A couple of recent articles from The Wall Street Journal and MarketWatch declare a comeback of Bill Miller as a co-manager of the Legg Mason Opportunity Trust fund.

According to the first article

“For the third straight quarter, Legg Mason Opportunity Trust finished first in The Wall Street Journal’s ranking of diversified U.S.-stock mutual funds with more than $50 million in assets and at least a three-year record.”

This performance is attributed to the fund’s investment in stocks such as BestBuy, Netflix and Groupon. The second article gives a bit more of historical background of the fund:

“Legg Mason Opportunity was in the bottom 10% of its Morningstar peer group in 2007, 2008 and 2010, before finishing dead last in 2011. In 2012, it was up nearly 40%, ranking in the top 2% of large-cap value category; that was good, but it could be looked at as an anomaly because Miller had managed one good year (2009) amid his miseries. But the fund has gained nearly 40% again already this year, putting Miller close enough to the top that investors are thinking this hot streak might be the start of something big.

To put the fund’s performance in perspective, let’s take a look at the results of the Alpholio™ analysis of class C shares:

Cumulative RealAlpha™ for LMOPX

As the chart shows, the general trend of the fund’s cumulative RealAlpha™ in the past eight years has been downward, resulting in an aggregate alpha loss of about 75%. A pattern emerges: after each of the 2005-07 and 2009-11 plateau periods, RealAlpha™ decreased further. If history is any guide, the most recent period of relatively flat RealAlpha™ performance from the beginning of 2012 till present might be followed by another slide.

Alpholio statistics for the fund clearly demonstrate the amount of value the fund destroyed on a truly risk-adjusted basis:

LMOPX Statistics

Of note here is also the high volatility of the fund’s monthly returns, which approached almost 30%, or approx. twice that of the S&P 500® index, in the analysis period. Fund’s returns did not justify this elevated volatility, as its Sharpe Ratio was about half that of the index, according to Morningstar’s figures.

Moreover, while Morningstar currently classifies the fund in the US OE Mid-Cap Value category, its two equivalent exchange-traded product (ETP) positions with the highest weights are currently Vanguard Small-Cap Growth ETF (VBK, 57.3%) and Vanguard Financials ETF (VFH, 40.5%). The latter is a reflection of the 36.1% of holdings in financials as of March 31, 2013 stated in the latest quarterly report. At 27.7%, the second biggest subset of the fund’s holdings was in consumer discretionary sector, followed by 13.2% in information technology.

While investors might be tempted to draw conclusions only from the most recent performance, they should instead look at the longer-term record of the fund, which is not as encouraging.


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