Bill Miller is back with a vengeance, thrashing the market again though he's taking some pretty big risks in doing so.
The legendary portfolio manager's Miller Opportunity Trust mutual fund is up a gaudy 13.9 percent this year, easily beating the 's return of 7.8 percent including dividends, according to Morningstar. That puts the $1.4 billion security in the rating firm's top 1 percentile in its category.
The big play: Options on Apple that gave the fund the chance to buy and turn a profit if the stock passed $100 a share and were purchased when the shares were just short of that target, or "strike" as it is known. Of course, the stock was trading around $153 a share Wednesday afternoon and is up 32 percent in 2017 alone, making the options play a strong move.
Miller is best known for his record-setting feat of topping the market benchmark for 15 years straight between 1991 and 2005. By contrast, only about 1 in 5 managers surpassed index returns just in 2016.
However, in the ensuing years his record was spotty, particularly through the financial crisis and again in 2010-11. He has since ended his long-term relationship with Legg Mason and gone out on his own with the Opportunity fund.
The recent performance of the fund shows that anyone who thought Miller's best days were behind him were mistaken, though analysts worry that the fund has little protection should the market turn south.
"Obviously we went through a period of challenging performance. That's typical for the investment management business," Samantha McLemore, the fund's portfolio manager, said in a phone interview. "Now we're back in a period of strong performance. Certainly, some people have said Bill is back and he's doing great, given the changes in our organization over the past decade."
As the financial crisis began to unfold, Miller's $20 billion Legg Mason Value Trust fund stumbled due to overexposure to bank stocks and some illiquid investments, and investors began to pile out. The fund, now called ClearBridge Value and no longer run by Miller, is down to $2.4 billion and has returned just 4.3 percent this year, below the market gain.
The secret sauce for Miller isn't much of a secret at all: He's still a value investor, looking for underpriced stocks and piling up on them. Even if that stock is as widely held and commonly known as Apple.
"The philosophy hasn't changed. We've always been long-term value investors," McLemore said. "We've actually owned Apple for many years, cut it back and added to it at different times. ... We've been big believers in the power of that brand."
As for the Miller brand itself, some luster certainly came off in the years of underperformance and during an increasingly rocky relationship with Legg Mason. The divorce between the two became final in late February of this year, though he stopped managing the Value fund in 2011.
Since then, he has quietly built a portfolio that is highly concentrated in U.S. stocks — a 94.3 percent weighting, to be specific, according to Morningstar.
That, too, is not new. Miller always has preferred domestic companies, and he holds that view even at a time when the big sexy play of 2017 has been to rebalance toward European and global stocks. International funds have pulled in $45.8 billion of investor cash this year and European funds have seen $7.7 billion of inflows, compared with $18.8 billion for the much larger U.S. market.
Miller isn't looking to chase returns overseas.
"We've always been U.S.-centric. That's where we think we have the best competitive advantage, that's the market we know the most," McLemore said. "We're not trying to migrate the portfolio around geographically."
That approach may have made his investors money but it hasn't exactly endeared him to analysts. The fund's full-throated commitment to U.S. stocks with little to hedge in the case of a market downturn inspires worries that more underperformance along the lines of what happened around the financial crisis years is always a danger.
"Our research tries to spot investment strategies that can outperform on a risk-adjusted basis over a full market cycle, and not just through periods when the market is up a lot," said Morningstar analyst Andrew Daniels. "Due to the significant risks that are taken here ... we don't have confidence in the ability to outperform" over a longer term.
Indeed, over the past three years the fund has annual returns of just 7.9 percent, lagging the S&P 500 and around the middle of the pack compared with its peers. However, the five-year performance is stellar at 19.5 percent compared with the 14.5 percent for the large-cap benchmark.
Still, Morningstar gives the fund just two stars, which equates to "neutral."
(A note: Daniels said Miller's fund looks more like a mid-cap. So compared with the three-year performance of the Russell 2000 at 7.9 percent, the fund is about equal to the market, and the five-year run easily dwarfs the index's 12 percent.)
"With the market up pretty much the last several years, it's not surprising that Bill Miller has done well," Daniels said.
A little hindsight also may be helping Miller.
McLemore said the firm brought in outside help to analyze the years of underperformance and found a few trends that pulled down returns: the focus on investments that could not easily be sold, and the tendency to hang onto losing positions too long.
Though the fund likes to hold for three to five years, adherence to any strategy can hurt a fund. However, Miller continues to be a believer in embattled pharmaceutical company Valeant, which has tumbled 54 percent over the past year and comprises 3 percent of weighting in the fund.
McLemore, however, believes the fund is positioned well for the future.
"It's sort of a back-to-basics approach. We're all having a good time doing it," she said. "One thing I admire so much about Bill is an adherence to stay true to your knitting even after significant periods of underperformance. I think he did that."