Legg Mason Capital Management Value Trust (ticker symbol LMVTX) is a mutual fund with approx. $2.3 billion in assets managed by Mary Chris Gay and Sam Peters. Currently, Morningstar rates the fund One Star / Neutral in the Large Blend category. The last Morningstar report on the fund, titled “The fund continues to struggle under new management.” was published in November 2012. The reason for this title is the departure of the longtime manager of the fund, Bill Miller, in April 2012. Let’s assess the fund’s performance using the Alpholio™ methodology.
First, the total return chart, which includes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:
The chart shows that the fund’ performance was significantly below that of its reference portfolio for the vast majority of the analysis period that began in early 2005.
This is further illustrated by the cumulative RealAlpha™ chart:
The chart clearly demonstrates the long-term negative trend in the cumulative RealAlpha™ of the fund. By the beginning of 2013, an investor who bought the fund at the beginning of 2005 and held to his/her investment would realize over 50% of loss compared to the reference portfolio. Please note that the fund underperformed the reference portfolio even in 2005, which was the last year of its 15-year streak of beating the S&P 500 index.
The overall statistics further highlight the dismal performance of the fund:
At over 20%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was high compared to that of the overall stock market. The volatility of the reference portfolio was lower than that of the fund. The overall discounted annualized RealAlpha™ figure was highly negative, which underscores that, compared to the reference portfolio, the fund destroyed a lot of value for its shareholders.
The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:
The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.
The signal would allow an investor to avoid a long period of the fund’s underperformance, interrupted only by a brief period of recovery in 2009.
The following chart shows the major investment “themes” of the fund over time:
In the analysis period, the fund held equivalent equity positions in VFH (Vanguard Financials ETF; average weight of 21.4%), VCR (Vanguard Consumer Discretionary ETF; average weight of 19.3%), VHT (Vanguard Health Care ETF; 16.2%), MTK (SPDR® Morgan Stanley Technology ETF; 13%), IXN (iShares Global Technology ETF; 9.1%), and JKG (iShares Morningstar Mid-Cap ETF; 7.4%).
For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in IXG (iShares Global Financials ETF; average weight of 7.1%).
Given the disastrous performance of the fund relative to its reference portfolio in the past eight years, the current expense ratio of 1.80% for class C shares, coupled with the 0.95% rear load, certainly do not add to the fund’s appeal.