Bill And Miller Value Trust Essay

1615 words - 7 pages


Value Trust is a mutual fund that has performed well against various indexes in the years leading up to 2005. Value Trust takes S&P 500 as its benchmark index, which it has outperformed for the last 14 years. Prior to 2005, Value Trust had an average annual total return of 14.6%, which was 3.67% higher than S&P 500’s average annual returns. From exhibits 1 and 5 we can see that the return was much higher for Value Trust (15.04%) compared to the S&P 500 (9.48%) over a ten year period. The NAV was consistently increasing from 1994 to 2000 up until the market crash when the NAV decreased but then again increased consistently until 2004. The NAV is an investment measure and increase ...view middle of the document...

He believed in judging a stock based on its intrinsic capabilities as opposed to what the market thought of it. That many a times meant taking positions in stocks with least promising outlook, but that was in cohesion with his strategy of "buying for less is better than buying for more". With a view towards the future, Bill Miller also made sure that he was always vary of valuation illusions. He made sure he invested in stocks he felt would earn him returns even if they seemed expensive. Also, the Value Trust portfolio had just 36 stocks, which meant that Bill Miller or Value Trust seldom sold stocks and only added stocks which they wanted to hold long-term. In other words, he always aimed to gain long term returns rather than short term returns. Bill Miller was also an advocate of cyclical and secular under-pricing and made sure that his portfolio captured mispricing along both dimensions so as to hedge the risk. Finally, he was ready to take risks and put money on growth stocks - which he analyzed would give him above market returns. Although this strategy that Bill Miller subscribed to was in cohesion with the technical and fundamental analysis, it would be hard to discredit the fact that there was luck involved. Also, he benefited immensely from the timing of the calendar year. In fact, a deeper dive into the specifics divulge that Miller's fund lagged behind the S&P 500 in 32 12 month periods out of the 152 periods in question.
It would not be an easy task to sustain Miller's historical performance in the future. There are several factors that point toward this conclusion. Though Miller's strategy to manage the fund was impressive and based on a view of the future rather than mere fundamental and technical analysis, luck and timing played a major part in his success. In-fact, Morning star states that Miller's fund lagged behind the S&P 500 in 32 12 month periods out of the 152 12 - month periods that were accounted for. Also, the Efficient Markets theory supports the conclusion that efficient markets adjust to new information so quickly that no portfolio choosing technique can consistently outperform a simple buy-hold strategy. EMH also states that it is not possible to attain consistent abnormal returns and any kinds of analysis is not useful. Additionally, many people are of the opinion that stock prices follow a "random walk" and price movements over time were uncorrelated.
Also, looking at it from the probability point of view, in any given year a portfolio manager has a 50% chance of outperforming the markets. So if this probability is taken over a period of time, the probability that that manager will continue to outperform the market diminishes with each passing year, with the probability of success in 15 consecutive years reaching 0.003%. So, as clear from the calculation, the probability that Miller would successfully outperform the S&P 500 15th year in a row is as low as 0.003% and therefore highly unsustainable
Although the...

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