CNBC.com published an interesting article this week on Legg Mason’s Bill Miller, who announced he was stepping down as the manager of Legg Mason’s flagship Value Fund. Miller was one of the last of a dying breed of high profile, “rock star” mutual fund managers trying to beat their benchmark indexes each year. Unfortunately, Miller’s unlikely run of outperformance came to an end in 2006 and Miller has struggled mightily since that time. A recent article from Reuters titled “Miller’s Fall Shows Luck at Play in Investing” had some interesting comments from the President of Fund Research at Morningstar, Don Phillips, who said that Miller himself “always acknowledged what a difficult competitor the S&P 500 is” and that “even when he was getting all the praise, he (Miller) was very skeptical”.
California Institute of Technology professor Bradford Cornell continued with “most of the annual variation in performance is due to luck, not skill. Annual rankings of fund performance provide almost no information regarding management skill”.
It makes sense, then, that investors are continuing to gravitate in huge numbers towards passively managed ETFs, where investors can capture the benchmark returns at a fraction of the cost charged by overpriced actively managed mutual funds. Investors are realizing that it’s more important to pick the right asset classes than trying to pick the right individual stocks or bonds. And what better way to pick the right asset classes than with ETFs?
As Phil Pearlman, executive editor of StockTwits, commented in the CNBC.com article, “Mutual funds remind me of AOL dial-up: a dwindling collection of old people who don’t know better, contributing monthly to a comically inferior product and Miller was the symbol figurehead of this beta minus fees charade”.
It looks like the charade is up and Miller is smart enough to recognize that. ETFs are quietly killing the actively managed mutual fund industry and “rock star” mutual fund managers are becoming a relic of the past.
