Bill Miller Value Trust Case Study Essay Example

relative performance to that index was 38.92%, which he did not beat.

Similarly in 2000, Value Trust realized a total return of -7.14% with a style of large cap value, while the performance of that index was 9.7%. A good performance of a fund is one that provides attractive reward-to-volatility trade-off and to consistently outperform appropriate benchmarks, which Miller did not fully accomplish.

Before discussing Miller’s strategy it is important to note the current theories of the market. One theory that is widely accepted by financial scholars is the Efficient Market Hypothesis, which is the notion that capital markets incorporates all relevant information into existing securities’ prices. EMH has three forms: strong, semi-strong, and weak efficiency. This theory lies in the assumption that technical analysis is useless since it depends on historic data. In our opinion, EMH does not fully explain the market and has proven faulty over the years, such as: the Great Depression, tech bubble, and our latest recession. We believe there are other variables that EMH fails to incorporate, such as: Behavioral and Psychological Finance, which Miller does take into account.

While Miller may have been modest when saying the streak consisted of 95% luck, as Stephen Jay Gould stated, “long streaks are extraordinary luck imposed on great skill.” Miller has a certain methodology when selecting companies, which could help explain his consistency. Miller believed in buying low-price, high intrinsic-value stocks, while taking a long-term view on the market. Miller’s approach was research-intensive and highly concentrated with nearly 50% of Value Trust’s assets invested in just 10 large cap companies.

One problem that our group is concerned with, that Morningstar points out, is the size

of the fund and the amount of assets it contains. The typical actively managed domestic stock mutual fund with atleast $35 billion in assets holds 265 stock and stashed 22% of assets in its top 10 holdings, while Value Trust holds only 36 stocks and squeezed 50% of assets into its top 10 holdings. This translates into a higher standard deviation and will hold more business risk. As Value Trust grows, Miller will not be able to maintain this same strategy, because he owns too much of them already.

The fund’s expense ratio of 1.7% coupled with sales fees of .7% add to the possible difficulties of the fund. Because of these factors, it would not be wise to invest in Value Trust in 2005. Even though his performance was very impressive, the odds of Miller continuing such a streak are not likely.