Given the battering print publishers and shopping malls are taking courtesy of the internet, who would make big bets on these beaten-up fields of commerce? Famed stock picker Bill Miller and his 36-year-old son Bill Miller IV would. They’re co-managers of Miller Value Partners’ Income Strategy investment fund.
In their quest to invest in unconventional income sources, the contrarian Millers buy undervalued securities with a history of high levels of income, the younger Miller explains in an interview with ThinkAdvisor. He also reveals his father’s investing process.
Seventy percent in equities — mainly private equity stocks — the income strategy is scoring a total net return of 16.26% on a trailing 12-month basis. AUM is $120 million.
Investing legend Miller, 67, founded Miller Value Partners after a 35-year career at Legg Mason Capital Management. He served as chief investment officer there and became a Wall Street star managing the Value Trust fund and outperforming the S&P for 15 years straight, from 1991 to 2005. But during the financial crisis, he misjudged the market, figuring that once the calamity subsided, financial stocks would quickly rebound, son Bill says.
The manager was proven wrong, however; and his fund lost two-thirds of its value. Following some years of gains and losses running another fund, Miller departed the firm in 2016.
Bill IV joined Legg Mason in 2008, working with his father primarily in a research capacity. A year later the two started the Income strategy and by 2013, he had become co-manager.
The number of holdings in the portfolio is small; but when it comes to variety, it is extensive and includes high-yield corporate debt, preferred shares, real estate investment trusts and business development companies, among others.
Nearly 22% of the portfolio is in the REIT sector. In Q2 of this year, the Millers bought shopping center REITs Washington Prime Group and CBL & Associates.
ThinkAdvisor recently interviewed the Baltimore-based Miller IV by phone. He discussed the managers’ buy-and-hold value strategy — including why investing in alternative asset managers is appealing — and what he’s learned about investing from a legendary fund manager who happens to be his dad. Here are highlights:
THINKADVISOR: There are only 40 names in your fund. Comparatively speaking, that’s very few.
BILLL MILLER IV: Yes, relative to other portfolios, it’s super-concentrated. Most income funds have 100-plus names. Ours is a very concentrated, aggressive income fund.
Also, surprisingly, about 70% of the holdings are in equities versus bonds. And you’re mainly in private equity stocks.
Those are the biggest positions, collectively, about 15% of the fund. When we started, we had the exact opposite: 70% in bonds. Now we think the best risk-adjusted income streams are in equities, broadly speaking.
You started the fund with your father in 2009 when you were both at Legg Mason Capital Management. What did you have in mind?
Undervalued income was the idea then, and it still is today. We said let’s start a portfolio of things that are safer in the capital structure but that could do equal to or better than equities and that, even if spreads didn’t recover that year, we could [get] a very nice income stream in the interim.
A recent Forbes article called your father “an aggressive risk-taker” and your style “more cautious.” True?
My father has a lower evidentiary threshold than I might. That’s more a function of his experience: He’s able to see patterns and understand their significance more quickly.
And the implications of that?
If he sees a pattern that he believes has a lot of signal value, he may be more willing to act on it a lot more quickly that I would. I might see the same fact pattern and say, “I want to look at a few more things before I commit to it.” He’ll say, “I’ve already seen this story enough times, and I don’t need any more information. This is enough to be a good setup.”
Is that what he thought about Bitcoin when he reportedly invested 1% of his net worth in it?
He put 1% in many, many years ago. Now it would be a more significant portion of his net worth.
Do you have a number?
I prefer not to say, but it’s significant. We both invested in it early on. It’s been a good ride.
What have you learned most from your dad about investing?
Observing him operate has been very valuable. For him, everything comes down to an objective assessment of the facts. He’s very unemotional, unreactive and data-driven. Often in the market, you make a lot more money sitting still than by being active and making a lot of changes to the portfolio. So watching his approach to valuation and looking at situations has been extremely valuable.
What else about his process has been helpful to you?
One of the reasons he’s done as well as he has is because he brings a philosophical approach to his analyses. He can view things from angles that no one else is looking at. That’s allowed him to be much earlier into all kinds of huge compounding machines that other people are afraid to step into before they’ve seen the proof. After the market has seen the proof, a lot of the time it’s too late.
What was your father’s big investing mistake during the financial crisis?
He would say that his mistake was that he viewed the financial crisis from a typical financial crisis perspective, which is that once you inject liquidity, things tend to get better — except this wasn’t a typical financial crisis. This was a crisis of collateral values which underpinned the entire system. That’s what he’d tell you he missed.
What lesson did you learn from that?
His framing on the collateral values is something we think about often to this day. It’s been an important takeaway.
When it comes to the income fund, why do you like investing in alternative asset managers, such as the Carlyle Group and Apollo Global Management, your top two holdings?
They had a great year, broadly, up 40% to 60%. But we think the valuations are compelling and that they could continue to move meaningfully higher. They check all the boxes for a great investment, like huge insider ownership, very smart investors, great capital allocation. They’re trading at very low multiples relative to what we think they could earn over the next couple of years. They’re also gathering assets much faster than traditional asset managers.
The fund is focused on REITs to a large extent. They’re 21.60% of the portfolio. Why is that?