Investing: Can an Advisor Add Value?

Do you want this person/fund to manage your money?  Is this the right fund for you?

Resume:

• Beat the S & P 500 every calendar year from 1991-2005
• Named "Portfolio Manager of the Decade" in 1999 by Morningstar
• Barron's included him on its "All-Century Team" in 1999
• Fortune Magazine desribed him as "one of the greatest investors of our time" in 2006 profile
• And then there is this fact:  For the five year period ending December 31, 2010, this fund was LAST among 1,187 US large cap stock funds, as tracked by Morningstar.

The fund and fund manager described above is Bill Miller, manager of the Legg Mason Capital Management Value Trust for 30 years, who recently announced his retirement, effective in April 2012. The facts of this stock mutual fund performance clearly shows why it is nearly impossible to consistently predict the "best" fund managers over a long period of time.

After his great track record and much publicity, his fund was in the 98th or 99th percentile in 4 out of the last 5 calendar years, through 2010.  Through October, 2011, his fund is in the 82nd percentile. (per Morningstar data).

How can someone who is so "good," then become so unsuccessful?

This is a key question, which every investor must consider, in determining their advisor and investment philosophy. Was Miller lucky?  Did he lose his touch?  How do you know if your advisor or mutual fund manager will do the same?

Understanding what occurred with this fund, and how common this inconsistency in mutual fund performance is, is the basis for one of the fundamental investment philosophies that we adhere to. We recommend this strategy for your investment success, over a long period of time.



To describe the different philosphies, Bill Miller picked stocks for his fund that he thought were "value" stocks. He believes in active investing; that he could identify the best stocks to own that were undervalued. We believe that no one has the ability to consistently identify fund or money managers that can outperform a respective benchmark, over a very long period of time. Thus, we adhere to a "passive" strategy, which means that we recommend a very globally diversified set of stock mutual funds that hold a set of stocks in each "asset class," without making predictions or claiming to have a crystal ball.

It would have been very reasonable in 2000 or 2005 to put money into Bill Miller's fund, based on his past track record. Let's see how his fund did, and compare it to one of the funds that we use, in a similar asset class. Bill's fund is a large company value fund, so we will compare it to Dimensional Fund Advisor's (DFA)US Large Cap Value III fund (DFUVX).

For the 10 years ended 11/29/11, $10,000 invested would have grown as follows (per Morningstar.com):

• Legg Mason Fund:           $8,363 (a loss of $1,637)
• DFA US Large Value      $15,388 (a gain of $5,388)
• Vanguard S&P 500         $12,627  (a gain of $2,627)

By using the appropriate long term strategy, as your investment advisor, we can add significant value. We can provide you and your family with a solid investment strategy, that will result in greater comfort and sense of security.

Other Conclusions:

The Lost Decade:  There has been much written about how the past 10 years ended in 2010 were considered the "lost decade," where investors made no money. This was true for many investors. While the  figures above are for the 10 years ended in November 2011, the DFA US Large Value fund was very profitable over this period. This shows the importance of diversification and owning more than just the S&P 500 as the basis of your portfolio.

Costs and expenses: 

We believe to be most successful, you should focus on the things that you can control. Thus, evaluating mutual fund expense fees should be an important part of your investment approach.

Bill Miller's fund charged various up-front fees, depending on which "class" of the fund that an investor used. None of the funds that we recommend charge such fees.

The annual expense ratio of Miller's fund is 1.75%. This means that each year, the fund subtracts 1.75% in fees, from whatever the actual performance is. The comparable DFA fund that we utilize, DFUVX charges .14%, one of the lowest expense ratios in the industry, for this fund category.

There are many other lessons to be gained from reviewing the experience of this fund and this fund manager, as well as carefully evaluating most mutual funds, or your own investment portfolio.  
  
Important notes:  The above examples are illustrative only. No one fund should constitute an investment portfolio. The above figures do not include an investment advisory fee, which our firm charges, separate from mutual fund fees. Legg Mason's fund would have charged a load, which is not included in this information.

Sources:  Morningstar website, 11/30/11; article by Weston Wellington, Dimensional Fund Advisors, dated 11/29/11