Comeback kid? Bill Miller vaults to top of fund heap

Equities that fell furthest last year are surging the most in a decade, reversing the fortunes of mutual funds and signaling that developed countries, banks and Asian exporters will extend the global rally. The MSCI All-Country World Index's 100 worst-performing stocks of 2010 rose 5.3% as a group last month, the top January gain since 2001, while last year's best performers fell 2.6%, according to data compiled by Bloomberg. Investors are moving into developed nations from emerging markets, buying European banks and selling raw-materials shares, snapping up South Korea's electronics exporters and avoiding Indian consumer stocks — all at the fastest pace since the bull market began. The switch shows increased confidence that growth in Europe and the United States will underpin the global expansion as emerging countries raise interest rates to combat inflation, according to Artemis Investment Management LLP and ING Investment Management. That has catapulted Bill Miller's $4.07 billion Legg Mason Capital Management Value Trust Ticker:(LMVTX) to the top of the mutual fund rankings after trailing 98% of its peers in 2010, data compiled by Bloomberg show. “For the bull market to continue, we need to see a broadening of the rally,” said Jacob de Tusch-Lec, who helps oversee about $18 billion as a money manager at Artemis. Without it, “you would get overheated bubbles in many parts,” he said. The turnaround as global stocks posted the biggest January advance in five years shows that investors are more willing to risk money on companies where weaker economic growth or earnings increases have pushed down valuations. The 100 stocks with the biggest gains in 2011 trade at two times book value, or assets minus liabilities, compared with 5.6 times for those whose shares have done worst, according to data compiled by Bloomberg. This year's relative performance, called the “Great Rotation” in a Jan. 27 note by Bank of America Merrill Lynch, saddled some of last year's top-performing money managers with losses and boosted returns at the worst performers. Mr. Miller's fund gained 5.4% through Feb. 1 as holdings such as Cisco Systems Inc. (CSCO) rebounded, putting the 61-year-old manager ahead of 91% of his rivals.

INCREASED EXPOSURE

“Bill characterized 2010 as a very good investment year, but not a good performance year,” said Mary Chris Gay, assistant portfolio manager of the Legg Mason Capital Management Value Trust. “We were able to make a lot of investments and increase exposure where we felt there was considerable opportunity.” The $21.8 billion Oppenheimer Developing Markets Fund Ticker:(ODMAX), which beat 91% of its peers last year by loading up on emerging-markets consumer stocks, including Hindustan Unilever Ltd. Ticker:(HUL.BO) of Mumbai, India, has trailed 93% of rivals this year with a 3.9% drop, Bloomberg data through Feb. 1 show. Luxembourg-based Oyster Funds' $3.5 billion European Opportunities fund is losing to 94% of its peers, following a 21% gain last year that topped 82% of rivals, the data show. “Many fund managers we suspect would have found the beginning of 2011 to be quite painful,” Andrew Lapthorne, a global quantitative strategist for Société Gén- érale SA, wrote in a Feb. 1 report. “The consensus seemed very much positioned for more of the same in 2011, but from many angles, the reverse seems to have happened.” Justin Leverenz, manager of the Oppenheimer Inc. offering, declined to comment, according to spokeswoman Kaitlyn Downing. Eric Bendahan, manager of the Oyster fund, wasn't available to comment, spokeswoman Leila Bernasconi said. The value of world equities climbed 1.6% last month and reached $53.6 trillion Feb. 1, the most since June 2008, data compiled by Bloomberg show. The MSCI World Index, a gauge for $29.6 trillion of advanced-country shares, is valued at 15.9 times reported profits, a 29% discount to the average level since February 1995, data compiled by Bloomberg show. Analysts have boosted estimates for 12-month profit growth in the MSCI All-Country index to 25%, from 23% at the end of December, according to data compiled by Bloomberg.

'HAS LEGS'

“There has been new money coming in,” said Andrew Milligan, who helps oversee about $232 billion as head of global strategy at Standard Life Investments Ltd. “There is still an underlying conviction that the economic recovery has legs, that profits will be positive.” This year's shifts probably will be short-lived, according to Peter Oppenheimer, an equity strategist at The Goldman Sachs Group Inc. More than 60% of similar rotations in Europe during the past 30 years failed to last longer than three months, he wrote in a Jan. 26 research report. Maria Gordon, the emerging-markets-equity portfolio manager at Pacific Investment Management Co. LLC, which oversees about $1.2 trillion, said that she is looking for opportunities to buy shares of this year's laggards. “You may want to be buying the stories when they are derated, and the hopes and dreams have turned to disappointment,” she said. “I like looking through the ash and finding jewels.”

ECONOMIC DATA

Reports showed that U.S. consumer confidence rose more than forecast last month, while the ISM-Chicago gauge of business expansion rose to the highest level since 1988. German unemployment fell to an 18-year low in January, and European retail sales increased at the fastest rate in more than four years. Citigroup Inc.'s Economic Surprise Index for the United States, a gauge of how much reports are exceeding the median economist estimates in Bloomberg News surveys, advanced to 40, from 26 a year ago, while the gauge for Europe jumped to 52, from 10. The emerging-markets reading dropped to 24, from 51. The eurozone and the United States had a combined annual gross domestic product of about $27 trillion at the end of 2009, World Bank data compiled by Bloomberg show. Brazil, Russia, India and China, the biggest emerging economies, had a combined GDP of about $9 trillion, the data show.

EXCEEDING PROJECTIONS

Europe and the United States are exceeding economic projections as the Federal Reserve and European Central Bank keep benchmark interest rates at record lows to spur growth. Meanwhile, central banks in the BRIC countries are tightening monetary policy. Brazil's central bank lifted its benchmark overnight rate by 50 basis points, or 0.5 percentage points, to 11.25% on Jan. 19. India raised rates to the highest in two years Jan. 25 and signaled more increases. China has ordered lenders to set aside more money as reserves four times since October and raised interest rates twice in the fourth quarter. Russia increased banks' reserve requirements for the first time since 2009 on Jan. 31 to stem the fastest inflation in a year. “The global environment has really changed,” said Maarten-Jan Bakkum, an emerging-markets strategist with ING Investment Management, which oversees about $511 billion. “After years of disappointment on growth in the U.S and Europe, expectations have improved. We are in an environment where emerging markets will probably struggle relative to developed markets,” Mr. Bakkum said. The MSCI World gauge of advanced-nation equities beat the MSCI Emerging Markets Index by 5.5 percentage points this year through Feb. 2, after trailing by 51 percentage points from the start of the global bull market in March 2009 through the end of 2010. Europe's Stoxx 600 Banks index rallied 8.6% in January as China and Japan pledged to keep buying the region's bonds, easing concern the debt crisis will spread.

CHINA DEMAND

The gauge of lenders, including Dexia SA and UniCredit SpA, is beating the Stoxx 600 Basic Resource Index by 13 percentage points. Shares of mining companies such as Xstrata PLC sank this year on speculation that demand from China will weaken as interest rates rise. South Korea's Kospi Index, dominated by exporters including Seoul, South Korea-based LG Electronics Inc., has beaten India's Bombay Stock Exchange Sensitive Index by 13 percentage points in 2011, after underperforming by 30 percentage points the previous two years. South Korean trade amounts to about 97% of GDP, double the ratio of 46% in India, according to the World Trade Organization's website. The Kospi is valued at 10 times estimated 2011 earnings, versus 17 for the so-called Sensex. Hindustan Unilever trades for 22 times net assets, compared with 2.9 for the 188-company MSCI All-Country World Index Consumer Staples measure, even after the stock slid 12% this year. The company accounted for about 1.5% of the Oppenheimer Developing Markets Fund at the end of last year, according to OppenheimerFunds' website.

YEAR OF 'CATCH-UP'

Cisco, which generated more than 74% of fiscal 2010 revenue in Europe and the United States, trades for 15.7 times reported earnings, 61% less than the average since 1991 and 9% cheaper than technology stocks in MSCI's global gauge, data compiled by Bloomberg show. The Legg Mason Capital Management Value Trust held 5 million shares as of Dec. 31, or 2.6% of the fund's assets, according to its website. Cisco shares have rallied about 7% this year after retreating 16% in 2010. “We see 2011 as being more the year of the developed markets,” Lothar Mentel, who oversees about $3.2 billion as the chief investment officer at Octopus Investments Ltd., said in a Jan. 31 interview with Bloomberg Television in London. “This year is going to be the year of the catch-up.”