Legg Mason's Bill Miller Exits: Last Mutual Fund Rock Star?

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The end of Bill Miller's 30-year run managing the Legg Mason Value Trust (NYSE: LM - News) may mark the end of investment rock stars to emerge from the mutual fund industry as more versatile and higher-paying hedge funds attract the best talent and exchange traded funds offer a lower cost alternative to retail investors.


Bill Miller became a household name and his fund, a member of many 401k plans, amid a 15-year streak of beating the S&P 500 (INDEX: ^GSPC - News) beginning in the early 1990s. The mutual fund star mantle was passed to Miller from Peter Lynch, who was famous for his stewardship of the Fidelity Magellan Fund and his book, "One Up on Wall Street," in the 1980s.

As the focus faded on the likes of Miller and Lynch, as well Mario Gabelli, Marty Whitman, Charles Royce and David Dreman, the new stars of the investing world emerged from the hedge fund industry. Names like Bill Ackman, David Einhorn and John Paulson are now the most-followed stock pickers.

"Mutual funds remind me of AOL (NYSE: AOL - News) dial-up: a dwindling collection of old people who don't know better, contributing monthly to a comically inferior product," said Phil Pearlman, investor and executive editor of StockTwits.com. "And Miller was the symbolic figurehead of this beta minus fees charade."

Equity mutual funds, which tend to have a long-only style and a mandate to be mostly fully invested, have been a victim of a low return, high correlation world, leaving little room for the outperformance and separation that makes stars. The S&P 500 is trading around the same levels the index was at in 1999, a victim of the Internet and housing bubbles popping.

"Stars depend on market cycles and investor appetites," said Michael Farr of Farr, Miller & Washington, a high net worth investment management firm. "In the last decade, only higher risk (often with leverage) has produced returns."

Hedge funds have been raking in assets at an explosive pace over the last decade because of their ability to lever up and their versatility to bet against stocks, as well as the use of more exotic instruments such as currencies and credit default swaps .

Assets in hedge funds, closed to people without a minimum of $1 million to invest, grew to $1.7 trillion as of the end of the third quarter, according to BarclayHedge, an alternative investment database. Mutual fund assets were at $11 trillion as of September, down from their high of $12 trillion at the end of 2007, according to the Investment Company Institute.

Greenlight Capital's Einhorn, Pershing Square's Bill Ackman and John Paulson all gained notoriety for their bets against the housing crisis. Einhorn was famously short Lehman long before its 2008 bankruptcy. Bill Miller, to the detriment of his fund's holders, infamously kept buying Bear Stearns before it collapsed and was sold to JPMorgan (NYSE: JPM - News).

Meanwhile, the popularity of exchange-traded funds among retail investors have shined a light on the fee structure of actively-managed stock mutual funds, the majority of which have been underperforming the S&P 500 the last decade. Assets in ETFs, which blindly mimic whole sectors and indexes are currently at around $1 trillion, up from $608 billion at the end of 2007, according to ICI.

For example, Miller's Value Trust has an expense ratio of 1.76 percent, while the PowerShares Nasdaq 100 (NASDAQ: QQQ - News), among the most actively-traded ETF, has a ratio of 0.2 percent.

"Stock-picking managers haven't been able to become stars in the last five to 10 years because stock picking itself has not been a rewarding endeavor," said Josh Brown, money manager and author of The Reformed Broker blog. "Record high correlations and ETFization has meant that knowing which asset classes to weight more heavily and lightly has produced superior returns for fund managers who know how to do it - not choosing Coke (NYSE: KO - News) over Pepsi (NYSE: PEP - News)."