Miller and Heebner: A Study in Contrasting Investment Styles

Both Bill Miller’s Legg Mason Value Trust [LMVTX] and Ken Heebner’s CGM Focus Fund [CGMFX] have great long-term track record that would be the envy of most equity fund managers. While Miller has underperformed recently, he is still sticking to his guns in his latest commentary and he continues to focus on long-term value and a low-turnover philosophy. By contrast, Heebner has the hot hand right now (see Fortune article here) and runs a high-turnover portfolio.

Using the techniques shown in the sidebar titled 'Reverse engineering a manager's macro exposures', I estimated both Miller and Heebner’s sector and other exposures.

Miller is Value and Heebner Growth

I pointed out before that Bill Miller started to tilt towards Value in a significant way back in December 2007 and his bias is unchanged. As shown by the chart below, Bill Miller’s portfolio remains tilted towards Value, while Heebner is tilted towards Growth.

Miller buying Financials and Heebner owns Resources

Much of their style differences are attributable to sector weightings as the Russell 1000 Value Index is significantly overweight Financials compared to the Russell 1000 Growth. Bill Miller main overweight is in the beaten down financial sector of the market, while Heebner is underweight the sector.

Heebner, on the other hand, is still devoted to the resources sector with overweight positions in Energy…

…and Materials:

Both hold high beta portfolios
When considering these two managers one might be tempted to conclude that they are polar opposites of each other, they do agree on some points. Both managers’ portfolios have above average market betas, indicating that they expect the market to rise. Moreover, they are both underweight the traditional defensive sectors of the market such as Health Care and Consumer Staples.

Investment thesis and risks
Not to put words into each manager’s mouth, it seems that Bill Miller believes that despite the financial stresses evident in the system, the large financial franchises remain intact and have real lasting value. Miller’s investment thesis depends on no other hidden landmines blowing up in the financial sector.

By contrast, Ken Heebner believes that the commodity cycle is not over and is betting big on their continued rise. His thesis depends on continued US Dollar weakness and, to a lesser extent, that a US slowdown will not significantly drag down world growth. So far, he has been right, as evidenced by the new recovery high seen in the Baltic Dry Index. However, Heebner’s portfolio is a high-turnover portfolio and Heebner has shown himself to be flexible to reverse himself should the situation change.

The views of both of these investors deserve our respect.

Comments

[mindmuse]

Interesting contrast of a couple of very influential investors. And very nice that you point out the higher beta bias of both.

Personally, I'm much more solidly of the belief of Heebner at this time.

Maybe financials are a great value now. And maybe venomous snake-handlers will escape unscathed. I just don't think there's any true transparency and predictability there. I'm overweight parts of the economy that to me are real, tangible, direct contributors to world needs today - and those aren't squirrelly financial derivatives, but demonstrable materials in demand to build economic infrastructure needs. I just don't see why one would think Miller rather than Heebner is more in step with current the current world situation.

[fxtrader07]

Miller and an "oustanding track record"? give me a break!
he hadn't one - even before the debacle of the past 12 months!
As the saying goes "only when the tide goes out you discover who was swimming naked". Go figure, Miller seems to be one of the naked guys out there.

[Cicero]

Over the last 10 years Miller had three great years (~48%, 44%, 27%), one good year (~12%), two blah years at ~6%, one awful year (losing ~19%), and three bad years (losing ~10%, and 7% twice). His five year average return is under 7%, and that doesn't cover his three worst years of the last 10. I assume that if you pull back further, say 20 years, that his record looks less dismal, but either way, his reputation seems to exceed his results.

[Foust]

Not defending Miller here, but if you look at rolling one-year excess returns relative to the S&P 500 on a monthly basis, Heebner (based on CGM Mutual, not Focus) has actually underperformed more than he has outperformed since inception. Miller has outperformed 70% of the time, beginning in 1995 and running through march 2008. Obviously, the magnitude of underperformance over the last two years has been staggering, but Heebner has gone through even worse periods (97-98) of underperformance that everyone is ignoring now because he has the hot hand. The real stud, over the short and long term, is Manu Daftary at QUAGX.

[E.D. Hart]

The real story is not value vs, growth: it is low inflation expectation environment vs, high inflation expectation environment. Heebner has the world macro view of rising inflation and Miller has the macro view that things will revert to the mean and we will come back to 80s, and 90s level inflation. Heebner has the right macro view as the world is currently undergoing a cataclysmic macro change that leaves Millers investing thesis behind. Heebner is also a value investor buying companies for less than their intrinsic value. He just has higher turnover.

[PelicanPete]

Heebner is flexible. He will change his strategies on a dime if he feels the market calls for it. Miller is not. Miller wants to dictate to the market how it should go and he stubbornly holds on too long to his losers.

[alphameister]

Never have accepted the distinction between growth and value. No characteristic is more important in my view of value than the ability to grow a company at a superior rate. The secret is to avoid overpaying for that growth. Heebner gets it. Paradoxically, flexibility is an important part of strength. Anyone expecting financials to resume those illusory past patterns of earnings growth are headed for big disappointments.