One of the most appealing aspect of the money management business is that it is pretty easy to keep score. The score most people is use is time-weighted total returns. So-and-so earned 10% last year, 10% per annum over the past three years, etc. However these are not necessarily the returns investors take home. Because the above calculation assumes a fixed dollar invested. The fact of the matter is that the amount of money fund managers manage varies over time due not only to market fluctuations but the flows in (and out) of their funds. Some recent research highlights the hedge fund managers, like George Soros and Bill Paulson, that did best on the absolute return in dollars.
This distinction is particularly noteworthy when it comes to the case of Bill Miller of Legg Mason Capital Management, the manager of the Legg Mason Value Trust. Miller came in for a great deal of notoriety when he outperformed the S&P 500 for 15 years in a row. Unfortunately for the investors in the fund they piled in just in time for the fund to experience a period of severe undeperformance. The firm continues to tout its intellectual rigor, but investors burned in the fund probably don’t care too much at this point. In today’s screencast we examine the detrimental role growing assets under management can have on fund returns.
Posts mentioned in the above screencast:
Legg Mason Capital Management Value Trust investor returns. (Morningstar)
Legg Mason/Western Asset fund family data. (Morningstar)
How much does size erode mutual fund performance? (SSRN)
Money vs. time-weighted returns. (Investopedia)