Sam Peters expects today to be business as usual — except, of course, that it will be the first day that he manages the $2.5 billion Legg Mason Capital Management Value Trust [LMVTX] without the legendary Bill Miller at his side.
Indeed, today marks Mr. Miller's last day at the helm of a fund with which he has been synonymous for decades, and which beat the S&P 500 for 15 straight years, from 1991 through 2006.
Although there is no easy way to pass such a golden baton, Mr. Peters, chief investment officer at Legg Mason Inc. and a co-manager of the Value Trust since 2010, said that the change couldn't have come at a better time.
“I'd be a hell of a lot more nervous taking over after the streak,” he said. “Today there's a skeptical backdrop that I love and think I can take advantage of. Everyone wants fixed income right now. No one wants the area we're in. That's going to give us some tail winds.”
In addition to the demand for fixed income, Mr. Peters is aware that he must compete with the growing appetite for passive investments, especially in the large-cap-equity arena.
“How many people want active U.S. management right now? Not a lot,” Mr. Peters said.
Active large-cap U.S. funds experienced more than $75 billion of outflows over the 12-month period ended March 31, according to Morningstar Inc. Passive large-cap exchange-traded funds, meanwhile, posted more than $43 billion in inflows.
Since 2006, when Value Trust's streak ended, the struggles of Mr. Miller and other star managers, such as Bruce Berkowitz, helped push investors toward passive investments.
Between January 2006 and October 2011, for example, Value Trust lost 36%, highlighted by a disastrous 2008 that saw the fund lose more than half its value. The S&P 500, meanwhile, gained more than 13%.
The fund has $2.5 billion in assets, down from a peak of $12.5 billion in 1999, according to Lipper Inc.
The turning point came when Mr. Miller took a large position in Google Inc., possibly the quintessential growth stock, which went against the grain of the mutual fund's value-oriented nature, said Lee Munson, chief investment officer at Portfolio LLC.
“That was when the show was over,” Mr. Munson said.
Bridget Hughes, an analyst at Morningstar, wrote in a recent report on the fund that in addition to shifting to more of a growth style, Mr. Miller also had a tendency to double or triple his bets while they were on the way down, making mistakes “deadly.”
Mr. Peters said that his approach will be value-driven and that one key difference between his management style and Mr. Miller's is that he focuses more on portfolio construction.
“If there was a cheap opportunity in the market, Bill would add it regardless,” he said. “I think a little more about how it will fit into a concentrated portfolio.”
Observers are seeing investors warm to value-driven strategies, mainly thanks to their connection to dividend-paying stocks.
That could lead to increased interest in the fund, said Matthew Lemieux, research analyst at Lipper.
“If we see some stability in the equity markets, value could be where people go,” he said.
But Mr. Peters is leery of chasing dividends for the sake of attracting investors, because a lot of high-dividend-paying stocks are trading at historically expensive prices.
“It's the yield chase,” he said.
Mr. Peters is particularly avoiding stocks that pay out more than 70% of their free cash flow in dividends.
Such companies, he said, tend to be the high-dividend payers that are attracting the most attention.
Instead, Mr. Peters is focused on companies with lower payout ratios that have room to increase dividends.
Because those stocks have low yields, the potential for growth in their dividends is undervalued, he said.
MetLife Inc. (MET) is an example of a company that Mr. Peters likes. It has a dividend of 2.1%, but he thinks that the yield could compound up to 30% over the next three years.
JPMorgan Chase & Co. (JPM) is another company with the potential to increase its dividend to the 10%-to-20% range over the next few years, Mr. Peters said.
This year, the strategy has paid off. Through April 26, the fund was up 14%, 2 percentage points better than the S&P 500.
“If we focus on what we're good at, people will come back,” Mr. Peters said.
jkephart@investmentnews.com
