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INVESTING: Tough stock market brings big names back to Earth

September 8, 2008

Oh, how some of the mighty have fallen. A number of high-profile professional investors are struggling in this bear market. Perhaps surprisingly, many of these managers come from the "value investing" category, a style of investing that is supposed to outperform-or at least lose less

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markets.

In their heydays, when their mutual funds produced investment returns that soundly beat the market averages, these managers were often accorded star status in the financial press.

Here are a few of the recent laggards with their year-to-date returns in parentheses: Bill Miller, manager of Legg Mason Value Trust (-29 percent); David Dreman, manager of Dreman Large Cap Contrarian Value (-20 percent); Chris Davis, of Davis Funds, who took over management of the Clipper Fund in 2006 (-25 percent); Wally Weitz, manager of Weitz Value Fund (-16 percent); and Marty Whitman, Third Avenue Value (-16 percent). Even the reigning star mutual fund manager, Ken Heebner, manager of CGM Focus Fund, is taking hits this year as his concentrated holdings in commodity companies have been errant. He's down 13 percent.

The big names in value investing are suffering in large part because they hold financial companies-the very stocks that have taken a beating this year. Favorite holdings of these managers were the large banks like Citigroup (-35 percent), Bank of America (-21 percent), and the mortgage giants Fannie Mae (-81 percent) and Freddie Mac (-85 percent). In addition, some waded into the bond insurers, like Ambac Financial (-66 percent), thinking the stock had become too cheap only to see it sink much further.

The most stunning collapse has to be that of Miller. From 1991-2005, the Legg Mason mutual fund manager beat the market every year, and he was being hailed as one of the great investors of all time.

And, of course, his returns and the media attention that followed put the marketing machine in high gear, attracting billions of new money into the fund. However, investors who bought into the fund late in Miller's streak have not fared well and investment losses and investor withdrawals over the last 2-1/2 years have cut fund assets in half.

Miller's fund recently sustained big losses in Bear Stearns (rescued by JP Morgan) and Countrywide Financial (since acquired by Bank of America). As a result of the recent poor performance, the stellar long-term track record of the Legg Mason Value Trust has reverted to average.

People are asking whether Miller's fund ever should have been classified as a value fund. He certainly talked the value philosophy, and there was an element of contrarianism in some of his picks. But large holdings in Amazon.com, eBay, Yahoo!, and Google-not companies possessing undervalued characteristics-had many observers scratching their head.

Should investors have relied on the maxim to sell a mutual fund at peak hype, a tactic that often applies to individual stocks? History seems to suggest it. The Fidelity Magellan fund a decade or so ago was the diva of the mutual fund world, but over the last 10 years returns have been merely average (4.65 percent annually). A key factor seems to be that these funds become victims of their own success. As more money flows in, they become too big to manage effectively.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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