What famed investorGerald Tsai was to the "go-go" 1960s and legendary fund manager Peter Lynch was to the 1980s, Bill Miller has been to the 1990s and 2000s. The chairman and chief investment officer at Legg Mason ( LM ) is widely considered the benchmark to which all other active fund managers are compared.
His acclaim is widely held: Money Magazine named him "The Greatest Money Manager of the 1990's" and SmartMoney called him one of their "Power 30." He was selected as Morningstar's Fund Manager of the Year five different times, also being named "Fund Manager of the Decade" for the 1990s. Barron's chose him for their prestigious "All-Century Investment Team" and his leadership won Standard & Poor's/Business Week's "Excellence in Fund Management Award" for 4 of the last 9 years.
But the reality is, Miller's performance at his flagship Legg Mason Value Trust ( LMVTX ) over the past decade has been rather like the stock market in general: Weak. Even though the fund has doubled in value over the past two years, if you had invested in it on Jan. 2, 1998 (and didn't reinvest dividends), the average annual return was -0.25% through 2011. With dividends reinvested, the average annual return jumps to 3.11%, for a total return of 50.85%. To compare, simply holding cash would have earned you 48.31%, meaning that even with a massive comeback, the fund's 13-year record has it only barely beating an investment in T-bills over the same period.
Ultimately, the point isn't about Miller â?? many other stock funds share similar records â?? only that even the best investment managers can't make money when they're forced to own an underperforming investment. Those who were betting on Miller's fund back in 1998 were to an even greater extent simply betting on stocks as an asset class.
Back then, stocks meant "growth" just the same way commodities mean "growth" today. In five years, an entirely different asset class will likely have the world's focus.
The lesson to heed is we're not stock investors or bond investors or commodity investors. Whether we admit it or not, each of us is an absolute-return investor with one goal only: making money over time.
That's not achieved by always being right on the market , but by maintaining a disciplined focus so that you're always profitable. And as we age, the importance of an absolute return gets even more important because our risk tolerance shrinks.
Even at relatively low levels of return, compound interest builds vast wealth over time, providing the absence of any return-wrecking drawdown. Stars like Bill Miller are acclaimed pickers, but longer-term returns demonstrate whether it's the manager or simply an "all-in" approach that has built up a portfolio.
Here's my prediction : Just as growth stock investing dominated the 1990s and commodities/emerging markets ruled the 2000s, you will see "absolute return" investing, strategies with a hedge-fund-like focus on consistent returns and controlled drawdowns across every market environment become the preferred investment approach of the brave new environment in which we now operate.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC .
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