Tuesday, April 14, 2009

Legendary Value Investing Fund Managers Getting The Sack!

Last August, Henry Blodget wrote, "Bill's not the first legend to get hammered by mean reversion, and he won't be the last" in his article, Legendary Fund Manager Bill Miller Fired By Client

  • A few years ago, Legg Mason Value Trust manager Bill Miller was revered the world around for outperforming the S&P 500 15 years in a row. Now, after a couple of horrible years have wiped out almost all of that outperformance, he's getting fired by state pension funds:
Do see also Bill Miller Featured on WSJ: The Stock Picker's Defeat

Yup, how ironic is that Bill Miller isn't the last!

Last week,
Grantham Fired by Massachusetts Pension After Losses

  • April 8 (Bloomberg) -- The Massachusetts state pension system fired Jeremy Grantham’s firm as manager of $230 million in emerging-markets debt after losses from asset-backed securities dragged down returns.

    The pension system’s board voted at a hearing in Boston today to pull its money from developing-nation debt investments managed by Grantham, Mayo, Van Otterloo & Co. The firm continues to run a $500 million emerging-markets stock fund for the state....

And also gone was the legendary 'contrarian' David Dreman!

And NY Times columnist, Floyd Norris, wrote the following David Dreman, Contrarian Fund Manager, Exits Unbowed

  • David N. Dreman was a star mutual fund manager. Then he bought bank shares and held on as the financial crisis grew.

    Now he has been fired from the flagship fund that bears his name, despite what remains a good long-term record. The fund’s name will be changed, and the fund will take fewer risks. A drab industry will become a little drabber.

    In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.

    “The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace and the experts you respect,” Mr. Dreman wrote in his best-selling 1998 book, “Contrarian Investment Strategies.”

    Mr. Dreman rose to fame in the 1990s, when the fund he began in 1988 amassed an impressive long-term record. But he had been preaching, and practicing, the gospel of investing in unpopular stocks with low price-earnings ratios since the late 1970s. He has been a columnist for Forbes Magazine.

    As the fund industry concentrated, the Dreman fund family was bought by Kemper, which was bought by Scudder, which was bought by Deutsche Bank. Last week the fund board installed by Deutsche quietly filed with the Securities and Exchange Commission a disclosure that Mr. Dreman’s firm would no longer manage what is now called the DWS Dreman High Return Equity Fund.

    On June 1, Deutsche will take over the management, and assign the job to a team of managers based in its Frankfurt office. The fund will become known as the DWS Strategic Value Fund. Mr. Dreman’s firm will continue to manage three smaller Deutsche funds, but don’t be surprised if those relationships eventually end.

    Mr. Dreman, who is 72, did not sound bitter when I spoke to him this week. “The board of directors is obviously entitled to do what they did,” he said. But neither was he repentant.
    “Low P/E has worked well over time,” he added. “There will be years that we are very out of favor, but we make it up.”

    You wouldn’t have known that the fund’s long-term record remained better than the market from reading what Deutsche officials had to say. “We had seen very weak performance for the fund over every major time horizon,” David Wertheim, the bank’s project manager for equities, told Bloomberg News. He declined to speak to me.

    Those time frames are one year, three years and five years, the periods that are used by fund raters like Morningstar and Lipper. Just now they are dominated by last year, which was a horrid one for the Dreman fund. Even so, it still has a superior long-term record.

    There are few celebrity mutual fund managers any more. Fund groups prefer to promote themselves rather than a manager who could leave to start a hedge fund. In an age when holding on to assets is the way for a fund family to profit, they may well prefer a fund that sticks close to its peers. The new fund managers plan to own more stocks, with less concentration in any one stock, and a broader definition of value investing. They are far less likely to stand out from the crowd.

    Mr. Dreman often stood out. I checked the fund’s last 14 annual reports, each of which showed its performance relative to Lipper’s group of equity-income mutual funds. In seven of those years, it was in the top quartile. In four of them, it was in the bottom quartile. Only in three of the years did the fund end up in the middle 50 percent of funds.

    The recent bad performance has been costly for Deutsche Bank, as well as the fund investors. Because of a combination of poor performance and investor withdrawals, the fund had $2.4 billion in assets on March 31, down from $8.3 billion in late 2007.

    What went wrong? You can get a hint from part of the fund’s most recent annual report, for the year that ended last November. “The cornerstone of our contrarian value investing philosophy is to seek companies that are financially sound but have fallen out of favor with the investing public,” it said.

    With too many financial companies, among them Washington Mutual, Citigroup and Fannie Mae, Mr. Dreman and his colleagues did not realize until too late that the companies were not financially sound, no matter what their books seemed to say.

    Buying stocks with low P/E ratios can make sense only if the earnings — the “E” — are real. “The E was much worse than anyone thought,” Mr. Dreman told me. “The banks themselves had no idea of how bad the E was.”

    He still thinks his strategy will work, and told me he thinks the market may well have hit bottom. As that last annual report put it, “The last few months have provided many opportunities to buy strong companies with good long-term prospects at the lowest prices we have seen in many decades, and we have taken advantage of what we regard as incredible bargains.”

    My suspicion is that Mr. Dreman could have saved his job if he had been more willing to bend with the times and go along with the current investment consensus. After all, this is a market where Citigroup and Bank of America could see their shares collapse after the government made it clear they would not be allowed to fail. How could any rational investor want to own a bank stock in that environment?

    Of course, what is obvious is sometimes wrong. In February 2000,
    George Vanderheiden retired at the age of 54 from Fidelity Investments, where his sparkling long-term record at the Destiny Fund had been tarnished by underperformance caused by his refusal to jump on the technology stock bandwagon.

    His successors knew a trend when they saw one. They managed to get in on the tech stock boom just before it ended. The fund lost big, when it would have done well had his successors stayed with Mr. Vanderheiden’s stocks.

    The people who run mutual fund companies, it turns out, are very much like other investors, something Mr. Dreman well understood.

    “The major thesis of this book,” he wrote in 1998, “is that investors overreact to events.”