Bill Miller Joins Winners in Reversal of Fortune During Rally

Morningstar Investment Conference

Bill Miller.

Photographer: Tim Boyle/Bloomberg
  • Legg Mason fund was among the worst performers in past year
  • Loomis among funds boosted by rise in currencies, high yield

The Loomis Sayles & Co. flagship bond fund trailed 97 percent of rivals last year as its bets on bonds and currencies went awry. Now it’s beating 97 percent of the same peers in the past month.

“There have not been big changes to the portfolio,” said Elaine Stokes, who manages the fund with Dan Fuss and Matthew Eagan. “There have been big changes in the markets.”

Bill Miller
Bill Miller
Photographer: Tim Boyle/Bloomberg

A rally in risk assets -- commodities, currencies, high-yield bonds and stocks -- has created a swift reversal of fortune for some mutual fund managers in the past month. After a slowdown in China and a plunge in oil prices sparked turmoil in global markets and recession concerns, investors have recently become more confident in the expansion of the U.S. economy and the prospect that China will stabilize.

Legg Mason’s Bill Miller and Capital Growth Management’s Ken Heebner are among managers whose mutual funds struggled in the end of 2015 and the first part of this year. Markets ranging from stocks and high-yield debt to oil plunged in January and the first part of February, touching a bottom on Feb. 11, according to data compiled by Bloomberg. At that point in 2016, the Standard & Poor’s 500 Index was down 11 percent, and oil was selling for about $26 a barrel, down from about $37 at the start of the year.

Legg Mason Opportunity Trust and the CGM Focus Fund catapulted to the top of their peer group in the past month as investors jumped on their out-of-favor bets. The $639 million Eaton Vance Bond Fund did a similar about-face, lagging behind 99 percent of competitors last year before beating 99 percent in the month ended March 22.

“Some of the markets, especially commodity markets, just overshot on the way down,” said Kathleen Gaffney, manager of the Eaton Vance fund.

Gaffney’s fund benefited from the rise in currencies such as the Brazilian real, up 8.6 percent against the U.S. dollar since Feb. 11, and the rebound in commodities. One of her holdings, a bond that matures in 2043 issued by mining giant Freeport-McMoran Inc., currently trades for about 64 cents on the dollar, an increase from 39 cents at the end of January.


Junk Bonds Recover

The $16 billion Loomis Sayles Bond Fund has been helped by the recovery in junk bonds, which have climbed 9.3 percent since Feb. 11, according to the Bank of America Merrill Lynch U.S. High Yield Index.

“We are back from the brink,” said Stokes. “Earlier in the year people were starting to compare the economic situation to 2008.”

The bounce-back in economically sensitive stocks explains why Heebner’s $933 million CGM Focus Fund beat 99 percent of rivals in the past month. Last year he trailed 90 percent. 

Heebner, who is known for making big bets on industries, had roughly one-third of his money in homebuilding stocks as of Dec. 31, his year-end report showed. The Standard & Poor’s Supercomposite Homebuilding index gained 20 percent since Feb. 11.

Martha McGuire, a spokeswoman for Heebner, declined to comment on his performance.

Airline Stocks Jump

Miller’s fund has risen along with airline stocks, which represented about 13 percent of the $1.6 billion Legg Mason Opportunity Trust as of Dec. 31, according to the firm’s website. Delta Airlines Inc., his largest holding, rose 20 percent after reaching a low for the year on Feb. 8, according to data compiled by Bloomberg. The fund gained 9 percent in the past month.

“The airlines during the selloff got down to some of the cheapest valuations in their history,” said Samantha McLemore, who manages the fund with Miller. “We still like them a lot.”

For James Kieffer, one of the managers of the $867 million Artisan Value Fund, the path to better performance runs through the oil patch. As oil prices have climbed back to about $40 a barrel, shares of Apache Corp. have soared, helping lift the fund to a 12 percent gain in the past month, better than 98 percent of rivals.

“You are seeing a classic response in oil,” said Kieffer. “Supplies are tightening and prices are moving higher.”

’Bear Market Rally’

How long can the current rebound last? Jeffrey Gundlach, co-founder of DoubleLine Capital, called the turnaround in stocks “a bear market rally” in a March 8 webcast and said betting on stocks is a “big losing proposition.” He said the rally in risk assets was nearing an end, according to a tweet by Reuters the same day.

Even with the rebound in the past month, many of the funds still have not made up the ground they lost in the selloff. Miller’s Legg Mason fund is down about 22 percent from its July peak last year.

Stokes at Loomis Sayles is sanguine about the markets, saying beaten-down assets such currencies and high-yield bonds, can go higher even as the pace of gains is likely to slow.

“I think this is the early innings of a positive rally in the markets,” Eaton Vance’s Gaffney said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE