Comeback kid? Bill Miller vaults to top of mutual fund heap

Submerging emerging markets help reverse fortunes of Legg Mason stock picker; 'Great Rotation'

Feb 3, 2011 @ 6:58 am

Equities that fell farthest last year are surging the most in a decade, reversing the fortunes of mutual funds and signaling developed countries, banks and Asian exporters will extend the global rally.

The MSCI All-Country World Index's 100 worst-performing stocks of 2010 rose 5.3 percent as a group last month, the top January gain since 2001, while last year's best performers fell 2.6 percent, according to data compiled by Bloomberg. Investors are moving into developed nations from emerging markets, buying European banks and selling raw-materials shares, snapping up South Korea's electronics exporters and avoiding Indian consumer stocks -- all at the fastest pace since the bull market began.

The switch shows increased confidence that growth in the U.S. and Europe will underpin the global expansion as emerging countries raise interest rates to combat inflation, according to Artemis Investment Management and ING Investment Management. It has catapulted Bill Miller's $4.07 billion Legg Mason Capital Management Value Trust to the top of the mutual fund rankings after trailing 98 percent of peers in 2010, data compiled by Bloomberg show.

“For the bull market to continue we need to see a broadening of the rally,” said Jacob de Tusch-Lec, who helps oversee about $18 billion as a money manager at Artemis in London. Without it, “you would get overheated bubbles in many parts,” he said.

Worst to First

The turnaround as global stocks posted the biggest January advance in five years shows investors are more willing to risk money on companies where weaker economic growth or earnings increases have pushed down valuations. The 100 stocks with the biggest gains in 2011 trade at 2 times book value, or assets minus liabilities, compared with 5.6 times for those whose shares have done worst, according to data compiled by Bloomberg.

The MSCI AC World dropped less than 0.1 percent as of 10:26 a.m. in London today, while U.S. stock-index futures were also little changed.

This year's relative performance, called the “Great Rotation” in a Jan. 27 note by Bank of America Merrill Lynch, saddled some of last year's top-performing money managers with losses and boosted returns at the worst performers. Miller's fund gained 5.4 percent through Feb. 1 as holdings including San Jose, California-based Cisco Systems Inc. rebounded, putting the 61-year-old manager ahead of 91 percent of his rivals.

Increase Exposure

“Bill characterized 2010 as a very good investment year, but not a good performance year,” Mary Chris Gay, assistant portfolio manager of the Legg Mason Capital Management Value Trust, said in an interview yesterday. “We were able to make a lot of investments and increase exposure where we felt there was considerable opportunity.”

The $21.8 billion Oppenheimer Developing Markets Fund in New York, which beat 91 percent of peers last year by loading up on emerging-market consumer stocks including India's Hindustan Unilever Ltd., has trailed 93 percent of rivals this year with a 3.9 percent drop, Bloomberg data through Feb. 1 show. Oyster Funds' Luxembourg-based $3.5 billion European Opportunities fund is losing to 94 percent of its peers, following a 21 percent gain in 2010 that topped 82 percent of rivals, the data show.

‘Quite Painful'

“Many fund managers we suspect would have found the beginning of 2011 to be quite painful,” Andrew Lapthorne, the Societe Generale SA global quantitative strategist in London, wrote in a Feb. 1 report. “The consensus seemed very much positioned for more of the same in 2011, but from many angles the reverse seems to have happened.”

Justin Leverenz, manager of the Oppenheimer fund, declined to comment, according to spokeswoman Kaitlyn Downing. Oyster's Eric Bendahan wasn't available to comment, spokeswoman Leila Bernasconi said.

The value of world equities climbed 1.6 percent in January and reached $53.6 trillion on Feb. 1, the most since June 2008, data compiled by Bloomberg show. The MSCI World Index, a gauge for $29.6 trillion of advanced-country shares, is valued at 15.9 times reported profits, a 29 percent discount to the average level since February 1995, data compiled by Bloomberg show.

Analysts have boosted estimates for 12-month profit growth in the MSCI All-Country index to 25 percent from 23 percent at the end of December, according to data compiled by Bloomberg.

‘Has Legs'

“There has been new money coming in,” said Andrew Milligan, who helps oversee about $232 billion as head of global strategy at Standard Life Investments in Edinburgh. “There is still an underlying conviction that the economic recovery has legs, that profits will be positive.”

This year's shifts will probably be short-lived, according to Peter Oppenheimer, a London-based equity strategist at Goldman Sachs Group Inc. More than 60 percent of similar rotations in Europe during the past 30 years failed to last longer than three months, he wrote in a Jan. 26 research report.

Maria Gordon, the London-based emerging market equity portfolio manager at Pacific Investment Management Co., which oversees about $1.2 trillion, said she's looking for opportunities to buy shares of this year's laggards.

“You may want to be buying the stories when they are de-rated and the hopes and dreams have turned to disappointment,” she said. “I like looking through the ash and finding jewels.”

Confidence, Unemployment

Reports last month showed U.S. consumer confidence rose more than forecast in January, while the Institute of Supply Management-Chicago Inc.'s gauge of business expansion rose to the highest level since 1988. German unemployment fell to an 18- year low in January, and European retail sales increased at the fastest rate in more than four years.

Citigroup Inc.'s Economic Surprise Index for the U.S., a gauge of how much reports are exceeding the median economist estimates in Bloomberg News surveys, advanced to 40 from 26 a year ago, while the gauge for Europe has jumped to 52 from 10. The emerging-market reading has dropped to 24 from 51.

The U.S. and euro zone had combined annual gross domestic product of about $27 trillion at the end of 2009, World Bank data compiled by Bloomberg show. Brazil, Russia, India and China, the biggest emerging economies known as the BRICs, had a combined GDP of about $9 trillion, the data show.

The U.S. and Europe are exceeding economic projections as the Federal Reserve and European Central Bank keep benchmark interest rates at record lows to spur growth. Meanwhile, central banks in the BRIC countries are tightening monetary policy.

Economic Shifts

Brazil's central bank lifted its benchmark overnight rate by 50 basis points, or 0.5 percentage point, to 11.25 percent on Jan. 19. India raised rates to the highest in two years on Jan. 25 and signaled more increases. China has ordered lenders to set aside more money as reserves four times since October and raised interest rates twice in the fourth quarter. Russia increased banks' reserve requirements for the first time since 2009 on Jan. 31 to stem the fastest inflation in a year.

“The global environment has really changed,” said Maarten-Jan Bakkum, an emerging-markets strategist at ING Investment Management in The Hauge, which oversees about $511 billion. “After years of disappointment on growth in the U.S and Europe, expectations have improved. We are in an environment where emerging markets will probably struggle relative to developed markets.”

The MSCI World gauge of advanced-nation equities beat the MSCI Emerging Markets Index by 5.5 percentage points this year through yesterday, after trailing by 51 percentage points from the start of the global bull market in March 2009 through the end of 2010. Europe's Stoxx 600 Banks index rallied 8.6 percent in January as China and Japan pledged to keep buying the region's bonds, easing concern the debt crisis will spread.

China Demand

The gauge of lenders including Brussels-based Dexia SA and UniCredit SpA of Milan is beating the Stoxx 600 Basic Resource Index by 13 percentage points. Mining shares such as Zug, Switzerland-based Xstrata Plc sank this year on speculation demand from China will weaken as interest rates rise.

South Korea's Kospi Index, dominated by exporters including Seoul-based LG Electronics Inc., has beaten India's Bombay Stock Exchange Sensitive Index by 13 percentage points in 2011, after underperforming by 30 percentage points the previous two years.

South Korean trade amounts to about 97 percent of GDP, double the ratio of 46 percent in India, according to the World Trade Organization's website. The Kospi is valued at 10 times estimated 2011 earnings versus 17 for the so-called Sensex.

Hindustan Unilever trades for 22 times net assets, compared with 2.9 for the 188-company MSCI All-Country World Index Consumer Staples measure, even after the stock slid 12 percent this year. The Mumbai-based company accounted for about 1.5 percent of the Oppenheimer Developing Markets Fund at the end of 2010, according to OppenheimerFunds Inc.'s website.

‘Year of Catch-Up'

Cisco, which generated more than 74 percent of fiscal 2010 revenue in the U.S. and Europe, trades for 15.7 times reported earnings, 61 percent less than the average since 1991 and 9 percent cheaper than technology stocks in MSCI's global gauge, data compiled by Bloomberg show. The Legg Mason Capital Management Value Trust held 5 million shares as of Dec. 31, or 2.6 percent of the fund's assets, according to its website.

Cisco shares have rallied 6.9 percent this year after retreating 16 percent in 2010.

“We see 2011 as being more the year of the developed markets,” Lothar Mentel, who oversees about $3.2 billion as the London-based chief investment officer at Octopus Investments Ltd., said in a Jan. 31 interview with Bloomberg Television. “This year is going to be the year of the catch-up.”


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