The fund world's battered heavyweight champ is betting that financial stocks, tech stocks and decked Net book peddler
will help him keep his belt this year.
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After one of his worst years in recent memory,
Bill Miller is still the only fund manager to beat the
in each of the last 10 years. The Baltimore-based shop filed year-end shareholder reports for his large-cap
Value Trust fund with regulators on Wednesday. The upshot: Miller believes the
attempts to goose the economy will send an odd couple north in 2001, sleepy finanicials and life-of-the-party tech stocks. And according to a similar report for the mid-cap
Special Investment fund, of which Miller handed the reins to co-manager Lisa Rapuano at year-end, in the fourth quarter the pair rebuilt the position in Amazon.com's sagging stock they'd dumped in the second quarter.
Yes, shareholder reports are dated, dry and drab. And Miller's Value Trust fund lost 7.1% last year, trailing most value funds and narrowly edging out the S&P 500. But his unique approach to value investing and his S&P-beating streak have earned comparisons with Andy Warhol look-alike and
guru turned pitch man
. He's also been right a lot more than he's been wrong, so let's hear him out, shall we?
Miller, who worked as a military intelligence officer and pursued a Ph.D. in philosophy before running money, isn't a traditional value manager. Most value pros, essentially Wall Street's bargain hunters, stick to cheap stocks with steady if unspectacular earnings growth in sectors like financials. He, on the other hand, chides his colleagues for their "unwillingness to try to analyze" pricier and faster-growing fare in the tech sector in his letter to Value Trust shareholders. He's publicly beaten the drum for pricey, mercurial types like Net media behemoth
AOL Time Warner
and PC maker
, all of which were in the Value Trust fund at the end of last year and all of which lost more than half their value in 2000.
Miller sees a Fed-driven sea change between last year and this one, as the Fed cuts rates to goose the economy.
"As a general rule, when the Federal Reserve is trying to encourage growth by lowering rates, it's time to play offense in the market. When they are trying to slow growth by raising rates, emphasizing defenses is the right strategy. Last year, defensive, lower-risk names were the winners: REITs, utilities, drugs, health care" and consumer cyclicals, he writes. "This year we believe that most of last year's winners should be avoided, with the exception of financials."
And so far this year his crystal ball is looking pretty accurate. Stocks like
that grew into big weightings by the end of last year are in the red since Jan. 1.
He thinks tech stocks, most of which were torched last year as the
fell nearly 40%, will come along for the ride.
"Technology and financial stocks have moved in opposite directions over the past 1 1/2 years since the Fed started
raising rates in the summer of 1999. We believe that divergence will end this year," he writes to Value Trust shareholders. "The 50 basis point cut in short-term rates on Jan. 3 was the first time the Fed has moved
rates between meetings since the global financial panic in the fall of 1998. From that rate cut until the tightening began, both groups outperformed. We think they will again."
Falling rates typically help financial stocks like banks, insurers and brokerages because, among other things, they can spur loan growth, decrease the interest paid on deposits and boost the stock market. In the report, he says his favorite financials are savings and loan bank
and mortgage insurer
As for tech, he feels good about the bruised PC shops he's holding such as Gateway,
, thinking they're positioned for a strong rebound if economic growth and demand for their products picks up.
"Technology shares, especially those whose current valuations reflect great skepticism about growth, such as PC makers, should also do well as the market begins to discount the resumptions of
economic growth in the second half of this year and on into 2002," he writes, later cautioning that today's priciest tech stocks are probably still in for a rough ride.
Miller put his investors' money where his mouth is. Last year he took a beating for having a heavier tech taste than other value managers, and in the fourth quarter he didn't cut out any tech stocks. In fact, he didn't add any new names and only liquidated one position, mortgage shop
In the fourth quarter he raised the fund's share balances in Dell, Gateway and IBM. He did the same with Amazon.com, a controversial Miller fave. During the fourth quarter, the Value Trust fund's Amazon.com share balance rose from 12 million to 19.2 million according to the fund's shareholder reports. Because the stock fell more than 40% in the fourth quarter, its weighting in the fund actually dropped from 3.5% to 2.5% in the fourth quarter, despite buying more shares.
The Special Investment fund bought 1.5 million Amazon shares in the fourth quarter, which added up to a 1% weighting in the fund at year-end, according to its shareholder report. Miller and Rapuano dumped the stock in last year's second quarter, choosing a more defensive position in the company's convertible bonds. The bonds, which were nearly 2% of the fund at year-end, fell 44% in the fourth quarter, according to the fund's report.
With the unprofitable online bookseller's stock more than 80% off its 52-week high, most observers still see it as a growth stock given its speculative nature. In her letter to Special Investment fund shareholders, Rapuano lays out her and Miller's case for the company.
"We already owned
Amazon.com's convertible bonds, and when the common stock's price plummeted into the 20s (and then the teens,) we believed the risk/reward proposition of the stock was better than the bonds," she writes. "Amazon is a highly controversial company and stock, and the level of fear and misinformation surrounding it rivals anything we have ever seen. We believe we have a solid understanding of their business model and potential profitability, and that the market's negative psychology has driven the stock to a valuation that is very compelling."
If few value purists don't agree with this move, at least they'll probably agree that it's a contrarian play. About half of the growth fund managers who owned the once hot-stock cut their losses last year. For the record, Miller and Rapuano, who has worked with Miller for some six years, have a solid record with the Special Investment fund, which beats its average peer and the S&P 500 over the last 10 years.
Fund Junkie runs every Monday, Wednesday and Friday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.