The Investment Scientist

The Perils of Chasing a ‘Hot’ Fund Manager

Posted on: December 8, 2011

Bill Miller's Legg Mason Value Trust

On November 17, Bill Miller announced that he would step down as manager of Legg Mason Capital Management Value Trust (LMVTX).

From 1991 to 2005, under Miller’s stewardship the fund outperformed the S&P 500 index for an astounding 15 straight years. Since then, the fund has underperformed the index in all but one year, and by a significant margin.

So what’s the problem? The problem is many investors bought the fund only after Miller had become a mutual fund rock star, just in time for his hot streak to end. They missed much of his upward ride, but were fully onboard when the fund went down the toilet. See the table below.

1991 to 2005 annualized After 2005 annualized
LMVTX fund average return 16.44% -7.4%
Average LMVTX investor return 11.34% -8.31%
S&P 500 index average return 11.51% 2.52%

Judging by how his investors did relative to the S&P 500, I could argue that Miller, a legendary fund manager and poster child of the mutual fund industry, destroyed wealth for his investors, while charging them a 1.6% annual fee for the privilege.

Now the financial press is trying to convince you that all the hot managers are in hedge funds. I am convinced! Since the unregulated hedge fund industry is where these hot managers can charge you 2/20 (2% annual fees and 20% profit sharing, if any) to destroy your wealth.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

4 Responses to "The Perils of Chasing a ‘Hot’ Fund Manager"

I have an investment manager and I leave him alone. I also have a hobby online account that I use to build cash for vacations and other stuff. I have 2 IRAs one is institutionally manage, TIAA-Cref, and the other I manage.

I was doing really good this year until I read a hot trader’s online tip sheet one time too many. It sounded so good…but I was left holding when the bubble burst. My take, a lot of those guys are pumping the system. When enough amateurs are in, they get out in a big way.

Meanwhile, my ideas have worked out well. I’ve covered the lossed and made a few bucks. I still leave the washed out shares on the board, not vainly hoping they will return someday, rather as reminder that my ideas are as good, maybe better, than the hot shot advisor that sends emails.

My hobby account has paid for domestic travel and great vacations and my personally manage IRA is up too. Next year I’ll just stick with my obsevations of trends and try to get in the way!

Ron, you are doing a lot better than most investors out there.

Michael, I just love to watch people, I always have. Three years ago we spent the Holidays in Phoenix. My good friend is a retired policeman and loves to shoot and collect guns. One of the places we went was Cabela’s gun room. There were 50-60 people waiting in line to look at and purchase guns at the sales counter.

I had never seen a que like this for any manufactured product. I understand Apple has sales events similar to this, but I had never seen it.

That’s just information. But, I have found that nothing drives profits for a business like sales. You can streamline, automate, reduce staffing…all of the business model tweaking. Still, without sales (top line growth) the business stagnates and weakens.

When I came home I could have let that information slip into oblivion. Or, I could look for a gun manufacturer poised to take advantage of this budding trend driven some by fear of the new administration and some by concealed carry laws changing. I bought a middle aged American gun manufacturer with a new management team, Sturm Ruger, RGR @ about $11. Today they are at about $34.

When the auto industry collapsed I bought F @ 1.91. I think the companies involved with the gov’t will have to divert money from R&D and other areas to service gov’t obligations while Ford will continue to increase market share.

My financial planner uses the “disciplined approach”. I use more of a trend spotting approach rooted in what people are doing and where’s the best spot to take advantage. What’s best? Who knows. At the end of my run, someone will have to make an accounting then we’ll see. Right now we’re having a contest to discover which works best. And, it’s another way to diversify.

The disciplined rules say unless you are wealthy individual stocks are not the best idea. What I find is they really put a spear point on your portfolio. The reality is that spear piont can either point up….or down.

Most people want an advisor to take care of their money. We have been conditioned to take and give it to our bankers since early childhood. Millions of people have saved trillions of dollars through IRAs and 401ks, with automated payroll deductions. All of this is a method for someone else to take care of your money for you. It’s great if you have someone you know and trust.

For the most part, it’s just an extension of the take your money and give it to the banker. Had people known how much of their money was involved in debt swaps, invested in securitized mortgages, foreign debt, and such…had they known, that the bubble may have never reached the point it did. Or, they would have invested somewhere else and avoided the tragedy.


Your approach remind me of Peter Lynch and what he advocated. It makes a lot of sense.

For ordinary folks, it’s hard to have an information advantage over Wall Street. That’s the reason why most financial advisors advice the disciplined approach.

You are very observant, and indeed you have uncovered information that is not yet in the market.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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