Aug

9

 It would be nice if you could just put your money in mutual funds managed by established, well-regarded front-men and outperform the market.

I was recalling a discussion on the spec-list literally 10 years ago in which a Lister advised that if you want to know when/what to buy, then just take a look at what Mason Hawkins, Bill Miller, Marty Whitman (all of whom manage mutual funds available to the retail investor), and a few other names (all of whom managed hedge funds unavailable to the retail investor) were all doing and imitate them.

At that time, Hawkins, Miller, and Whitman all had great reputations. Furthermore, if you were to read an interview with them, they could make very compelling cases for the stocks that they owned.

What happened to their mutual funds over the next ten years?

I think it's important to separate their "alpha" returns from their "beta" returns, and this is something that can be done very easily at Morningstar.com, where they conveniently provide, for the past 3, 5, 10, and 15 years, each mutual fund's alpha and beta.

Here's a table.

columns:

 Marquee investor / mutual fund ticker / 10-year alpha vs S&P / 10-year alpha of fund category vs S&P / fund category

Mason Hawkins / llpfx / -1.77% / -0.36% / large blend

Bill Miller / lmvtx / -6.16% / -0.36% / large blend

Marty Whitman / tavfx / 0.47% / 1.06% / MSCI EAFE

So let's take a look. Mason Hawkins' fund LLPFX's alpha was -1.77%. That means that given his beta with the S&P 500, his fund returned -1.77% less than it "should" have. Now his fund is in the "large blend" category. We should consider whether his negative alpha came about just because he was in "large blend" stocks, and they just had a bad 10-years. In fact it turns out that "large blend" mutual funds had an alpha of -0.36%. So that could explain some of Hawkins' negative alpha, but not all. He under-performed.

Similarly Bill Miller's fund LMVTX had an alpha of -6.16%, not good by any measure. His fund is also in the "large blend" category, so that only explains -0.36% of his large negative alpha.

Marty Whitman's fund TAVFX had a positive alpha of +0.47% vs the S&P. But he's in the MSCI EAFE (basically "international / developed world") category, which itself had a positive alpha of +1.06%. Foreign stocks happened to beat US stocks, and that more than explains Whitman's positive alpha to the S&P.

So all three of the marquee mutual fund managers mentioned 10-years ago by a Lister (who himself is very knowledgeable and experienced) failed to add any risk-adjusted extra goodies, and in fact they took something away from what you should have gotten based on the market risk that you took with them.

I've always enjoyed reading intelligent analyses of individual stocks, but that's probably something I should do just for fun, not with any expectation that it will make money.

Gary Rogan writes:

Bill is a gambler who bets huge on things he can't possibly know with any degree of certainty. He is very smart so usually his bets pay off. He is still a wild gambler who given enough time will blow up, or at least lose a lot of capital.

Buying a lot of inexpensive stocks with stable fundamentals when they are down, either relative to their historical valuations or to typical long term average ratios of P/E or P/S, in multiple areas, is still gambling like everything else, but a much more stable form of it that's not likely to blow up unless the market blows up and you can still beat the market.


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