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Thursday, July 7, 2011

Legg Mason 10 Year Results

Larry Swedroe presents 10 year results for Legg Mason funds in a post on Arianna Capital Management entitled "Legg-Mason:  Does it Add Value?" The answer he finds is no. Compared to similar Dimensional Fund Advisor (DFA) passively managed funds, the Legg funds underperform in 6 out of 6 asset class comparisons. Equally weighted by asset class, the underperformance averages to 2.4%.

Over 10 years, 2.4% takes a chunk out of the bottom line.  DIY Investor looked at  the impact of just management fees over the long term in "What is the Cost of Investment Management?"

Swedroe quotes his co-author (The Only Guide You'll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments (Bloomberg)) Kevin Grogan as saying, "If this were a fight, it would be stopped."

Legg's Chief Investment Officer, Bill Miller, is a brilliant, experienced investment manager and knows stocks inside and out. And yet he produces the results presented by Swedroe. The question that Swedroe asks is: how can they still have $700 million under management?  He offers a number of explanations ranging from failure to admit their error to hope for a turn around. Wes Wellington of DFA argues that Bill Millers intellect carries the day. It is hard to believe that someone as smart as Bill Miler can't beat a "...simple market index".

I would  offer a couple more reasons. First, many investors have never seen the comparative results as shown by Swedroe. Legg is obviously not out there touting the fact of their underperformance. Secondly, many investors are offered Legg Funds in 401(k) plans where they may be the the least poor of the available choices.

As a final point to ponder: if you have an advisor trying to beat the market do you think he or she is smarter than Bill Miller?


  1. No question Bill Miller is a very smart guy, but that doesn't mean he can outperform the markets with an expense ratio hovering close to 2% and a taste for financial status and high-risk turnaround plays. When the market gods favor his type of stocks, he will look like a genius; when they don't, he will look like a fool. In the 80's and 90's he was a genius; in the '00s a fool. He has also stock his shareholders with some pretty hefty capital gains over the years.

  2. re: The Grouch Well put. On the human side I've met several people whose retirement portfolios have been wrecked by putting most of their assets with Miller at the wrong time.

  3. I invested with Miller for a while myself, and since he works primarily out of Baltimore have read numerous articles on him. I was lucky enough to get out ahead in the late 1990's. I had trouble handling the volatility. It looks like Legg Mason has rebranded and renamed a lot of their funds, usually not a sign of market-beating performance.

  4. Your final question is especially poignant Robert. I have been asked by the Globe and Mail to write an article explaining why I indexed my portfolio. While drafting the piece yesterday, I brought up Miller, and suggested that there's no way that I'm smarter than him. My individual stock picks beat the performance of his fund, even when he was beating the S&P 500, but that doesn't mean anything. Time is the friend of the great investment strategy, and the enemy of the mediocre (and expensive) one. Relative to Miller's intellect, I would be mediocre. And time would have eventually revealed that. Indexing a portfolio is far wiser than actively managing one.

  5. Frankly, I'll always go with the low-fee passive account. Fees take a huge chunk out of any investment, and no matter how "smart" someone is, they'll likely never beat the market in the long-term. Some people have good years -- heck, some even have good decades! -- but in the long run, no one outsmarts the index.

  6. re: Andrew Actually I believe that your stocks outperforming his says something because of the fact that you were at a , I believe, huge, disadvantage in that Miller can pick up the phone and talk to Gates, Buffett etc. It's like you telling me you beat Usain Bolt in a race I would be impressed. If you said you had street shoes on I would really be impressed!
    Just like in life, I believe there are different kinds of intelligence in the investment world (wrapped up no doubt in ego). There is intelligence in being able to recall all kinds of facts and reciting seemingly sophisticated industry overviews and then there is the intelligence that gets you to see the big picture and why trying to outsmart the rest of the world, especially after shaving off 2%, is futile, I'm really impressed that The Grouch got out even when Miller was on his hot streak!

  7. re: Paula Low-fee passive is definitely the way to go. I would add that a really bad time to look at active managers is after they have had a few good years.
    Thanks for stopping by.

  8. Bogle got this right. Costs matter as much as investment returns. LM is not known for low ERs.

  9. re: MoneyCone Costs are especially important over periods as long as 10 years...good observation.

  10. I could beat bolt if he was running, and I was riding a bike. Over 100 meters, he would beat me. But over 200 meters, I would catch him, even from a standing start (I was once invited to the Olympic trials for bicycle road racing)

    Who's the better specimen, physically? Bolt. But I would still get him.

    The advantage I would have is similar to the statistical advantage of beating Miller with indexes. I don't have to be smarter. I just have to use a more efficient vehicle!

  11. Hey...I bet we could sell some Millionaire Teacher books if we could get up a race between you and Usain -:)