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November 03, 2006
A big crowd to get Miller's market-beater crown
The popular stereotype of the wacky, opinionated and brilliant fund manager is about to take a serious hit. After Peter Lynch retired, there was a short-term deficit of WOB's. Thankfully in recent years, we've witnessed the emergence of Bill Miller, former military intelligence officer, former PhD candidate in philosophy and soon-to-be former holder of the longest ongoing market-beating streak in mutual fund land. The bad news is there's no top wacky, opinionated and brilliant manager in the wings to fill this much needed role.
As has been endlessly written about, including by us, Miller's Legg Mason Value Trust (Symbol: LMVTX) likely will finish the year trailing the S&P 500 index. That will mark the end of a record-setting run of 15 consecutive years of outperformance (and about 6 or 7 years of mega amounts of free publicity). As of yesterday, according to Morningstar, the fund was trailing the index by just over 10 percentage points with less than two months to go.
Only slightly less frequently remarked upon, the next-best candidate and heir apparent to the wacky, opinionated and brilliant fund manager crown, Manu Daftary, is having almost as bad a year as Miller. Boston-based Daftary has strong opinions and an unusual investment process that emphasizes avoiding growth blow-ups as much as finding winners (with some stock shorting to boot). But Daftary's Quaker Strategic Growth Fund (QUAGX), which has outperformed the S&P 500 for 8 years in a row, is trailing this year by 8.5 percentage points. So who next will wear the crown and garner all the attendant free publicity?
Unfortunately for headline writers and TV producers everywhere, there is a tie between a whole bunch of funds. And making matters worse, most are team managed. Among large-cap, diversified stock funds, the Goldman Sachs Growth Strategy (GGSAX) and Manning & Napier Pro-Blend Maximum Term (EXHAX) have beaten the S&P since 1999 and are ahead in 2006, Morningstar says. Mark Carhart, Raymond Iwanoski and Katinka Domotorffy run the Goldman fund, up 12% year to date. Carhart is a hard-core quant who has written published papers analyzing fund performance. I've never met him but I'd wager that he wouldn't quite measure up to Miller or Daftary as a dinner guest or CNBC talking head.
And the Manning & Napier fund, up 16%, lists EIGHT managers -- Oy! At least none of Capital Research & Management's American Funds are on they list -- they're run by even bigger and more anonymous teams. Oh wait, ther $35 billion American Funds Fundamental Investors Fund (ANCFX) is in the running as well.
On a serious note, of course, it's worth mentioning that a boatload of research supports picking fund managers based on long-term performance. Many of the best performing funds over 10-year periods had, within those 10 years, three-year periods where they were among the worst funds in their category. On that score, Miller and Daftary still look good. Miller's 10-year annualized return of 12.6% beats the S&P by almost 4 percentage points and is ahead of 97% of his peers. Daftary hasn't been in business as long at his current fund (he just had hit the 10 year mark this week) but he's ahead of 85% of similar funds and almost 2 points ahead of the S&P annually over the past five years. And unlike Miller, Daftary has done it while showing less volatility, or beta, than the S&P over the past three years.
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