Investors pull billions out of value funds
Value funds around the world have reported such serious falls in performance since the onset of the credit crunch that investors have pulled billions out of them rather than risk further losses. The value strategy run by veteran fund manager Bill Miller at Legg Mason is among the funds worst hit, after investors withdrew more than $8bn (€5.4bn) of assets over the past year from his strategy alone.
The news comes as value funds go out on a limb as they bet on a resurgence in returns, according to market observers. Value funds try to invest in stocks in the belief that the share price will rise as its value becomes apparent. Value managers look at criteria such as the ratio between a company’s share price and the assets that the company actually owns, to determine whether its share price reflects fair value.
Miller’s assets under management, which include institutional and retail assets, halved from $49.4bn at the end of June last year to $24.2bn at the end of June this year as his fund reported returns of -36% over the period.
About a third of the fall in assets was due to client outflows, a Legg Mason spokeswoman said. Miller’s value strategy returned -8% over the three years to the end of June, according to Legg Mason.
Mary Chris Gay, who works alongside Miller at Legg Mason, said: “Much of our struggle in the past year is due to the fact that we are valuation-centric investors in a market environment that has been perfectly arrayed for the outperformance of momentum-based strategies. Value investors like us buy companies that trade at a discount to their intrinsic value…The credit crisis and run-up in commodity prices led investors to distrust valuation.”
Many funds, including Miller’s, were caught out by the continuing fall in financials’ share prices. Pzena Investment Management, a value manager based in New York, held over 40% of its portfolio in financials earlier this year. Most of its strategies are now negative over three years thanks to its one-year performance.
Its large-cap value strategy reported gross performance of -3.6% over three years, after one year performance of -27.6%. Investors have piled out of the John Hancock Classic Value mutual fund, managed by Pzena: at the end of June last year it was $9.7bn in size, and it was $2.6bn in size a year later. Pzena declined to comment.
European funds have also struggled. Global large-cap value funds domiciled on the continent have average returns of -22% over the year to the end of July, according to data provider Morningstar, while large-cap value funds in the US have average returns of -15% over the 12-month period.
Three-year performance has been pulled down sharply as a result: the European funds’ three year figures are now negative at -3%, and US funds are down to single figures at 5% over the period.
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