There’s not that many long-running relationships on Wall Street to begin with, and now there’s one less. Last week, Bill Miller, the Legg Mason manager made famous by beating the S&P 500 from 1991 to 2005, is leaving the Baltimore-based money firm after 35 years. The breakup is somewhat anticlimactic, of course, since Miller’s good fund, formerly known as the Legg Mason Capital Management Value Trust, and his winning ways, probably known as good luck, both left the company years ago.
In the last decade, an average of just 37% of large-cap mutual funds outperformed their benchmark in any given year
The Value Trust, which was taken over by ClearBridge in 2012, outperformed the S&P 500 for 15 straight years, an outsized streak of good fortune unlikely to ever be broken. Miller’s statistically improbable run was made in large part by winning then-contrarian bets on stocks like Amazon, Google, and eBay. Only the gamblers weren’t surprised when his wagers on losers like Bear Stearns and American International Group during the financial crisis in 2008 proved him every bit as wrong as he had been right.
Only 437 of 2053 actively managed large-cap funds have beaten the S&P 500 year to date
Today, what is now the ClearBridge Value fund is a fraction of its former self, very much like the actively-managed fund industry on the whole. Fact is, hundreds of billions of dollars – more than $300 billion in the last twelve months – have been pulled from active funds.
The underperformance of actively managed funds has been wider than the cost of the funds’ expense ratios
Why? Because investors have lost confidence in “star” managers, and they’re placing their money with cheaper funds that mimic stock and bond indexes instead. Bill Miller’s streak will likely stand forever, but the days of the old-time stock picker may have come and gone.
What the markets have been doing…
Stocks, as is their preference of late, were mixed across the period but higher at the end. Each of the big benchmarks – the Dow, the S&P 500, and the NASDAQ – reached all-highs during the two-week stretch before falling back before the bell rang. To quote one market watcher: “Nobody seems to be particularly optimistic about much of anything and yet the stock market in the U.S. seems to do nothing but go up.”
Surprisingly enough, the price of oil and its effect on energy stocks actually played a big part in the period’s activities. After a report from Reuters on Thursday that Saudi Arabia was willing to cooperate with other producers to stabilize prices, short sellers ran for cover and oil prices rose 4%, their biggest daily gain in a month. Reportedly, market participants expect oil prices to settle into a new long-term average in the $40 to $50 per barrel range.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Treasury yields, meanwhile, fell to their lowest level since the start of the month on Friday’s report of flat retail sales along with the largest drop in producer prices in nearly a year. Investment-grade corporates also traded well, with robust demand for new deals across sectors and credit qualities. High yield bonds, especially new deals, generated healthy interest due in part to favorable corporate earnings reports. Municipals were mostly unchanged as the sector paid back some of the outperformance versus government issues.
|Fixed Income||Yield||Two-Week Yield Change|
|Bloomberg Corporate Bond Index||2.78%||+0.02%|
|30-Year Municipal Bonds||2.17%||-(0.02)%|
Yes, the heat is on…
Quote of the Week…
“It’s surreal. It’s clear that central banks are dominating markets. There’s a race to the bottom.”
- Gregory Peters, senior investment officer at Prudential Fixed Income, on negative yielding bonds
Number of the Week…
The amount Goldman Sachs has agreed to pay to settle allegations it misused confidential regulatory materials leaked from the Federal Reserve
What Fund Architects has been doing…
So far, August has been relatively quiet and mostly positive for the month. Second quarter earnings have been positive overall – growth is slow but that comes as no real surprise.
For our part, the moves we made to start the month have performed well, particularly the energy infrastructure MLP. The stock, which currently produces nearly a 12% dividend yield, is up around 3% so since we purchased it. It’s a relatively small weighting but the returns are still nice. The iShares Global Healthcare ETF we added, somewhat defensively, is down slightly. On the bond side, both the High-Yield Corporates and Convertibles we re-purchased have done quite well for the Portfolios.
At this point in the month, the Technology sector is sticking its head above the crowd. It’s not unlikely we’ll be taking a position at the beginning of next month, most likely with assets from our Healthcare and Treasury positions. Stay tuned.
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.