Bill Miller And Value Trust Case Brief
John Westby-Gibson
FIRE 461 – spring 2015
Assignment: Bill Miller and Value Trust Case Brief
Conventional academic theories suggest that in markets characterized by high competition, easy entry, and information efficiency, it would be extremely difficult to beat the market on a sustained basis. William H. (Bill) Miller III, a mutual fund manager of Baltimore, Maryland – based Legg Mason, seemed to defy such theories while managing Legg Mason’s $11.2 billion Value Trust. Miller and Value Trust outperformed the S&P 500 for 14 consecutive years, the longest success streak for any portfolio manager in the mutual-fund industry. Proponents of academic theory have explained this extraordinary success as luck, meanwhile others attribute the sustained performance to the skill and strategies of Bill Miller. The question that is posed in the conclusion of the case is whether or not, as of the middle of 2005, it was rational for an equity investor to buy shares in Value Trust. To begin to answer this question, one would need to develop a deeper understanding of the drivers of Value Trust’s performance and decide how much of it could be attributed to “celestial luck” or “mortal genius.”
One popular theory accepted by most financial economists is the efficient markets hypothesis (EMH) which says that capital markers incorporate all the relevant information into existing securities’ prices. If EMH were true, then arguably it would be impossible to beat the market with superior skill or intellect. However, even among academicians, it is believed that there are more significant factors within behavioral finance such as greed, fear, and panic which are instrumental in the setting of stock prices. Despite additional academic research and apparently predictable stock-price patterns which have exposed inconsistencies with the EMH, it remained the dominant paradigm in the academic community. An investor holding these theories to be, at least, mostly accurate would not rationally
FIRE 461 – spring 2015
Assignment: Bill Miller and Value Trust Case Brief
Conventional academic theories suggest that in markets characterized by high competition, easy entry, and information efficiency, it would be extremely difficult to beat the market on a sustained basis. William H. (Bill) Miller III, a mutual fund manager of Baltimore, Maryland – based Legg Mason, seemed to defy such theories while managing Legg Mason’s $11.2 billion Value Trust. Miller and Value Trust outperformed the S&P 500 for 14 consecutive years, the longest success streak for any portfolio manager in the mutual-fund industry. Proponents of academic theory have explained this extraordinary success as luck, meanwhile others attribute the sustained performance to the skill and strategies of Bill Miller. The question that is posed in the conclusion of the case is whether or not, as of the middle of 2005, it was rational for an equity investor to buy shares in Value Trust. To begin to answer this question, one would need to develop a deeper understanding of the drivers of Value Trust’s performance and decide how much of it could be attributed to “celestial luck” or “mortal genius.”
One popular theory accepted by most financial economists is the efficient markets hypothesis (EMH) which says that capital markers incorporate all the relevant information into existing securities’ prices. If EMH were true, then arguably it would be impossible to beat the market with superior skill or intellect. However, even among academicians, it is believed that there are more significant factors within behavioral finance such as greed, fear, and panic which are instrumental in the setting of stock prices. Despite additional academic research and apparently predictable stock-price patterns which have exposed inconsistencies with the EMH, it remained the dominant paradigm in the academic community. An investor holding these theories to be, at least, mostly accurate would not rationally