Before the real estate and stock market declines started in 2007, Bill Miller was known for one major accomplishment. As the portfolio manager of the Legg Mason Value Trust, Miller had beaten the S&P 500 index for 15 consecutive years from 1991 to 2005. However, over the next few years, Miller's ill-timed bets on real estate stocks, among others, led to a couple of years of significant annual declines. In fact, during the first half of 2008, Miller's fund was down nearly 30% and the number got worse by year end.
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Down But Not Out
While Miller will admit he underestimated the effect that credit and housing crisis would have on equity prices, so did 99% of other intelligent investors in 2008. This is certainly not an excuse as Miller will readily admit. Still, Miller's long-term record should carry more weight than a couple of years of terrible numbers. Especially now, since Miller has the experience and lessons of 2008 from which to learn and benefit. And in 2009, on the heels of an impressive market rally, Miller's fund was up over 40%. To be fair, Miller's 2009 numbers have more ground to cover to make up for 2008 losses, but if anyone can do it, it's Miller.
Looking at where Miller is positioning his portfolio in 2010, there is a heavy weighting towards large-cap quality and technology. His biggest holding is an 8% position in AES (NYSE:AES), an $8 billion global utility company. AES provides electricity all over the world. The shares trade for $12 and command a P/E of 12. Utilities companies are viewed as the ultimate safe play during any economic scenario. It's likely this view along with an attractive price appeals to Miller. (For more, check out Trust In Utilities.)
Miller's other large holdings are not any under-the-rock stocks. He owns large positions in insurers Aflac (NYSE:AFL) and Aetna (NYSE:AET), both of which trade at attractive earnings multiples and will likely grow as the economy grows. Miller has recently allocated 3% of his capital to tech behemoth IBM (NYSE: IBM). According to Miller, "IBM has record earnings, trades at 12 times this years results, buys back shares every year, and has grown its dividend 25% per year the last five years."
Last year's market rally was more favorable for smaller, lesser-quality names than it was for the large, quality names. Miller, along with many other investment pros, clearly feels the best values today are in strongest franchises that continue to churn out cash. (For related reading, check out The Greatest Investors Tutorial.)
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