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Investing With Style -- Any Style

Bill Miller has a record unmatched in mutual funds. His Legg Mason Value Trust (LMVTX) has trumped the Standard & Poor's 500-stock index in each of the past 14 calendar years. But Miller's lesser-known portfolio, Legg Mason Opportunity Trust (LMOPX), is the more interesting investment vehicle. Unlike the $17.2 billion Value fund, which focuses on big, often out-of-favor stocks, the $3.8 billion Opportunity fund has wide berth to buy almost anything and it's as close to a hedge fund as a mutual fund can get. Over the past five years the no-load fund has posted annualized returns of 8.7%, compared with 2.0% for Value and -2.7% for the S&P 500. The expense ratio is 1.9%. BusinessWeek Chicago correspondent Adrienne Carter spoke with Miller about this unusual fund.

What distinguishes Legg Mason Opportunity?

This fund has the ability to do just about anything that regulation allows. It can own large, small, international, or domestic stocks. It can be short. It can be long. It can own currencies. To a certain extent, it's experimental because some of the things we're trying to do is put to work theoretical concepts.

What theories have you put into practice?

Malcolm Gladwell has a new book out called Blink: The Power of Thinking Without Thinking. Part of the argument of the book is that quick judgments can be just as good as judgments arrived at after long and careful analysis.

How is this applied in the stock market?

Career Education Corp (CECO). came under pressure in part because of accusations about enrollment figures being inaccurate. The stock collapsed from $70 to around $30, while its competitors continued to trade at high valuations. We've seen enough of these situations before and saw that there was an opportunity here. We were able to act faster than we would have in other circumstances.

So you like to buy controversial stocks?

A lot of the stuff we're interested in tends to be where there is fear, where people perceive there is a one-way bet.

Are there any one-way bets now?

Everyone thinks the dollar is going down, that they can all make money by shorting the dollar. I'm not playing a rising dollar today, but I wouldn't rule it out. One way is to own European exporters -- which are penalized when the dollar goes down and benefit when it goes up.

The fund has a 3% stake in hedge funds. What's the strategy behind that move?

We own positions in three hedge funds -- Omega Capital Partners, Arience Capital Partners I, and Hygrove Capital Fund. One reason is that these portfolios can be long and short, so they've been less volatile than the overall fund while still adding value.

Are there challenges in running this fund?

One thing the fund brings out is that the current regulatory environment is insufficiently flexible. For example, this fund has many of the powers of a hedge fund in that it's relatively unconstrained. But whenever we try to do something that's out of the ordinary -- like short-sell oil, something we considered doing when it was priced in the mid-50s -- we run into regulatory roadblocks that have to be navigated by an army of lawyers. Between the time I make that type of decision and try to implement it, the price drops, and we miss the opportunity.

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