Miller and Value Trust’s core competencies case

CASE 2

BILL MILLER AND VALUE TRUST

Teaching Note

Synopsis and Objectives

Set in the autumn of 2005, the case recounts the

remarkable performance record of Value Trust, a mutual fund

managed by William H. (Bill) Miller III at Legg Mason, Inc. The

case describes the investment style of Miller, whose record with

Value Trust had beaten the S&P 500 fourteen years in a row. The

tasks for the student are to assess the performance of the fund, consider the sources of that

success, and to decide on the sustainability of Miller’s performance. Consistent with the

introductory nature of this case, the analysis requires no numerical calculations. The instructor

should not be deceived, however, because the absorption of the capital-market background and

the implications of the finance concepts in the case will fully occupy the novice. This case updates

and replaces “Peter Lynch and the Fidelity Magellan Fund,” (UVA-F-0777) and “The Fidelity

Magellan Fund, 1995” (UVA-F-1126).

The case is intended for use in the opening stages of a finance course. It provides a

nontechnical introduction to the U.S. equity markets and sets the foundation for some basic

concepts in finance. Specific teaching objectives are to:

Motivate a discussion of the concept of capital-market efficiency.

Impart some recent capital-market history—in particular, regarding the Internet bubble of

the late 1990s and early 2000s, and the market crash of 1987.

Convey a perspective on the role of large institutions (lead steers) in setting securities’

prices.

Introduce the basic concept of value additivity. As illustrated by the net asset valuation of

mutual funds, the value of a firm will be equal to the sum of the values of its parts.

Affirm the notion of using market benchmarks to assess performance.

This teaching note was prepared by Robert F. Bruner with the assistance of Sean D. Carr. It was written as a basis

for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.

To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced,

stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic,

mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

Suggested complementary case in

investment management and

financial performance: “Warren E.

Buffett, 2005” (case 1).

Suggested Questions for Advance Assignment to Students

1. How well has Value Trust performed in recent years? In making that assessment, what

benchmark(s) are you using? How do you measure investment performance? What does

good performance mean to you?

2. What might explain the fund’s performance? To what extent do you believe an investment

strategy, such as Miller’s, explains performance?

3. How easy will it be to sustain Miller’s historical performance record into the future? What

factors support your conclusion?

4. Consider the mutual fund industry. What roles do portfolio managers play? What are the

differences between fundamental and technical securities analysis? How well do mutual

funds generally perform relative to the overall market?

5. What is capital-market efficiency? What are its implications for investment performance in

general? What are the implications for fund managers, if the market exhibits characteristics

of strong, semi-strong, or weak efficiency?

6. Suppose that you are an advisor to wealthy individuals in the area of equity investments.

In 2005, would you recommend investing in Miller’s Value Trust? What beliefs about the

equity markets does your answer reflect?

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