After three decades of managing money on behalf of Legg Mason Inc. (LM), Bill Miller is going to run a mutual fund under his own name.
The Miller Income Opportunity Trust (LMOPX) last week filed with the U.S. Securities and Exchange Commission to sell shares to the public. The fund, to be run by Mr. Miller and his son, Bill Miller IV, will seek to produce a high level of income from a “wide array of sources” by identifying “mispriced” investment opportunities, according to the Dec. 13 filing.
The fund will be overseen by LMM, an investment advisory firm that is owned in equal parts by the Millers and Legg Mason. The older Miller will run the fund and his son will be assistant portfolio manager. Renowned for besting the benchmark S&P 500 for 15 years in a row, Bill Miller stumbled during the recession with subpar returns, only to enjoy a renaissance in the past two years in a “go-anywhere” fund that bears some similarities to the one he's starting now.
Mr. Miller currently oversees the $1.78 billion Legg Mason Opportunity Trust, which has returned 60% this year, more than double the 28% gain for the S&P 500. The fund has generated an average annual gain of 25% during the past five years, ranking it among the top 3 percent of peers with a similar mandate, according to data compiled by Bloomberg.
While Opportunity Trust has the leeway to invest across asset classes, its holdings have generally consisted of publicly and privately traded equities. Common stocks comprised 99.8% of the opportunity trust's assets as of Sept. 30, according to regulatory filings, with some of its largest stakes consisting of investments in Genworth Financial Inc., MGIC Investment Corp. and Delta Air Lines Inc.
In contrast, Mr. Miller's new fund will focus on income, investing during normal market conditions in “cash-distributing” equities, fixed-income securities, derivatives and other financial instruments of issuers worldwide. Annual operating expenses aren't expected to exceed 1.25% in the Class A shares, the filing said.
“The ability to tactically move across asset classes and up and own the capital structure is intended to allow the fund to access the greatest yield and valuation opportunities,” the Dec. 13 filing said.
Mr. Miller has been running the high-income strategy through a separate account, funded in part by him and other Legg Mason executives, that had a market value of about $38.6 million as of Sept. 30. This account has generated an average annual return of 27%, not counting management fees, since its inception in April 2009, according to the prospectus.
Mr. Miller joined Legg Mason in 1981 and founded the firm's first mutual fund. That fund, the Legg Mason Capital Management Value Trust, outperformed the S&P 500 for 15 years through 2005, generating an average annual return of 15.7% during the period.
The streak came to an end in 2006, when the $21 billion value trust rose 5.9%, trailing all 107 competing “multicap value” mutual funds tracked by Bloomberg. During the 2008 credit crisis, the Value Trust lost 55% by betting on financial stocks, prompting a wave of withdrawals. In April 2012, Mr. Miller left the value trust, which currently has about $2.5 billion in net assets.