Legg Mason US Equity Fund Accumulation Units

It has been a painful ride for many investors in the Legg Mason US Equity Fund, managed by Bill Miller, over the last few years. Mr Miller is the man who famously beat the S&P 500 Index consecutively for 15 years from 1990 through 2005, but this fund has now gone from being one of the best performers to one of the worst.

So what went wrong? To re-cap, Bill Miller has not been a fan of energy stocks and avoiding these has hurt the fund as the sector has performed well. Additionally, the team underestimated the extent to which the fund’s financial holdings would come under severe pressure on the back of the credit crunch. The fund currently has around 19% exposure to the financials sector and this has proven detrimental over the last year.

A painful example of a financial stock held in the fund is Freddie Mac, the US government-backed financier of mortgages. The company has reported one piece of bad news after another this year – the most recent being a $820 million loss and a sharp cut in their dividend which sent its shares plunging further, clearly not helping the fund.

The fund’s exposure to housebuilders has also hindered performance. Bill Miller and his team bought into these after they dipped in late 2005, but the stocks have fallen further in the housing market slowdown.

The US market has seen its fair share of doom and gloom and investors have experienced testing times. What has to be said is Bill Miller remains true to his philosophy adopting his traditional ‘value’ style of investing. This basically employs a long term approach investing in companies that are on low valuations and where there is potential for a significant rise in the share price. He is convinced that financial stocks are undervalued and energy companies are too pricey at present. This style means there will be periods of underperformance and investors may require a great deal of patience before the market notices any undervaluation in certain sectors and finally re-rates them.

Once we see a sustainable recovery in the financials sector, we expect this fund to show a marked improvement in performance. It has of course been a disappointing period for the fund but if you believe that value style investing will outperform over the longer term as it has done so historically, although past performance is not a guide to the future, then Bill Miller may just have a chance of turning around its performance if his style comes back in favour.

While we have removed the Legg Mason US Equity Fund from the Wealth 150 list of favoured funds in each sector, we believe investors should continue to hold and adopt a long term horizon.