I had a lovely lunch with Roger Ehrenberg this afternoon, and we talked among other things about the big buy-side firms such as Warburg Pincus, Fortress, and the like – companies who seem to be able to raise huge amounts of money irrespective of their investment performance. The trick, I think, is becoming big enough to build a large institutional sales team, which is charged with doing whatever it takes to make huge institutional investors comfortable writing those nine-figure checks.
Such investors aren’t looking for the kind of home runs that John Paulson, say, has been delivering, although Roger did say that even Paulson has recently got into bed with Investec Investcorp. Rather, they’re looking for customized solutions, lots of history and hand-holding, and lots of clear and credible risk management. Once you start being able to offer that, you can become truly enormous very quickly, almost regardless of your annual returns.
Retail-facing fund management, by contrast, is a much harder sell. Individuals tend to look at performance first and foremost, and a single star fund manager with a strong record is often the main reason why billions of dollars have been invested with that firm rather than some other.
All of which spells trouble for Legg Mason, which has a market capitalization of just $8 billion despite having $1 trillion of assets under management. That 0.8% ratio, notes Evan Newmark, is less than half the 2% ratio at rival Blackrock. And much of the reason for the depressed valuation is the underperformance of star fund manager Bill Miller:
Miller may not be the CEO or on the board, but he is the face of Legg Mason, faithfully followed by investors. And Legg Mason has ridden his performance for years in marketing the firm.
Lately, that has been a very, very rough ride. Since the streak ended in 2006, Miller’s Value Trust has been one of the worst performing large-cap funds in the U.S. According to Lipper and Morningstar, Value Trust is ranked last out of more than 500 peer funds over a three-year period. Year to date, the fund is down more than 17%. Assets in Value Trust have fallen to a little more than $12 billion from more than $20 billion in 2006…
The most dangerous thing for [CEO Mark] Fetting may be to leave Miller and several of the other poorly performing fund managers in place. If he doesn’t move them, perhaps outsiders will force him to.
I don’t see the point in ousting Miller. The individual investors who have invested in Value Trust have invested specifically in Miller, and the ones who remain are the Miller loyalists. Why piss them off unnecessarily by firing Miller? If they want to invest under a different fund manager, there’s no shortage of opportunities both inside and outside Legg Mason where they can do so.
Still, if Miller continues to underperform, a retail-facing shop like Legg Mason might want to start going on the lookout for a new star fund manager. Bill Millers and Peter Lynches are hard to find, but when they do come along, the retail billions aren’t far behind.