legg Mason, Inc., and was the fund manager of Value

Trust, an $11.2 billion mutual fund. He is noted for his outstanding performance of the trust

where he had outperformed its benchmark index, the S&P 500, for a solid 14 years. This had

been the longest sustained streak of success by a fund manager in the industry where simply

beating the benchmark index for a single year is considered an accomplishment. The question of

this case was whether Bill Miller had been a fund genius or simply a manager that just got lucky.

I. The average annual total return for the Value Trust fund was 14.6%, which surpassed the S&P

by 3.67% every year. Value Trust earned a cumulative return of more than 830% over the

previous 14 years, more than double that of its average peer and the index. There are two

approaches to measure venture execution, the NAV (Net Asset Value) and the Annual Total

Return. These approaches are useful when measuring the annual growth rate of the Net Asset

Value and measuring the dollar value today of investments that have been made in the past.

These measures are then contrasted against the benchmark portfolio to determine profitability as

seen with the Russel 2000 Index or the S&P 500 Composite Index. Progression is a sign of good

performance. As a rule, progress implies that your portfolio value is relentlessly expanding,

despite the fact that one or a greater amount of your speculations may have lost quality. If your

speculations are not demonstrating any increases or your record quality is slipping, you'll need to

decide why and settle on your best course of action. Likewise, in light of the fact that venture

markets transform constantly, you'll need to be aware of chances to enhance your portfolio's

execution, maybe by broadening into an alternate area of the economy or distributing a portion of

your portfolio to worldwide speculations. In order to free up cash to make these new buys, you

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might need to offer individual ventures whose execution has been disillusioning while not

relinquishing the advantage of allotments that you have chosen.

II. A few onlookers ascribed this accomplishment to the asset chief's cognizant

procedure of staying completely focused. Another famous ideology for the asset's allocation was

the uncommon aptitude of Bill Miller, the asset's portfolio supervisor. His methodology

consisted of serious examination and a profound focus on maintaining 50% of assets into only 10

expansive capitalization organizations. He was not reluctant to take huge positions in

development organizations but rather focused on areas where he had claimed that the lowest

average cost would win while adjusting his investing strategy appropriately to maintain positive

returns. His strategies included but were not limited to buying low priced, high value stocks,

researching least attractive areas of the markets, betting on investor behaviors, and understanding

the appropriate time to bid aggressively when stocks were low, and conservatively when they are

high in order to manage and limit respectable losses and gains.

III. It is already difficult to achieve success in this market for one year, so being that the

historical performance has sustained over a 14-year period has been profound. I believe it may be

probable but very difficult to repeat success as it is never easy to speculate market performance.

Due to the few amount of companies that the fund is comprised of there are not many more

options for the purchase of new stocks, meaning that the fund may have to search elsewhere for

new stocks that may not yield the same returns as presented in their past, and may ultimately lead

to losses. The future success can be driven by driving the confidence of investors through past

performance and by acquiring the trust of new investors. By instilling this confidence, the fund

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can stabilize and even drive up their underlying stock prices with increasing investor demand.

IV. Portfolio managers play a crucial role in the mutual fund industry, as they are directly

responsible for driving the success or failure of a fund playing a pivotal role in deciding the best

investment strategy. Essentially, portfolio managers use various metrics to choose which stocks

and bonds to buy and sell in order to outperform their fund’s compared “target index”. Usually,

some hybrid of the two key forms of financial market analysis (technical and fundamental) were

used to obtain above-average returns. However, it has been studied that these methods do not

hold consistently over time.

Technical analysis, is tied with the castle-in-the-air theory, where successful investors

analyze the behavior of other investors to determine where they will buy and ultimately become

the first mover to reap the rewards after the purchase drives prices up. This practice is said to be

10% logical and 90% psychological. These analysts are also called “chartists” as they study

historic chart data and trends to predict what the crowd will do. The opposite method,

fundamental analysis, is considered 90% logical and 10% psychological and directly relates to

the firm-foundation ideals. These “fundamentalists” try to estimate a stock’s intrinsic value and

relies on supply and demands, costs, and growth prospects to drive profits.

Mutual funds generally perform at or just under the market. Though, once the loads and

other expenses are considered, mutual funds relatively fall short. Additionally, while portfolio

managers play an important role in the industry, the quality of the governance structure in the

mutual fund industry is often overlooked.

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V. Capital market efficiency measures the extent of the accuracy of a stock’s price. It looks at

how fair current market prices are for an asset given current market situations. In an efficient

capital market stock prices are in equilibrium or are “fairly” priced. Efficient markets do not

imply that investors can not earn a positive return in the stock market.

There are many investors doing research and as new information comes to light, it is

analyzed and trades are made based upon this information. The Efficient Market Hypothesis

states that security prices reflect all available information, making it improbable to predict the

change of stocks before the market. There are implications for investment performance in

general, one of which is financial markets that will respond to new information immediately and

completely if the market is efficient. In other words, positive news will increase the valuation of

a stock yielding a price increase. As long as the market is efficient there is also no “best time” to

purchase an asset and price changes are serially random. Fund managers are a key element when

it comes to making decisions and making their clients a profit. They have to understand the

market and the three forms of efficiency. The three forms of efficiency are weak form, semi-

strong and strong form. Weak form efficiency says that information is based upon historical

prices and trading volumes. While it has strong support, it is very insignificant and no form of

technical analysis can be used to aid investors in trading decisions, but can yield returns through

fundamental analysis by determining undervalued and overvalued stocks to make returns

exceeding normal market returns. Semi-strong form efficiency states that because public

information is available to everyone, the stock price cannot be calculated to benefit investors

through technical or fundamental analysis yielding returns in excess of normal market returns.

This means that it is tough to separate the winners from the losers when everyone has access to

the same information. Strong form efficiency is based on all information, public, private and

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historical. This theory states that stock prices already reflect all information and there is no type

of information that can benefit an investor to make returns exceeding normal market returns.

Additionally, it is illegal to use insider information for trading, so fund managers need to tread

lightly when involved in this.

VI. The recommendation to invest with Bill Miller would be approved because the fund has

shown positive past returns and is continually growing steadily. We believe the steady growth

can be a result of the market being weak form efficient, as information is easy of access enabling

investors to predict outcomes. This growth directly impacts investors by providing changing the

demand for equity in the market while restructuring liquidity measures. With these changes

investors are constantly re-analyzing the probability of returns developing a constant changing

behavior of investment goals and objectives.