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Bill Miller: don’t count on a US correction yet

Bill Miller: don’t count on a US correction yet

Legg Mason Capital Management Opptnty A Dis A USDBill Miller (pictured) has dismissed fears of a correction, and has placed his biggest bet on housebuilders, even as negative arguments stack up against the sector.

Miller, the former manager of the flagship Legg Mason Capital Management Value A Acc USDLegg Mason Capital Management (LMCM) Value trust famously beat the S&P 500 index 15 years in a row until 2006, when he was heavily weighted to financials going into the credit crunch. The fund lagged the index in five out of the subsequent six years, including losing 55% in 2008, and in 2011 Miller handed over management of the fund, which was then $2.8 billion in size, to co-manager Sam Peters.

Despite this experience, Miller who remains chairman and chief investment officer of LMCM and portfolio manager of the smaller Opportunity Trust and Income Opportunities strategies, cautioned investors against calling the top of the market too early this time around.

Herd mentality

‘People say we are in a five-year bull market and are due for a correction, but bull markets do not die of old age. The biggest bull market we have ever seen was 17 years, but not many people made money off of that,’ he said.

Miller argued funds like his, which are actively managed, can exploit this herd-like behavioural trend to make returns.

‘Behaviour is the most enduring advantage for an active manager. There is data on how large groups of people behave, they can’t help themselves, they are built in a certain way,’ he said.

‘Housing in the US is an example. The longer house prices went up, the greater probability they placed on markets continuing to go up.’

Housebuilders

The single largest bet in the Opportunity fund is his exposure to the recovery in the US housing market, via housebuilders themselves and also indirectly through financials, which are benefiting from increased mortgage financing and loans.

At the end of April, the fund had 31% in financials, almost double the 16.1% S&P 500 weighting. In an expensive market, Miller thinks housing-related stocks still look attractive and could surprise on the upside.

‘If you look at the housing market now, household worth is at an all-time high, everything is high, apart from the housebuilder stocks,’ he said.

‘There is not a single housebuilder trading at a market multiple. Their earnings estimates are for 25% a year, conservatively, way above the market average, yet we are probably six years away from a peak in housing.’

Closet indexing

Miller argued the increasingly popularity of passive management was ‘a good thing’ as many managers are ‘closet indexers’ anyway.

‘The term active management is broad and according to recent studies, around 70% of so-called active funds are actually closet indexers,’ Miller said.

‘A passive approach is a 100% guarantee of underperformance, with every tracker subtracting expenses from the market return. We see passive funds as ultimately inflexible and missing opportunities whereas portfolios with a high active share can be flexible and creative as conditions change.’

‘At the moment, the key is to avoid closet indexing. I have 90% active share, one of the biggest in the country.’

But to be truly active, he said, you have to accept you do not know what will happen next.

‘One thing that is important is not to confuse risk with uncertainty. Getting comfortable with active management means getting comfortable with uncertainty,’ he added.

Miller seems to be back on form, with his fund beating the S&P over all time periods since launch in February 2009. Over one year to the end of April, the Legg Mason Capital Management Opportunity fund has returned 31.1%, compared to a rise of 20.4% for the S&P index.

Over three years, it has risen by 15.6% compared with the benchmark’s 13.8% rise.

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