Case Finance

1. Problem

In 2005, Value Trust, a mutual fund managed by William H. (Bill) Miller III at Legg Mason, Inc., did a remarkable performance record. The case describes the investment style of Miller, which allows Value Trust beaten the S&P 500 fourteen years in a row. The average annual return of Value Trust is 14.6% and the S&P 500 index is only 10.93%. However, many scholars believe that it is impossible of money managers in mutual fund to constantly beat the market because they believe that when they are able to beat the market, they simply being lucky. However, is it the case was Miller and Value? Is he lucky or he is able to beat the market?

1. Recommendation/ Conclusion

I believe that Miller’s performance and investment are not simply pure luck. Because he maximizes his return through not relying on fast pace trading. He holds his investment for a long period of time, combine with the types of stock that he purchases which are low prices and low expectation. He believes that low prices and low expectation stock are often times undervalued and carries more room for growth and profit. This combination allows him to gain exponential growth for his investment portfolio allowing him to be able to earn above average return in the market. As it is explain in the article, Miller tries to be more aggressive when the market is down and less aggressive when the market is up. He focuses in buying when the market is falling, instead of growing.

1. Questions

1. What might explain the fund’s performance?

Value Trust earn remarkable result for fourteen years in a row. I believe that Bill Miller’s investment was successful applied in the Value Trust and his investment strategy was different from any other businesses.

1. What in Miller’s strategy might explain performance?

Miller investment strategy causes the remarkable performance in Value Trust. His strategy to take the long view is an example, he believes that the biggest opportunity for the investor is to invest for the longer term. Because in a long run, most investment will follow a trend of growth. Combine with Miller’s focus a lot on buying lowing expectation stock. Low expectation stock has higher chances to start growing and when they grow, they grow exponentially.

1. How easy will it be to sustain Miller’s performance into the future?

It is not easy, the market itself keep on changing over the years. Especially, with the increasing amount of trend bubble. These trend bubble would help increase the value of the investment, however the trend bubble can bursts anytime allowing Value Trust to suffer great loss. Therefore, Value Trust has to keep a lookout on their investments future performance.

1. Discuss, the performance with regard to the theory of capital market efficiency.

Based on the theory capital market efficiency, Value Trust performance is all best on luck. Because efficient market theory believe that capital markets incorporated all the relevant information into existing securities’ prices. Which means they argue that it would be impossible to beat the market with superior skill and intellect. However, Value Trust performance has proven otherwise because they have earned above average return for the past fourteen years.