Bill Miller Value Trust Case Study

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In 2005, Value Trust, an $11.2 billion mutual fund managed by Bill Miller, had outperformed its benchmark index, the S&P 500, for a consecutive 14 years. This record marked the longest streak of success for any manager in the mutual fund industry, doubling the previous record. While Miller had been beaten in individual years, no manager has been as consistent. This has provoked many different questions in academia because it defies current conventional theories such as the Efficient Market Hypothesis (EMH). This case study will help try and explain Bill Miller’s phenomenal success while also pointing out some underlying reasoning.

Value Trust has surpassed the S&P 500 over the previous 14 years by an average total return of 3.67%, while also earning a 5 star rating by Morningstar. This is impressive by any standard because the mutual fund industry as a whole usually underperforms the market because of the inclusion of management fees. While Value Trust uses the S&P 500 as a benchmark, one should take caution when comparing the two. According to Morningstar, the S&P 500 is comprised of “large-cap-blend” funds. While Value Trust is comprised of nearly 50% large cap companies, Miller was not averse to taking large positions in growth companies. Value Trust has a beta against the S&P 500 of 1.31. This means that more volatility is expected in Value Trust, and therefore holds more risk. A better benchmark will be a comparable fund with similar objectives and risk, such as the Russell Indices. In other words, as the fund’s style changes, so should the benchmark.

In 1999, the fund’s annual total return was 26.71% with a style of large cap growth, the 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...
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